Is it Legal for a Roofer to Waive or Absorb my Insurance Deductible?

As a regional roofing contractor that has completed 1000s of insurance restoration projects over the years, Premier Roofing Company estimators and field representatives are asked regularly by customers whether it is possible for us to “cover the deductible” on an insurance claim for roof repairs. This puts our representatives in a difficult and awkward position because there are no great answers to give a homeowner.

Homeowners are often approached by seemingly legitimate contractors and told it is “perfectly legal” to cover a deductible on insurance repairs. Some roofers make it such a common practice; they openly advertise “Free Roof” on yard signs and door hangers. No one wants to be told they’re lying, cheating or committing some kind of crime for asking what seems to be a perfectly reasonable question. All we can do is explain the insurance claim process and let homeowners determine for themselves what is a legal and ethical business practice.

We choose not to compromise our ethics

As we rack up years in this industry, we see a disconcerting trend of contractors trading deductibles for repair work and it puts us in a tough spot. Do we compromise on our ethics and cut our costs by using cheaper labor and materials, or do we spend the time to educate our customers on the insurance claim process, our roof system, and the importance of using a stable contractor – a process that can take hours longer than simply chopping our price and “getting it over with.”

I recently brought my truck to the body shop to get some estimates on paint and dent repairs. I carry a pretty high deductible and the repairs would likely not have cost much more than $2,000. As I stood at the counter waiting for the secretary to process my estimate, I asked her (tongue in cheek) “So any wiggle room on this deductible of mine?” She didn’t even look away from the computer as she had clearly been asked this several times. “Nope” was her reply. I then asked “What if this was $7,000 worth of body work? I bet I could take my business elsewhere and get a deal.” Her reply was startling: “Well if you wanted your paint to peel off in 6 months, you could definitely do that.”

I was frustrated by the exchange, not because I didn’t like her answer and wanted a “better deal,” but because things are so different in our industry. For some reason, customers are more willing to take a chance on a cheap roofing contractor than a cheap body shop, which is nuts when you consider that we’re working on something a lot more expensive than a car (your home) and our installers are doing some of the most dangerous work in the construction industry. On top of that, you read stories about homeowners getting ripped off every year by roofers offering a “great deal” that subsequently close their doors after collecting $1,000s in insurance proceeds.

In the end, it’s just what the roofing industry has become: small contractors with low overheads providing shoddy work, cheap materials and kicking back money to customers because they can’t provide a service that is worth the meager insurance proceeds they are collecting. Throw in the fact that it’s illegal to siphon money from an insurance claim to the homeowner and it becomes clear why 80% of roofing contractors are out of business within 2½ years (2008 BBB).

It used to be perfectly legitimate

In the past, “absorbing” an insurance deductible would have been perfectly legitimate for a roofing contractor. As recently as 15 years ago, homeowners were given lump sum payments by their insurers when a loss occurred; the deductible was simply removed from that total. In fact, it was not only legal for the homeowner to keep the deductible; it was entirely up to the consumer whether the repairs had to be completed at all. For example: a wind storm hit a home, an insurance adjuster was dispatched and determined it would cost $10,000 to fix the damages to the roof. The homeowner’s deductible was $1,000, so the insurer cut a check for $9,000 and the homeowner decided what to do with the money. In other words, they could have given a contractor any sum of money, be it $500 for minor roof repairs, or all of the insurance proceeds plus the deductible to replace the roof.

Today insurance claims work differently. As most homeowners have Replacement Cost Value (RCV) provisions in their insurance policies, insurers have limited their exposure to RCV insurance claims by breaking down payments into multiple parts. Today, instead of receiving a lump-sum payment for work to be completed, funds for a roof replacement can come in as many as 4 separate checks and will often bear the name of the mortgagee of the property as a cosigner.

The only way to get all of the money from an insurance claim today is for a licensed contractor to actually bill the insurance company AND the mortgage company (if there is a mortgage on the property) for the completed work. For example: a hail storm hits a home, the homeowner files an insurance claim and a claims adjuster is dispatched to the location. The adjuster determines it will cost $10,000 to complete the repairs. There is a $1,000 deductible, so that is subtracted from the estimate. The roof isn’t brand new, so that depreciation (let’s say $5,000 for the sake of round numbers) is also subtracted from the estimate. Now the insured is given a primary check for $4,000 instead of $9,000. The remaining $5,000 worth of depreciation is only recoverable when an invoice of $10,000 or greater is received from a roofing contractor or general contractor (a homeowner can’t bill for the work without an invoice) and that check is made out to the mortgage company listed on the property.

So how is it that roofing contractors are “waiving” deductibles?

Well, in the simplest of terms, they’re fibbing to the insurance and mortgage companies. A homeowner’s insurance policy is a contract between the homeowner and the insurance company. Per this contract, homeowners trade annual premiums in exchange for protection from catastrophic damages to their properties minus a deductible. Just as you would have the legal protection if your insurance carrier were in breach of contract and refused to pay a claim, your insurer has legal protection from you if you fail to meet your obligations (i.e. you or your contractor provide inaccurate information to save on your deductible or premiums). Many contractors will advertise that a yard sign can be used as an “advertising credit” for the deductible amount. If they are planning to invoice for the full insurance claim, they must divulge in their invoice to the insurer the cost of work to be provided on the project. If they are charging the insurance provider $10,000 for work they actually do for $9,000, the roofer is inflating the price for goods sold to account for this discrepancy. Insurers would balk at the notion of subsidizing advertising for contractors…if they knew about it of course.

If an insurance company knows the work is being completed for less, they will provide less money. For example: If the insurer finds out that the homeowner was able to complete the work for $9,000 instead of $10,000, they would only release $8,000 total instead of $9,000 – again forcing the insured to pay the $1,000 deductible to the contractor. Long story short – the discrepancy between the price billed to the insurer and the price billed to the homeowner is technically a breach of contract between the insured and the insurer – regardless of whether it was facilitated by a contractor.

Some roofers will argue that it is entirely up to the contractor to decide what they are doing to get the work. If they want to pay a customer $1,000 to get their business, they should be allowed to do that regardless of whether an insurer is involved because the market should dictate what the acquisition cost of a customer should be. If the contractor is literally cutting a check back to the homeowner for “advertising” technically this would require that a Form-1099 be issued to the homeowner as the Federal Government requires transactions greater than $600 to be declared and for the homeowner to pay income tax on that transaction. I doubt contractors that cut checks back to homeowners are collecting Social Security numbers and properly filing their taxes for them – leaving another important detail out of the conversation.

Whether this is a crime for which homeowners or restoration contractors are likely to get caught is an entirely different argument as I wouldn’t recommend trying it either way. It strikes me as sketchy at best to falsify information you give your insurance company or to work with someone offering to do it for you. How many legitimate companies have at the center of their business model a plan to provide misleading information to the party cutting the checks?

By the same token, I can see why it happens so often: If I were new to the insurance claim process and a seemingly legitimate restoration contractor offered to absorb my deductible, I wouldn’t think for a minute that I could be in breach of contract.

In the end, if your insurer were to catch you or your contractor, my guess is that your contractor wouldn’t take all of the blame. So be cautious with contractors like these, they may be cutting corners on your project, or worse yet, putting your name on a falsified invoice they provide to your insurer. In the end, the old adage: “If it sounds too good to be true- it is,” explains everything better than I can, so be sure to do your research and choose a company with a long track record of customer satisfaction. Don’t let your guard down; check references, never give money to a contractor before the materials show up, and make sure you’re not getting put in a situation where you may be breaking the law just to get a “better deal.”

Chris Tulp is the Principal of Premier Roofing Company in Denver, Colorado. If you are interested in working with us, please request a free roof inspection from one of our roofing consultants.

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