Attorney Shelly Lee Griffin from the law firm of Secrest, Wardle, Lynch, Hampton, Truex and Morley, P.C. addresses fraudulent water claims, how they are being committed and what adjusters and special investigators should look for when investigating claims.
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The Insurance Law Podcast
Water Claims Could Become the New Arson
Intro: This is the Insurance Law Podcast, brought to you by Best’s Recommended Insurance Attorneys.
John Czuba: Welcome to the Insurance Law Podcast, the broadcast about timely and important legal issues affecting the insurance industry. I am John Czuba, Managing Editor of Best’s Recommended Insurance Attorneys.
We are pleased to have with us today Attorney Shelly Lee Griffin from the law firm Secrest Wardle in Michigan. Shelly is an Executive Partner with the firm. She specializes in insurance defense litigation, with an emphasis on fraud investigations. Her areas of expertise include first-party and third-party property insurance matters and coverage disputes.
Shelly assists insurers in investigating fire, water, and theft claims suspected of fraud. She also handles multiparty complex, large loss litigation, gas explosion losses, and subrogation.
And Shelly, we are very pleased to have you with us today.
Shelly Lee Griffin: Oh, thank you. This is my pleasure.
John Czuba: Today’s topic for discussion is Water is Becoming the New Arson, and Shelly for our first question this morning, what does Water is the New Arson mean?
Shelly Lee Griffin: So those that are familiar with the insurance fraud area, I think that arson has been a long staple in the insurance industry, like it’s an easy go-to people can imagine. You see it in the movies about people setting their home or their business on fire in order to collect insurance proceeds.
So Water is the New Arson is meant to convey that we are seeing a shift in the way people are committing fraud, and it’s much easier, at least in my opinion, to stage a water loss than to stage a fire loss. They both can have the same kind of profitability for someone that wants to commit insurance fraud.
So they will both get to both a water loss and a fire loss. They both cause damage to a structure, a building. It causes damage to the contents. It might be — you get additional living expenses or loss of business income. So those are ways that are — it’s just as profitable, but it’s easier for them to get away with it, I guess is why I think it’s an easier Water is the New Arson.
John Czuba: So why is it that a large water loss is less risk for an insurer to commit than arson?
Shelly Lee Griffin: So there are lots of similarities in them. So if you think about a fire loss and a water loss, usually the person that wants to commit those sort of — stage those sort of insurance claims, they are away from the home when they happen. In a typical fire loss, you have someone — people are out of the house and they are away from the home and a fire occurs inside the house. The fire department, someone, a passerby will notice the smoke or the fire shooting from the building, and they call the fire department, and the fire department comes, the police comes, and they put the fire out. And then you have all this damage to the house, the contents, the building, everything that would go with it, and sometimes it’s water damage.
When you have a water loss, you have — the family is away from the house, and if it’s a like a waterline from your second floor bathroom and it’s running and it’s run for days, if you say you are on vacation or you are out for the night, or you have just gone away for the weekend, it continues to run, and run, and run.
You get to come home and say, I discovered my house was flooded while I was gone. It doesn’t involve the fire department, and it doesn’t involve law enforcement coming, and it’s much harder for someone in the neighborhood to detect it. So in that sense you can get as much, if sometimes more, damage accomplished.
There’s times where we have — I have taken — insured has found out that they have set their house on fire and a witness will say that the homeowner is standing in the street yelling, who called the fire department, because they actually didn’t get to commit as much damage as they wanted to.
And so with the, it’s making it harder to detect, the homeowner has more control over the situation and how long the damage can — how much time they can have the damage occurring. It can be hours, days, and if it’s a long vacation, a week or more, and then they come back and they are the ones that are the first responders. You don’t have the fire department coming in. You have them calling. I called my plumber or I called a family friend and then we addressed it, and then they make the claim.
But by then they have been able to — they have been able to cause as much damage and it’s going unnoticed, and there is not the kind of criminal implications that you would get if a fire department arrived.
And in a fire you can have — you could be charged with arson, you could be causing injuries to the fire department, the fire department personnel and you could have it spreading to your neighbor’s property and then even in some instances harming your neighbors if the fire spreads.
Water just doesn’t have those kind of risks and you are not worried about someone charging you with staging a water loss, where you would be worried as a person perpetrating fraud of being charged with arson.
And so what we are finding is that, not only is it easier to perpetrate, but the insurance companies, there is a rush to deal with water. You can’t leave water sitting. They want to mitigate the damages immediately.
They are worried about mold growth over time and so what is usually the first course of action in a water loss is to say, let’s begin mitigation and remediation immediately. Let’s dry the structure out. And sometimes they are doing that even before they have determined if there is coverage. They haven’t determined. No one has actually said, well, let’s figure out how did this water loss occur? Was it a legitimate one?
And so because that rush to judgment, they are starting to pay on a claim before they have even determined should we be paying on this claim. And there is not as much — people aren’t suspecting that it’s happening and so they are not asking for a full investigation like you would with the fire loss.
With the fire loss, companies always hire an origin and cause investigator and they ask someone to determine — an expert to come in and say, where did this fire originate, what was the cause of it, and then there is scientific data that backs it up through like NFPA 921, which is a widely accepted scientific material that helps them determine the cause of the loss.
You don’t have that same equivalent in a water loss. I mean there are certainly codes and standards, but if you haven’t even — if that insurance company has just come in and said, we are worried about stopping further water damage, we want to prevent the spread of mold, and they are not taking the step to first figure out, is this a legitimate loss, then they have missed that and they have rushed to assuming liability and coverage.
Whereas the fire, I think there is more about, we need to investigate, we need to determine what was the cause of this fire and then there is, if it’s an intentionally caused fire or if it’s considered undetermined or suspicious, it will get a referral to an insurance special investigation unit, and then further investigation is conducted. And that’s when you see insurance companies look more closely at the insured, the homeowner, the business owner and saying that they have a possible motive for setting this fire and then they look further to see if it’s been staged.
So I think that people are accustomed to thinking, this goes back to why is Water the New Arson, but we are accustomed to suspecting fire losses don’t just happen, we know that something triggered it.
And I think people have for a long time just assumed nobody would stage a water loss, but for the reasons that I was just saying, I think it’s much easier to get away with, and it just doesn’t get the level of scrutiny and can cause the same, if not more, damage because of — especially the mold growth is an issue.
John Czuba: So Shelly, when investigating, what are some indicators that adjusters or special investigators should look for?
Shelly Lee Griffin: So I think that you want to look to see if there is — like you would in a fire loss, you are always looking at someone’s claim history. You want to see if they have experience with prior claims, because I think once you know how the claim process works and how much money you can ultimately be paid under a claim, you have sort of learned — it’s your beginning introduction to how much money can be made, so claim history is important.
I think financial distress is always an issue. You want to know is there a motivating factor, something that’s changed in their situation that would prompt them to want to commit insurance fraud. Sometimes that might be something like a bank or tax foreclosure, like their mortgage, they might be behind on their mortgage. They might have not been able to pay their property taxes. There’s things that are pushing them towards a situation where they might be losing their house, and this is a way of getting some money out of the house before that happens.
We look also at related losses. I think in the area of fraud investigation for insurance companies, the insurance companies are getting so much more savvy. There’s so much more information out there to pull together from social media and you can find that there are — we actually have discovered rings, people that all know each other. Maybe they’re all friends, or maybe they are all family, that are having all water losses around the same time.
Sometimes, it’s a domestic discord, where like maybe there’s a marital issue. You think that a couple might be divorcing and the house is their biggest asset, and they’re not going to get as much money as they think out of it, and so it’s much better to have a staged water loss because they will get more money for it as a result.
I think you always want to wonder, why is everyone gone from the house when these things happen, like where did they go, why weren’t they home? Sometimes, you’ll see it will be a weekday and something will happen in the middle of the night.
Especially if that’s a family that has children and it’s a school year, you’re like, why wasn’t the family home? Why weren’t those kids in bed? They had school the next day, or what is their explanation?
Sometimes people — some of the claims that I’ve seen were, a couple said, we went to go stay with family, and the family lived two miles away, and there would be no reason. If they lived so close, why would you have to go and stay with them for the weekend instead of being back at your own house that’s so close?
And then, there’s always the idea of like, we’re moving our furnishings. The neighbors will tell you, well, we saw them moving a baby grand piano out of the house the week before all this happened.
So these aren’t really all necessarily indicators just for water losses, but they’re indicators in general, and a lot of them follow what is a NICB, National Insurance Crime Bureau indicators.
John Czuba: Shelly, can you tell us some examples as to how it’s being committed?
Shelly Lee Griffin: So what we see for example is, a lot of the losses will be in a second floor bathroom, and if you’re in a second floor bathroom, the reason that’s an ideal location is that water runs down. So you are getting, if the second floor bathroom of a residence has a water failure, and I’m just going to explain the damages, then I’ll talk more specifically, but that by having it go on the second floor, it means it’s damaging everything on the second floor and then depending on how long they’re gone, it’s running down to the first floor.
It’s causing damage to the walls, the ceilings, the floor, subfloor. It might even affect the — depending how bad it is, it can affect the ceiling joists, and then just keeps running down just by gravity.
So you’ve had effectively caused damage on all levels of the house. By starting at the top level, by gravity, water is going to run down. So, that’s one of the things that we see.
And some examples just that I can tell you that on cases that I’ve been a part of, there is, one was the second floor bathroom scenario. The person was saying that the water lines, the cold and hot water lines, one of them had become disconnected from where your water connects to the faucet underneath the sink.
It was connected with a device that’s called a SharkBite. The SharkBite though, it’s almost like it sounds. It’s a way of connecting the two pieces of piping together, and it almost has teeth in it. And so once you insert it, the teeth become permanently implanted into the other.
Like if you’re saying the female and male end and they become connected, it’s impossible to remove them, like you physically cannot pull them apart. And because that was analyzed by a mechanical engineer, they said there was no failure. The way they are describing the loss couldn’t have possibly happened. At the time, that family was at an amusement park.
There’s another one, same scenario, second floor bathroom. These people are at a water park for the week, and they said that the PVC pipes, so water can be flown — they carry it through different — you might have copper, you might have PVC. And this, the PVC, which is a white plastic tubing that you see, again, you have the male and female ends, and there’s a furrow, that’s kind of the white, like the cap that you would, sort of speak, that you see when the female part is inserted into what you’d say the male connector part of it.
You put a lot of cement on it, PVC cement, and that creates this chemical bond. In that case, they try to say that there was cement failure, but it actually, that also we learned through an expert, it doesn’t. If there’s a sufficient amount of glue, it just won’t fail. It changes chemically, and when it’s connected, it’s not going to become unconnected. They become almost fused together, so that’s how that was discovered.
We’ve seen people do, where they actually will heat a solder joint. So if you’re looking at a copper piece, there was a case involved — I’m in Michigan right now, and we had heavy, heavy rain falls in an area, like historic rainfalls that caused a lot of flooding. And most of the people, and this affected several cities, did not have flood insurance, so there wasn’t anything that could protect them for all the damage they had to their basement. This was an insured that had that exact loss, and so a few weeks later, she presented a claim saying that the bar sink in her basement had failed.
And when it was investigated, we had a metallurgist look at it and she found that they had actually heated the solder joint, and made it appear heated, what was already a previous solder joint, to make it seem as though the solder joint failed, but instead, it was a second reheating.
Other times we see people using razor blades to try and disconnect the compression nut. And then even it can be as simple as using a hair dryer. You can use a hair dryer to heat those flexible hose lines and pull them apart, and so it looks as though it just failed, but instead, it was heated and then someone manipulated it.
And really, these kind of examples were only detected because an expert was brought in. It’s not something that you can see with a naked eye. It’s just — really you needed the proper expert to come in, figure out what was the cause, and that’s how in all of those cases the fraud was detected.
John Czuba: So Shelly, what are the key takeaways?
Shelly Lee Griffin: So the most important thing I think I’m hoping is people understand is that even if it’s a water loss, you should treat it like a fire loss, in the sense that you have to first determine where did the loss originate, and what was the cause, what caused it.
And even if it’s, you’re going to find times where it’s not actually a staged loss. But you might have — there might be a manufacturing defect in the product and it legitimately failed, and there’s a subrogation potential.
It might have been failed because there was corrosion or improper maintenance, but that isn’t covered under a homeowner’s policy, so you might have an exclusion. And then sometimes, especially like in Michigan, because we’re a colder climate, you see pipes freeze often, but the policies usually say you have to maintain heat.
So it’s not that you’re always going to find fraud, but you have to investigate it because you still might have other things to consider, that being the subrogation or other policy provisions that would affect coverage. So I’m hoping that that’s really the thing is that you’ve got to determine the cause first.
And then to determine the cause, you have to hire the right expert. You have to make sure you’re getting someone that like you would want to make sure they have the right qualifications if you had a fire investigator. So you want to make sure that the plumber, an engineer, a forensic failure analyst, that they are the people looking into the cause.
And then from outside of the expertise, I think if you’re someone that’s in the insurance, like a field adjuster, someone that’s first person to be on the site of where a loss occurs, you have to take photographs. You have to make sure you know the area of origin. You’ve got to look at plumbing. Plumbing, I’ve learned in this process, actually has date codes, so you can look to see.
Sometimes we’re seeing people, families sharing the same — there might have been one legitimate failure, and they’re passing that piece around to their friends and family so they can quite make the same kind of water loss claim.
The pipe codes will show you, if you compare it, like if the house was all built at the same time, then you’ll know the date code if it matches. If it was built in October of 2000, you’ll see a code kind of similarly on all the other plumbing. And so that’s something you want to look at.
Shelly Lee Griffin: And then just even more basically, you want to look at the utility records. So for example, I have a water loss right now where I think that the house had been unoccupied and vacant for a long time, and they went and got it insured, just so they could get covered for a water loss that had already occurred.
So the utility records showed there wasn’t electricity at the house, and there wasn’t any water usage. There wasn’t significant to show that someone had been occupying the house. But even the water records can show, you can actually study those water records to say how significant the damage was. You can look at the cubic feet over a period of time, how much water was released during the time that they were gone, and calculate. If you know the size of the room, how high the water should have gone up on the walls, for instance.
There is — for a different topic, and I think what people are used to seeing is that there’s been water mitigation fraud. And that’s where there’s excessive mitigation. And by looking at the water records and seeing, figuring out, calculating, well this is how much — it might have only gone up a couple of inches, but now they have torn out dry wall that goes up six feet of it from the bottom to the middle, when they didn’t need to.
And then likewise, you can look at heating records and say, well, here’s historically what they were using, and I know that if it shows that this year from last year, they reduced their heat by 75%, and you know well then they probably weren’t maintaining the heat in the house at this time.
So then finally I think that you really have to make sure you’re doing exams under oath to really pinpoint the insured. Get them, you are really only going to find out some of this information by taking examination under oath, getting the insured to provide. That’s where you make the document demand for all of the utility records. That’s where you get the information about whether the insured was experiencing financial distress, if there was domestic discord, and that’s where you get them, really to pin them down onto the facts of loss.
Now what was so interesting for me as someone that has been doing this work for more than 20 years, the arson that I had been seeing in the past, they were homes that you might not think that, you would kind of say, this isn’t a very nice home that was burned down. The water losses that I’m seeing are in very affluent neighborhoods. One of the claims that I’ve mentioned, the house was 5,400 square foot home. It was covered in marble, that the house where the neighbors saw them moving out a baby grand piano, and it was valued in the millions.
And so I think it was surprising to us to say. It’s not that — you wouldn’t have suspected when you approached this house that they would have any financial difficulty, but they were. So those are the things I guess, you just can’t take anything for granted. But that I’m seeing these sort of fraudulent water claims occurring in a much nicer neighborhood and homes that you would think that these people are flushed with cash. They’re living very high life, but I think fraud is fraud. It’s still a way of making money, and that’s just, they have learned a new way to try and beat the system.
John Czuba: Shelly, thank you very much for joining us today.
Shelly Lee Griffin: Thank you.
John Czuba: That was Shelly Lee Griffin, Executive Partner from the law firm Secrest Wardle in Michigan. And special thanks to today’s producer, Frank Vowinkel. Thank you all for joining us for the Insurance Law Podcast. To subscribe to this audio program, go to our webpage, www.ambest.com/claimsresource. And if you have any suggestions for a future topic regarding an insurance law case or issue, please email us at [email protected].
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