Let’s Understand Water Fraud Investigations
May 9, 2022
History has shown that in times of economic hardship and high unemployment, instances of insurance fraud increase dramatically, and the current global recession is no exception. Our observations in the field and conversations with insurers support this narrative. In the past several months, we have seen an increasing number of suspicious claims representing a growing problem for insurers, including fraudulent water claims.
Water losses aren’t always as straightforward as other types of losses. They come with several challenges, especially in determining the cause of failure. Unlike a fire loss, for example, the absence of the insured from their home does not necessarily make a water loss less likely.
Difficulties with water claims
- They often occur passively – Because water supply systems are always pressurized, passive failures can happen anytime. An insured can return from a vacation to find their flex hose or some other fitting has failed. Therefore, the passive nature of the loss makes it harder to identify the intentional act.
- The intentional act may occur before the loss – Intentional water losses are hardly ever hammer-to-the-pipe scenarios. This means intentional damage to a pipe, for example, won’t be washed away by the water. Homeowners could create a weakness in the system to make the loss appear more realistic, leading to the pressurized system failing independently. This is motivated by the fact that water damage does not destroy evidence like arson.
To avoid detection, homeowners create a situation where the loss somewhat occurs on its own. For example, a homeowner could loosen a valve or the threads on a connection or turn off a thermostat. In such scenarios, it takes time for the pressure to force a valve or cap open and for the house to reach freezing temperatures that lead to a freezing burst.
- Fraudulent claims look like real claims –All fraudulent water claims bear the same elements as accidental claims, in that water escapes through the exact mechanism in either case. And so, only an extensive and reasonably detailed investigation can conclusively determine whether a water loss should be classified as intentional or accidental.
Coverage denial issues
As a solicitor, you must consider several factors when you receive a claim. These factors affect coverage and the direction you take when dealing with a lawsuit.
- Beware of bad faith claims
Bad faith claims are always the primary concern in the insurance industry. As a result, the industry is constantly searching for ways to avoid these claims and deal with the insured in such cases. Therefore, due diligence requires that we determine whether coverage is appropriate and fair to the insured.
- Whiten v. Pilot
The Whiten v. Pilot case is a relatively extreme example of what can happen if you leave your insured in the lurch. However, it is a good reminder that you can’t make decisions based on instinct during coverage claims. You can’t cut your insured off unnecessarily while you’re investigating the loss. Even if you suspect a loss is intentional, you still need to investigate further and deal with the insured almost neutrally while doing so. This means you may incur ALA costs during the investigation, despite suspicion of insurance fraud.
Complete neutrality means doing emergency mitigation. For example, you may need to send someone to dry up premises to prevent further loss. You won’t prejudice your insurance. If damage worsens during the investigation, you must deal with it if coverage is not denied.
Avoid complete mitigation work like removing the walls. Your retained engineer will need to see all the evidence to determine where the water flowed. Removing the drywall may eliminate some proof. Limit your efforts to emergency mitigation.
- Look to policy language
The best thing to do is look at your specific policy conditions. Water losses are not subject to the same statutory conditions as fire losses. Many policies incorporate the statutory requirements for fire loss into other losses, but they’re not required to. So, you’ll have to look at the specific policy language to see whether those stack conditions apply. This will allow you to see what other exceptions or limitations may apply.
For example, suppose a water loss occurs in a seasonal home. In that case, a specific policy term may indicate what must be done to winterize that residence if it will be vacant for a certain period. This policy term may also state how long the owners can leave the place empty. Those are more straightforward terms to utilize if you want to deny coverage over a loss. In addition, they’re explicit in the policy, meaning you don’t need to consider whether the failure was intentional or accidental. Instead, you can look to something outside the bounds of policy as a basis to deny coverage.
Policy exceptions lie more in freeze-up losses. They predominantly stipulate the amount of heat required or how long you can leave the place vacant. Your policy may only cover specific types of water losses. The easiest way to deal with those claims is by looking at the particular policy language.
- Denial of claims requires loss to be intentionally caused
If you’re going to deny a claim based on something other than explicit policy language, you must prove that the loss was intentionally caused by the insured. The general rule of first-party insurance is that it covers fortuitous losses only, meaning coverage does not depend on the failure being utterly free of the insured’s fault. Their negligence can still lead to coverage, but it must be unintentional. The onus is on the insurer to prove positively that the insured intentionally caused the loss, which can be tricky.
Investigation of water claims can suggest negligence as being just as likely of a cause as an intentional loss. If both inferences are equally possible, the court will likely consider negligence over intentional causes. A thermostat being off when homeowners leave for vacation does not necessarily mean that they did it intentionally; it may be a mistake on their part.
Sometimes, the insured could destroy evidence to cover up an accidental cause. This makes such losses appear intentional because altering the evidence affects the insured’s credibility. However, it does not necessarily prove that the damage was deliberate.
In water losses, you don’t typically deal with many witnesses; you rely on the insured to tell you what happened. However, as a solicitor or investigator, you may be in a position where you have to disprove what the insured is telling you.
How to investigate water losses
- Causation is key
You need to know how the loss occurred, not just the mechanism. For example, you need to know precisely what caused a plumbing component to fail. Loss mechanisms are the same for negligent and intentional losses, so you need to conduct an in-depth investigation to determine the failure’s extent and its origin.
Several types of water losses lead to various questions that can only be answered with the help of an expert. You’ll require an expert to look at the physical evidence directly. Sometimes, the loss mechanism might be perfectly evident, but the exact cause warrants further analysis. An expert will be better positioned to dig into exactly what happened in and around the area of loss and the rest of the house and help you assess whether the claim could be fraudulent.
- Investigate early
You’ll want to conduct the investigation immediately after receiving the claim report. This ensures that the physical evidence is available and not disturbed more than necessary. An early investigation will also allow the engineer to be on-site for the inspection.
We’ve dealt with claims where a contractor informs the homeowner of the leak’s origin and then removes the part to send it to the engineer. While these may not be fraudulent claims, they prevent the success of our investigations. Upon receipt of the failed component, the engineer may determine that the leak did not occur at the original site of failure. Removal of that component, therefore, means evidence is no longer available for a conclusive determination of the loss. So, make sure your expert looks at the scene as it is.
The adjuster also needs to work at the outset of the claim. Early investigating allows all parties involved to get the freshest information from your insured, including maintenance and installation details. Insureds are typically more motivated to help you at the beginning. If you are primarily concerned about fraud or intentional causes, you must get the insured’s story earlier because they won’t have a chance to change it if they are lying. Tweaking their story to account for discrepancies leads to a further basis to suggest that they’re not a credible witness.
- Focus on subrogation
The focus on subrogation allows you to look at the cause objectively, which in turn helps you determine if a claim is fraudulent. On the other hand, a strict focus on coverage might lead to the question of whether the insured is at fault. While this is an important question, it doesn’t help you objectively determine the cause of a loss.
The information provided by your engineer will help you determine the express cause of the loss. All that information will lead you to whether a loss is intentional, so there would be a basis to deny coverage. If the loss is unintentional, objectively analyzing the evidence and information provided will help you determine the likely cause.
Case study 1: Faucet water supply line
Figure 1: A flex hose with failed steel braiding (left). A close-up of the site of failure (right)
A homeowner submitted an insurance claim after a flex hose failure. The industry had several issues with flex hoses years ago. While these failures still occur, they are much rarer than before, and the older flex hoses usually fail.
All flex hoses have steel braiding, an essential component of the hose. Failure of this component could cause the interior rubber hose to burst because the rubber on its own does not have sufficient strength to withstand depressurization.
The exterior of flex hoses can corrode naturally if exposed to water or other corrosive chemicals. The metal braids are made up of tiny individual strands, making them susceptible to damage, even after mild exposure to corrosive substances.
Figure 2: SEM images of the strands in the failed hose.
We used a scanning electron microscope (SEM) to examine the ends of the steel strands. The right-hand side image shows the material’s smearing, which indicates a mechanical force. The defamation observed was consistent with cutting.
Figure 3: An example of a flex hose that corroded without mechanical force.
Figure 3 shows examples of a naturally eroded flex hose strand. As opposed to figure 2, the strand has no smearing. However, some deposits throughout the end made it brittle, so it fell apart without deformation.
Our investigation revealed that the homeowner or tenant cut the metal braids to cause the water loss or cover up another loss. While this case was a blatant example of altering the evidence, it took a relatively extensive investigation to determine the cause. The SEM made it much easier to identify alterations in the proof because it wasn’t apparent at first glance.
Case study 2: Isolation Valve
Figure 4: The damaged isolation valve
A contractor was replacing the fan coil unit when water discharged from the isolation valve that is connected to it. The contractor, who reported the loss, claimed that he closed the valve, but there was no internal ball valve within. The investigation determined that the ball had been forcibly removed from the interior of the valve.
Figure 5: Observed damage to the internal threads on the valve’s ball.
Presumably, somebody used a pair of pliers or another tool to grab the valve and pull the ball out. Therefore, it was likely that the contractor dealing with this fan coil unit didn’t know what he was doing.
Figure 6: Evidence of other tool marks on the other side of the valve, which led to more suspicion.
There were two plausible scenarios in this case:
- The contractor didn’t shut the valve off, or
- He caused a water discharge and tried to cover it up by saying the ball wasn’t really in the valve.
Case study 3: Fictional Leak
Figure 7: The area that allegedly sustained water damage.
A homeowner reported a water loss to the insurer, claiming that there had been flooding in an
upper-floor bathroom. Additionally, the homeowner argued that water from the flooding flowed down and caused severe water damage to the basement. This was another case of a failed flex hose.
In his claim report, the homeowner said he had discovered the problem, shut off the water supply to the flex hose, and then replaced it. This is not an ideal scenario for insurers, adjusters, or solicitors. The insured would be expected to retain the failed hose for further inspection by an engineer. The insured claimed that he discarded the hose, which was cause for concern on our part.
Figure 8: A closeup of the area beneath the sink.
During the investigation, our experts saw few signs of an actual leak. In figure 8, the left-hand photo shows that everything was perfectly dry under the sink, which is inconsistent with a leak. In addition, there was no expansion or buckling of the wooden cabinetry on the tiled floor next to the sink. Had the leak been actual, there would be signs of some water influx into the cabinetry in the joints.
Figure 9: The bathroom floor, showing no sign of damage (left) and the inside of the floor register, filled with dust and construction debris (right).
As shown in figure 9, there was no evidence of moisture in any part of the bathroom floor. This confirmed that there was no leak in the area, especially one that could potentially reach the basement floor.
Figure 10: The ceiling space (left) and the kitchen downstairs (right)
None of the areas in figure 10 had evidence of water infiltration either. The chandelier was significantly dusty, indicating that it had not come into contact with water. The basement flooring and baseboards had already been removed when the investigators arrived.
Figure 11: The chandelier (left) and the basement floor (right).
Contrary to the evidence, the basement may have suffered water damage at some point. Presumably, there was water damage somewhere in the basement and the insured attempted to cover it up as a flex hose failure. Another possibility is that it was a blatant attempt to make a false claim after they’d already removed the flooring and baseboards. Further investigation also showed that there was no real evidence of a water loss upstairs.
Case study 4: Freezing
Figure 12: The disconnected thermostat (left) and its internal mechanism (right).
They discovered a water loss that led to a freeze-up. This loss occurred in a seasonal home when the insureds were not present. The homeowners claimed that the furnace had malfunctioned, causing the house to get too cold and freezing the pipes.
When experts arrived to inspect the scene, the insured disconnected the furnace and moved it out of the area. Unfortunately, they had also disconnected the thermostat, making it impossible to pull any history from it. As such, there was no way to investigate the temperature setting at the time of the loss.
After an inspection of the furnace, the investigator determined that it worked perfectly. It was bone dry inside, and there was no evidence of malfunction or water damage, which you would typically expect in a freeze-up.
Figure 13: The inside of the furnace.
The furnace is typically in the house’s basement, where the water collects. Any water coming down from floor registers will make its way into the furnace, and you’d expect to see some water damage there. In this case, it was bone dry and perfectly functional. While there was no specific evidence because the thermostat was not available for detailed testing, investigators couldn’t determine whether the insured had turned the thermostat off, set it to an absurdly low temperature, or just flipped a switch and turned the furnace off. There was no evidence to suggest that the furnace shouldn’t function.
Case study 5: Freezing II
Figure 14: A bathroom wall has been taken apart to show the pipes.
A homeowner claimed that there had been a freeze-up that led to a pipe burst, causing several water issues. Only one fitting appeared to have been impacted by the loss, which was suspicious. The freeze-up didn’t seem to affect anything else, which was unusual, especially given this is an interior wall. In typical freeze-ups of this nature, the whole house would get so cold that more components would be affected.
Our extensive examination determined that the fitting had been cut and re-set in place without being properly connected. So, when the water pressure increased, the fitting flew open on its own and caused the flood.
These cases are merely examples of water fraud investigations. While these are the most common, they are not a comprehensive list of regular water losses.
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