How to Curb Corruption in the Industry
Buyer Beware!
I remember, as a small child, following my grandpa around job sites. I was so enthralled with that confident man in blue and white striped bib overalls, wearing his work fedora. I was convinced that he could build anything, fix anything, tackle any project. He took pride in his work, and he instilled in me the concept of "an honest day’s work for an honest day’s pay."
There weren’t any shortcuts with Grandpa. If you were going to do something, you were going to do it right. There was a pencil behind his ear, a tablet in his hand, and a mason’s folding rule in the side pocket of his overalls. Most of all, he believed that the people he served needed to receive value for their money.
Grandpa has been dead for almost fifty years, yet those values he planted in a small boy still guide my decisions today.
The company I now serve, in my seventies, is asked daily to review and resolve discrepancies in the cost of what contractors and public adjusters expect to be paid versus the deliverables that the insured receive. There is an explosive rise in the cost of repair and a growing murkiness in the explanations given to justify it.
Let me use my personal home as an example.
My roof has a total of 44.7 squares, or 4,470 square feet, of shingle surface. It has eaves and rakes that total 340 feet, and ridges that are 194 feet in length. It is not a tiny roof, nor is it excessively large; it is simply a common roof with a moderate pitch, appropriate for the city and location where I live. I have a 1% deductible, which amounts to $4,800, and my roof is about 15 years old.
Last year, we had a minor hailstorm, and our doorbell rang constantly for three weeks. I was approached at least five times a day by a sincere young man or woman informing me that they were working with many of my neighbors to help them get a free new roof. They explained that their company was committed to providing quality service and materials, and they were willing to do this for what the insurance company would allow for the roof. In addition, they promised that if I would allow them to serve me, they would do all this while ‘absorbing’ my deductible, making it possible for me to have a free new roof. After the first week, I began answering the door while holding the leash of my pit bull terrier.
After the flood of helpful young people subsided, I began to question my neighbors. What I discovered was that many of them had received their free roof. They were a little hazy on the actual cost, since they had simply turned over the insurance proceeds, but their estimation of their free roofs ranged from $38,000 on the low end to over $45,000 on the high end. None had paid a deductible, stating that the roofer had given them an invoice which they presented to their carriers to receive the recoverable depreciation applied to their loss.
I questioned them concerning the total amount of the loss and the portion that was their deductible, and they said that their roofer had handled that. Since I had been involved in property claims for much of my career, I simply began to do the math and arrived at the following data.
The various insurance carriers had paid for these free roofs varied from $850 per square (or 100 square feet of roof) to as high as $1,000 per square. Also, based on the assumed value of each home, the deductibles varied from $4,500 to $6,500 on each loss.
Armed with this data, I decided to do the work to determine exactly what the real cost of replacing my roof would be. I began by assessing the components of my roof to determine the quantities of each part that I would need. Having collected the needed information concerning these items and their required quantities, I visited my local building supply to find out just exactly what the cost of roofing materials would be. After totaling the shingles, roofing felt, drip edge, flashing, pipe jacks, vents, starters, and ridge cap, I accumulated a total cost of materials of $6,421.34.
I questioned two professional roofers that I have trusted over the years and discovered that the rate they paid labor crews for removing and reinstalling new roofing on a house like mine was $90 per square, or in my case $4,650. This brought the total labor and material cost of my roof to $11,072, or $215 per square. The same square that my neighbors paid between $850 and $1,000 for. That would equate to a profit margin of over 70%.
I think I heard my grandpa cry out in anger from his grave.
Since property claims have dominated most of my career, I was intrigued as to how the roofer, who was not a party to the insurance agreement, could find the authority to simply waive the homeowner’s policy-mandated deductible. What I discovered was that in each case, the roofer had claimed the cost of the roof had exceeded the actual price paid by the amount of the deductible. In other words, they had committed a fraudulent act and, in the process, made the homeowner culpable in the same act.
I also discovered that in Texas, on September 1, 2019, statute Chapter 707.002 went into effect, prohibiting anyone from waiving, paying for, rebating, absorbing, offsetting, crediting, or otherwise assisting the insured in avoiding the payment of a deductible. Violations of this statute are classified as a Class B misdemeanor and are subject to up to 180 days in jail for both the contractor and the homeowner.
I decided that if another hailstorm strikes my neighborhood, I will let my pit terrier answer the door for me.
Others, with far more influence than mine, have determined the roofing industry to represent over $200 billion. Some state it is significantly higher than that, yet this mammoth industry is largely unmonitored. Many locations do not even require permitting for replacing an existing roof.
Even those that do rarely inspect the process. In most municipalities, there is no licensing requirement, and most residential roofs being replaced are done at the mercy of whoever walked up and persuaded the homeowner to trust their untested ethics and quality. Not only is this practice risky, but it is also extremely expensive, causing many first-party insurers to question the viability of offering roof coverage in the first place.
This example is roofing, yet the problem is rampant throughout the insurance restoration industry. The cost of a service is determined by who pays for it. As one contractor states, "I have a cash price, and I have an insurance price." The justification for higher costs of repair is simply the fact that competition has been eliminated and the insurer is at the mercy of those that have discovered their weaknesses.
It is my opinion that the only way to fight the deterioration of this industry is with information and awareness. Insurers and insureds need to become aware of the powerful yet negative influence all of this is having on the health of the property insurance industry.
Even as you read this blog, awareness is coming. Carriers are being forced to redefine coverage, limit exposure, and enforce the policies they have written. In addition, I believe it is also time for those of us in this industry to police the greed and corruption around us, or the cost of insuring anything will continue to spiral upward.