Are Vanishing Deductibles Legal in the Construction Business?
Nationwide Insurance, on the auto insurance side of the business, has promoted a service plan called Vanishing Deductible for drivers who do not have an accident. The general idea is to reward good, safe driving by reducing auto policy deductibles by $100 (up to $500) every year the driver does not have an accident. Vanishing Deductibles may be new with insurance policy decision makers but it is not a novel idea. Most respected roofers have experienced a scenario in which a homeowner had a competitive contractor propose to take care of all repairs without the homeowner having to pay out-of-pocket deductibles, but is it legal? Is it right? Where do you draw the line?
Just to be clear, the homeowner’s insurance policy between an insurance carrier and a homeowner is a contract signed by both parties outlining their responsibilities should an unforeseen event occur. In that contract, there is a section that explains what the homeowner is responsible for (deductible) and what the insurance carrier is responsible for (benefits, limits, and exclusions). It’s not just the insurance companies that have financial responsibility if something happens; the homeowner signed a contract stating their responsibilities as well.
First, is it legal or ethical for a contractor to waive a deductible? It’s all up for interpretation and discussion. Although, there is a significant difference between “legal” and “ethical.” Here are a few examples:
If a contractor knowingly misleads or inflates an estimate to cover the cost of the deductible, then that is considered insurance fraud. For example, if a homeowner had a deductible worth $1,000 and the damage is estimated at $10,000, $9,000 should come from insurance and $1,000 from the homeowner. Now let’s say a contractor knowingly inflates the damage to $11,000. The financial responsibility of the carrier increases to $10,000, and the contractor does the repair without the homeowner deductible. Knowingly misrepresenting an estimate to allow for an increase in carrier payouts is insurance fraud. There are significant criminal penalties for this type of fraud and hurts all parties involved. The carrier pays more immediately and has to increase rates at a quicker pace (the FBI states that the cost of insurance fraud is over $40 billion a year). The insured could potentially be held liable for the fraud and the uncertain nature of the completed work. The contractor will have obvious legal ramifications and the potential for brand destruction should they be caught. Finally, the insurance restoration industry as a whole will be affected by continuing to support a practice that is ethically wrong.
But what if the contractor gives a discount to a homeowner to do work that happens to be the same amount of a homeowner’s deductible? From the previous example, the contractor fixes the property by only using the $9,000 provided by the insurance carrier and not collecting the $1,000 from the homeowner. In that case, the actual amount supplied from the carrier will only be $9,000, as that is what was agreed upon in the homeowner’s policy. The other $1,000 is a “new customer discount” or an “advertising discount.” In other words, a contractor is “paying” a homeowner $1,000 for their marketing. In that case, one could argue that the homeowner and contractor need to fill out a 1099 because income was made on the marketing services. This type of financial transaction could be considered tax fraud.
When you dive into the above scenario further, it is the insurance carrier’s responsibility to pay for the value of the damaged property minus the deductible. If the contractor can do the work for $9,000, then the insurance carrier theoretically should have paid $8,000 and the homeowner the remaining $1,000. This could also be considered insurance fraud by inflating the price of the initial estimate.
How do states that constantly deal with property insurance claims view a contractor paying a deductible? What is their stance on the issue?
In Missouri, Senate Bill 101 states, “Under the act, contractors who perform roof or other residential exterior work are prohibited from offering to pay, in any monetary form, a homeowner’s insurance deductible as an incentive to encourage the homeowner to hire the contractor.” That sounds pretty black and white. A contractor cannot pay the insured’s deductible, including marketing or advertising fees.
In Colorado, Senate Bill 38 states, “A roofing contractor that performs roofing work, the payment for which will be made from the proceeds on a property and casualty insurance policy issued … shall not advertise or promise to pay, waive, or rebate all or part of any insurance deductible applicable to the claim for payment for roofing work covered.” Again, this sounds very clear cut.
Even in Texas, one of the least regulated states, the Better Business Bureau (BBB) released a report stating, “The BBB recommends that roofing contractors and consumers alike exercise caution in participating in such programs (waiving deductibles). These programs walk along a very fuzzy line of insurance fraud, and neither roofer nor consumer would want to be held liable for such serious allegations.” In other words, an ethical contractor would not allow their customer to actively participate in potentially fraudulent activities. Why would a homeowner want to work with a contractor who promotes insurance or tax fraud?
Having a contractor “pay,” “cover,” “handle,” “waive,” or “take care of” the deductible is viewed as both poor business practice and illegal. GAF supports those contractors who continue to encourage best industry practices in roofing.