Big news out of Denver Colorado. A restoration contractor has been indicted on a number of counts. There were a lot of terrible sounding of accusations like conspiracy, mail fraud and interference with commerce by threats or violence. But reading between the lines it basically boils down to an accusation that they submitted invoices to an insurance company that were not equal to what they paid their subcontractors. These are bad actors right? Maybe it’s not as evil as it sounds, or at least it might be a case of the pot calling the kettle black.
As I see it there a couple of mitigating factors that might color this situation a little and if not excuse this purported egregious act against nature, at least make it understandable how the practice came about.
First a little background. Understand that the insurance property claims business has become an increasingly dirty little game that is expected to be played by the rules the insurance companies have established. It is hard to wallow in the mud and not come out looking like a pig. Several of the companies that control the biggest share of the insurance market have established a set of rules that are fundamentally corrupt. If you want to be allowed to come to the dance, they want you to play by their rules. The rules I am speaking about the involve the unholy alliance of preferred vendor programs, 10 and 10 and Xactimate.
Preferred vendor programs have generally devolved into a system where contractors can be allowed to suck at the tit of the insurance companies in the form of being recommended to property owners who have damage claims, by agreeing to play by the insurers rules. The rules are: you follow the insurer’s rules. Preferred vendors are invited to the game at the active exclusion of those who have chosen to try to operate independently. Interference with commerce by threats or violence would be a kind characterization of the strong arm methods employed by some segments the insurance and adjusting community in enforcing the strength of this guild in many markets.
I’ve spoken before about the myth of 10 and 10, but it is such a manipulative system of convoluted logic that it deserves a revisiting in this case. It is a made up system that is based more upon Voodoo than accepted accounting or operating practice. Any knowledgable practitioner in the business knows that there is no link to reality in a system that purportedly ascribes 10% of the gross of a project to overhead somehow leaving 10% to be left over for profit. So many items have been systematically moved to overhead in the accounting of a modern restoration company that it is banality at its worst when some poor naïve fool says that 10% covers the overhead to operate a competent restoration contracting operation. This whole 10 and 10 thing is code for “if I’m either stupid or Machevellian enough to say it and if you are stupid enough to believe it, I’m going to try perform an act of fraud upon you and no kiss first. But don’t you try and defend yourself, we don’t allow that.”
The third leg is Xactimate. Xactimate has become the poster boy for the conspiracy that exists to perpetrate this carnal encounter between insurer and service provider. I guess the McCarron Fergusen Act is pretty good smoke screen for an active conspiracy to manipulate market prices by creating "pricelists" that rely heavily upon feedback of the tripe (read: averages of settled claims amounts from some time in the past) fed back into the system by insurance providers and ostensibly the same information fed back by companies that have either agreed (See preferred vendors above) to play (at least ostensibly-another blog subject altogether) by the insurer's rules or by the poor suckers who are just trying to provide good service and follow the rules, but couldn’t articulate the difference between overhead and direct cost if it bit ‘em in the butt.
This is not a system that is conducive to honest relationships and transaction of business. Anyone involved in a conspiracy to manipulate the market through schemes to fix prices should expect push back. The pushback soup d jour is to manipulate the system as much or before it manipulates you. It is an act of self-defense, commonly practiced. But, who would plant a garden full of stinkweed and expect to grow roses?
Now, we come to the real hypocrisy of this Denver situation, undisclosed discounts. Or ,as this US Attorney has been convinced to call it mail fraud, conspiracy and interference with commerce. Let’s look at a couple of examples:
I have it on belief and information that Allstate, State Farm and Farmers (and others?) have entered into a scheme whereby they contract with national flooring suppliers. They then, using a surrogate such as ITEL, develop a “retail price” for the replacement cost of flooring damaged in a loss, give that price to a consumer then actively steer the property owner (consumer) to use their flooring contractor, who provides the material at the retail price, but low and behold “discounts” the cost to the insurer. Can you believe that, based upon my information and belief, they do not disclose this relationship to the consumer!!!!!!!
If I am correct and I invite anyone to point out how I might have misunderstood this scheme, how is this any different than a contractor taking (undisclosed)discounts?
Or as another example, as I have it on understanding and belief, State Farm has a scheme where they enter into an arrangement with Home Depot where they require their preferred vendor (oh what an incestuous mess this is) to buy product from their preferred supplier. I understand they do allow the preferred vendor to get their made up 10 and 10 allowance, but fail to disclose to the property owner that there are discounts afforded the insurer for this.
Again, I invite someone to correct me if I misunderstand how the process works.
What’s the difference? Maybe it is having the power of the NICB and the postal authorities to act as your thugs. Maybe the McCarren Ferguson Act is long overdue for an overhaul, but this dance has been going on for a long time . Numerous insurers have spent considerable energy working to establish these rules. I believe, that this is a case of the pot is calling the kettle black, while hiding behind the skirt of a US District Attorney.
This part of the reason we opted out of the 10 and 10, preferred vendor, Xactimate pricelist system some time ago. We have to crash the party to get a chance to dance, but we don't have to worry about smelling like a pig.
