Contractor Fraud: What Claims Managers Need to Know

Contractor fraud is a growing concern in the insurance industry, costing billions annually and undermining the integrity of property restoration efforts. Claims managers and adjustors play a critical role in identifying red flags early and protecting both the insurer and the insured from fraudulent activity or untrustworthy service providers. 

Contractor fraud can take many forms. Deceptive practices by service providers during property repairs or renovations, can be conducted with or without the knowledge of insureds, and include tactics such as: 

• Misuse of insurance funds 

• Failure to complete agreed-upon work 

• Use of substandard materials without disclosure 

• Performing unlicensed or unauthorized work 

These actions not only delay recovery but can also lead to inflated claims and legal complications. 

Red Flags Claims Managers Should Watch For 

When reviewing claims, managers and adjustors should be alert for any of the following potential indicators that the service provider the insured selected for the restoration work may be untrustworthy or not fit for the job. 

• Delays in claim reporting 

• Vague or inconsistent facts of loss 

• Claim initiated by someone other than the insured 

• Insured identified contractor through door-to-door solicitation 

• Insured pressured to sign quickly or accept a “special deal” 

• Insured mentions high-pressure sales tactics or scare tactics used by contractor 

• Contractor has demanded full payment upfront or in cash 

• No written contract or vague contract terms 

• Suspiciously low bids or “too good to be true” discounts 

• Estimates that don’t align with the reported damage or damages that are not consistent with the facts of the loss 

• Contractor lacks references, insurance, or a permanent business address 

• Contractor or insured refuse to provide documentation or cooperate with investigation 

Common Examples of Fraud 

Reviewing common scenarios can help claims handlers recognize patterns of suspicious behavior they should be on the alert for during the claims process. Here are a few realistic examples of contractor fraud claims managers might encounter. 

Inflated Estimates 

A contractor submits an estimate for $45,000 to repair hail damage to a roof. Upon inspection, the actual damage is minor and should cost no more than $10,000. The contractor refuses to provide a breakdown of costs and has pressured the insured to sign immediately to “lock in” the price. 

Red Flags: 

• Estimate not consistent with damage 

• High-pressure sales tactics 

• Lack of cost transparency 

Third-Party Claim Initiation 

A claim is reported by a contractor, not the insured. The insured later says they were told the contractor would “handle everything” and were pressured into signing a contract they didn’t fully understand. 

Red Flags: 

• Claim not initiated by the insured 

• Insured unaware of claim details 

• Contractor controlling the process 

Unlicensed Work 

A contractor approaches a homeowner after a storm, claiming they can start repairs immediately. They begin work without pulling permits or providing proof of licensing. Later, the work is found to be substandard and not up to code. 

Red Flags: 

• Door-to-door solicitation 

• No license or permits 

• Poor workmanship 

Steps Claims Managers Can Take 

Claims managers sit at the frontline in identifying fraud and safeguarding the claims process. To ensure fair outcomes for the insurance company and the insured, consider the following best practices:  

Investigate Thoroughly from the Start 

• Conduct a detailed intake interview with the insured 

• Ask specific questions about how the contractor was selected 

• Document all communications and gather supporting evidence 

Scrutinize Documentation 

• Review all estimates, contracts, and invoices carefully 

• Request proof of licensing, insurance, and permits 

• Assign field investigations early—collect photos, conduct interviews 

• Compare contractor estimates with actual damage and industry standards 

Act on Suspicion 

• Don’t ignore red flags—refer for investigation as soon as reasonable suspicion arises 

• Investigation Solutions has proven techniques to help uncover the truth and identify fraudulent activities.  

• Investigation Solutions can use data analytics, machine learning, and anomaly detection to uncover suspicious patterns, such as inflated claims or false reports.  

Final Reminder: Stay Vigilant 

Recognizing contractor fraud early helps prevent financial loss, protects the insured’s restoration investment, and upholds the integrity of the claims process. The attention to detail and proactive approach of your claims team are key to stopping fraud before it escalates. You can enhance their skills in this area by deploying online or in-person fraud training to help recognize common signs of fraud and learn how to report suspicious activity. 

Reach out if you’d like to learn more about Davies’ tech-enabled fraud identification, investigation services, or fraud training from Investigation Solutions.