Battling Back Against the Use of AOBs in Water-Related Claims

Assignments of benefits are the fastest-moving vehicles for fraudulent activity in homeowners’ insurance claims.

July 22, 2016 Photo

Assignments of benefits, commonly referred to as AOBs, are not fraudulent, and its use is not a crime. Yet in Florida, AOBs are the fastest-moving vehicles for fraudulent activity in homeowners’ insurance claims. While AOBs have been used in personal injury protection (PIP), auto glass, and health insurance claims for years, they are appearing with increasing frequency in water-related claims.

Before the advent of AOBs in homeowners’ claims, vendors obtained a “direction to pay,” ensuring direct payment to the vendor for a covered loss but not the authority to sue and obtain attorney’s fees. The subtle shift to AOBs has created an optimal breeding ground for unscrupulous vendors and criminal rings. From leaky pipes to leaky roofs, carriers are seeing a marked increase in staged claims, inflated invoices, illegal waivers of deductibles, and unlawful referral fees.

The Florida Office of Insurance Regulation (OIR) recently conducted a data call to gauge the increase. Data was provided by the top 25 insurers in the state (representing 80.5 percent of the Florida homeowners’ market) for claims closed between Jan. 1, 2010, and Sept. 30, 2015. The data revealed that the frequency of water-related claims had increased 46 percent, and severity had increased 28 percent.

The OIR data call did not prove the fraudulent nature of these claims. However, the uptick in the number of claims with no corresponding natural cause for such claims leads to the logical conclusion that many are fraudulent. Indeed, the genesis of the increase is not difficult to discern. Homeowners with legitimate claims routinely are required to assign the benefits under their policies before a contractor or mitigation vendor agrees to commence work.

With an AOB in hand, a vendor can charge grossly inflated rates for their services (sometimes for services that were never rendered). Vendors know that they have the upper hand because if the vendor goes to court and is awarded a single dollar, the insurance company will have to pay the vendor’s attorney’s fees. What can be a relatively small amount in dispute can lead to a substantial fee award if a case is litigated. Insurance companies are, thus, faced with an unappetizing choice: Pay a fraudulent or inflated bill, or incur substantial fees and costs to investigate potential fraud and defend the inevitable lawsuit, all while risking potential liability for the vendor’s attorney’s fees.

These questionable claims often are difficult to investigate. The typical staged water loss is made two to three months after the alleged date of loss and is reported by the attorney’s office, a public adjuster, or a loss consultant. There are usually two claims called in on the same date. The two claims will involve two sections of the home, e.g., the bathroom and the kitchen, and the leaks to each room will have occurred about two weeks apart. Vendors hundreds of miles away from the insured’s home will provide invoices for services rendered on both alleged dates of loss. By the time the claim is reported, most of the repairs are completed and the faulty plumbing has been discarded. Attempts to inspect the home often are delayed, and recorded statements or examinations under oath are scheduled, canceled, and rescheduled. By the time the carrier is able to speak to the homeowners, they have little memory of the circumstances surrounding the loss.

Reminiscent of early PIP fraud days, law firms, loss consultants, and other interested parties provide seminars instructing vendors on how to position themselves to extort higher payments, get more return on supplemental claims, and recoup overhead and profit (whether lawfully charged or not). They even provide novel ways to avoid payment of a deductible. So great is the profit margin that referral fees as high as $1,000 are paid to plumbers and other vendors solely for notice of the potential insurance claim. Loss consultants knock on doors and sign up homeowners to file inflated or fabricated claims for old damage. Oftentimes, the insured is not even aware that they are represented by an attorney.

When the inevitable lawsuit comes, it comes in quadruplets. Typically, two lawsuits are filed on behalf of the insured (one for each of the purported water-related claims), and two are filed by the water mitigation vendor. The problem is so prevalent in South Florida that circuit courts have issued administrative orders to consolidate cases filed in county court by vendors holding AOBs with the circuit court cases filed by insureds.

For too long, companies have attempted to cut their losses by attacking the legality of the AOB itself. Florida appellate courts now have refused to allow carriers to limit assignments, and while some courts have recognized the growth of a cottage industry spawned by AOBs, they have left any potential fix in the hands of the Florida Legislature. For the past few years, legislative attempts at AOB reform have failed. With no end in sight, it is time to stop attacking AOBs and focus on the fraud and what feeds it—the “one-way” right to attorney’s fees.

Florida Statute § 627.428 has long allowed an award of fees to insureds that obtain monetary judgments against their insurance companies in order to “level the playing field.” Yet the advent of the AOB changes this equation, as lawyers, consultants, and vendors are in the game to make a profit, not to put the homeowner back to their pre-loss condition. These sophisticated parties simply do not stand on the same unleveled ground that warranted the right to attorney’s fees in the first place. Instead, vendors use this right as a threat to extort payment of unreasonable sums for their services.

Efforts at legislative change must continue. At the same time, without a concerted effort to weed out the bad players, aggressively investigate and litigate fraudulent patterns, and work closely with the OIR’s fraud unit and law enforcement, carriers will continue to see an increase in fraudulent claims for years to come. Other states allowing first-party fee awards could be next.

About The Authors
Maria Elena Abate

Maria Elena Abate is managing litigation shareholder of CLM Member Firm Colodny Fass P.A. She also is a member of CLM’s Insurance Fraud Committee and can be reached at (954) 492-4010,

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CLM’s Insurance Fraud Committee identifies, analyzes, and offers education on emerging fraud schemes and tactics; monitors and reports on developments in case law, state fraud statutes and applicable regulations; collaborates with other anti-fraud industry organizations and associations; and seeks to provide amicus support in matters of importance in the fight against insurance fraud.

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