Cleaning Up a Dirty Secret

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In the restoration industry, we are in the business of clean up. We get called when everything’s a mess, when things are covered in mud and sludge and water, when all that’s left is dust and ash and soot. We are needed after disaster, in the middle of chaos, or whenever something has gone terribly wrong.

We are the cleanup crews. We make things right again.

But there is a grimy little secret in our industry and it’s time to shine some light on it and get it cleaned up. Some restoration contractors have been involved in excessive plumbing kickback scheme and it’s dirtying the water for the rest of us.

How this works is that when a plumber is called to fix an emergency plumbing situation, he or she then recommends a particular restoration contractor to do the clean up and reconstruction. In exchange for this recommendation, the contractor pays the plumber a kickback. These referral kickbacks are not cheap; in fact, in our market these kickback prices are as high as $1200-$2000.

When the kickback is this high, it’s nearly impossible for the restoration company to make any money on the job. Profit margins are tight on every job. To overcome this deficit, these dubious restoration contractors then engage in unethical and dishonest business practices, such as padding the bill or doing extensive demolition work before an insurance adjuster has seen the property or approved any repairs.

An article in the Sun Sentinel in south Florida quoted Paul Handerhan, the Senior Vice President for the Florida Association for Insurance Reform:

“Plumbers, as the first respondents in water emergencies, are uniquely situated to steer contractors to homeowners. But referral fees of $1,000 to $2,000, while not illegal, often exceed the price of the emergency repair. If a plumber is getting a $2,000 referral fee, his new job is not being a plumber, His new job is to market himself to the [water] restoration guys,” Handerhan said. “Plus, the plumber is in a situation where he could be incentivized to create more damage than there already is.”

The kickbacks also drive up the cost of claims with assigned benefits, he said. “Clearly $1,000 to $2,000 has to be billed back into the services.”

These contractors are also known to get homeowners to sign binding contracts that give them sole ownership of any money paid out by the insurance company and also make the homeowner responsible for any bill not covered in the process, all before the insurance adjuster has even inspected the property. This can leave homeowners on the hook for exorbitant fees and unnecessary repairs, or it leaves the insurance company in the unenviable position of either having to pay bogus claims or disappoint, mistreat, and offend their customers. I know of homeowners that have been swindled out of tens of thousands of dollars through this scheme.

Homeowners and insurance companies aren’t the only ones hurt by these dishonest practices. When these stories come to light, everyone in the restoration industry suffers a hit to their trustworthiness, credibility, and integrity. Additionally, insurance premiums go up across the industry and reimbursement becomes even tighter as insurers worry about fraud and abuse. This ultimately harms everyone in the industry from being able to build and sustain their businesses.

So what can we do?

1. Be Honest – As simple and trite as it sounds, you really only have control over your own business practices. You can set your own standards, keep them high, and refuse to participate in kickbacks or the disreputable tactics used to pay for them. Be scrupulously honest and transparent in your work.

2. Support Reform – In several states there are current bills proposed to enact laws curbing this abuse, but many are hampered by a lack of support and competing interests. The bill in front of the Florida House and Senate right now, for example, is reported to have stalled for the fourth year in row. Clearly the industry needs some regulation in this area and reputable restoration contractors can add their leadership and support to the issue. I know over regulation can be hard to deal with and is a legitimate concern in our industry, but making these kickbacks illegal is the kind of regulation that makes us better and allows us to provide the best possible outcomes for our customers.

3. Blow the Whistle – When you know something, say something. For too long, restoration contractors have looked the other way or swept this practice under the rug. Perhaps it didn’t feel like your business or your problem. But we all look bad when unfair an unethical business practices are tolerated. All of our margins are affected when insurers cut payouts because of fraud and abuse. Don’t do business with companies that engage in these tactics. Warn others of plumbers and restoration companies that work within this kickback model and share your concerns with community business leaders and organizations that regulate the fair business practices in your area.

We are in the business of restoration. We make things better. By holding firm to ethical industry standards and supporting honest business practice, we can restore our reputation as an industry and our good name with insurers and homeowners alike.

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3 thoughts on “Cleaning Up a Dirty Secret

  1. Ben

    This type of behavior is exactly why you are seeing the entire insurance industry shift towards the use of third party administrators such as Alacrity, Code Blue, Contractor Connections, etc. It is unfortunate because you used to be able to make a decent living doing this type of work, but if the current trend continues I think nearly all the honest contractors will be forced out. We are facing financial pressures that you bring to light, but on the other hand the third party administrator model brings a different set of financial pressures simultaneously making it far less profititable to perform the emergency mitigation and nearly unprofitable to do any general contracting or rebuild work. In my opinion if it gets to the point that you can not make a decent living while maintaining ethical and honest business practices, then it is time to find some other way to make a living. I am hopeful that meaningful regulations may be able to be passed, but given the lack of it in nearly every state, I’m not holding my breath.

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  2. Jeff Farley

    I saw this post last week and vowed to return and reply when I had time, as it’s been important to me for years. Yes, it’s a dirty practice, but not a secret. I would add a fourth step to the list–Educate yourself. A few years ago I saw an online discussion among contractors on this topic and one from my state said it was necessary for survival in their market. I informed her that this was illegal in California, and she feigned surprise. How can a licensed contractor not know the law? Aside from the moral question, I was and am still disappointed some contractors choose to rationalize their decision to break the law. It’s not worth it, then, now or ever. But murder and theft are illegal but laws don’t prevent all crimes.

    Even more egregious are illegal payments to adjusters. Everyone knows kickbacks happen despite being illegal. Cash, trips, drugs and prostitutes have all been used to curry favor with claims reps and get business. This is a long way from handing out notepads or candy. Every few years a carrier will find out and prosecute their own to send a message to both their staff and contractors but it doesn’t stop.. Some state contractors license boards have prosecuted contractors for kickbacks but it still happens. I know a contractor that has completely remodeled the home of a local fire chief and his family to be the exclusive responder for board-ups. He offered to let me in on it and provide mitigation services he didn’t offer. I refused. He’ll never be on any carrier programs and says he doesn’t need to. Someday it will catch up to him, I hope. Crooked contractors are a pox on us all.

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  3. Ken Larsen

    One of the commenters mentioned this issue of paying plumbers for referrals is one of the reasons why insurers use “Third Party Administrators” (TPAs) to assign the claim to a contractor for their “administration services.”

    Please think about this for a moment.

    If it is deemed unethical / illegal to pay a plumber for a referral… then why is it okay to pay a TPA for the same referral?!

    This issue of paying kickbacks to those who refer customers is being perpetuated by the insurers themselves! Reform is definitely necessary. Paying for a referral – is a softball business model. It is weak… and participants risk a compromise to their reputation and character.

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