The world is changing. Waiving or rebating insurance deductibles has always been insurance fraud, but now state legislators and regulators are taking note. A minimum of 28 states have laws making it illegal to waive or rebate a homeowner’s deductible, in addition to insurance fraud. Most of those laws require the payment of a fine and many include the “opportunity” to go to jail.

So, why do roofing contractors do it? Simple. To close the deal with the homeowner before the next contractor does.

Most roofers use one of many estimating products on the market, which allows them to input their individual product and labor costs for the project. Most insurance companies have their own adjusters that do the legwork to determine the replacement value of the claim, using their own models. Generally, there’s a comfortable space between the two that entices a contractor to waive the homeowner deductible and accept a lower margin on the project. Profit is profit, without regard to the actual ROI.

Why are there insurance deductibles?

Have you ever wondered why insurance companies require deductibles? As natural disasters increase in frequency, whether it’s hail to floods, hurricanes to tornados or to fire, insurance losses are on the rise. Like any business, an insurance company is in business to make money, for shareholders if public or ownership if private. Loss increases are not acceptable without mitigation, and they mitigate their losses in two ways:

First, they hike premiums. This means the homeowner in Indiana enjoys higher premiums to help pay for the hurricane on the East Coast or fire on the West Coast. Or the homeowner in Ohio enjoys higher premiums to help pay for the hail and tornado belts. It’s a simple "law-of-large numbers" solution that insurance companies have used since they came into existence.

Second, they impose higher deductibles to the homeowner to reduce the actual claim amount. This has been transforming for decades in the states that experience more natural disasters than those that do not. For example, while states like Illinois still impose a flat $500 or $1,000 deductible for a roof, in Texas, where there’s a lot of hail, the deductible is now based on 1% or 2% of the value of the home. At 1%, a $250,000 home now has a roof deductible for $2,500. That’s a big difference and insurance companies are expanding the concept.

With the higher premiums and the higher deductibles, they are reducing losses. That is just simple math.

Unfortunately, too many roofing contractors absorb those deductibles. That effectively means the additional cost from the insurance company to the homeowner is simply being passed along to the contractor, who waives the deductible to get the project. The homeowner doesn’t care, it’s not out of their pocket. The insurance company doesn’t care, their out-of-pocket has been reduced on the claim.

It’s the contractor who should care for three reasons. 1) They’re reducing their own profits; 2) they’re committing insurance fraud; and 3) depending on the state, they may be breaking the law. Find your state law here:

Insurance companies have detailed records of every homeowner’s deductible and they cover the amount above the deductible. Though it may seem that they won’t notice if you’ve covered the deductible as a contractor, you may be wrong. Concealing such payment facts from insurance companies falls in the category of insurance fraud.

Additionally, starting with the larger homeowner’s insurance companies, it’s not uncommon for them to request proof of payment of the deductible from either the homeowner or the contractor. This trend will continue to expand. Not all insurance companies require that documentation on every single claim. Yet.

The Consumer Experience

You’re relaxing in your living room on a Saturday morning and you hear a knock on your door. To your surprise ther’s a roofing contractor standing there with a clipboard and a kind smile. They apologize for bothering you and mention that they’re working in your neighborhood, helping your neighbor replace their roof. They ask you if you’ve considered replacing or repairing your roof via an insurance claim.

You immediately have flashbacks to the hail storm that rolled through town several weeks ago, leaving your roof, siding and car damaged, dented and in urgent need of repair. You tell them that, unfortunately, you called your insurance company and were informed that you’d need to pay an insurance deductible of $1,500 in order to repair the damage. The timing could not be worse, as you just replaced your HVAC system, fixed the car or bought new furniture and you are going to be cash strapped for a few months. In short, you’re unable to pay your deductible without assistance.

Data shows that 69% of people have less than $1,000 in savings.

The roofing contractor tells you, his company will replace your roof and cover your insurance deductible for you, that he can discount it off of the project cost, and he really wants to help you. Wow! This seems like a great offer. You’ve seen the roofing company’s trucks in your neighborhood, you know that they’re a reputable company and they do high-quality work. So why not take their offer and get a new roof “for free”?

The roofing contractor is willing to waive or discount your insurance deductible to win the job, and insurance will cover the rest. This makes sense and seems like a no-brainer, right? Unfortunately, no. Accepting this “discount” from the contractor could be considered insurance fraud.

What to do:

The solutions are straight forward. To avoid waiving easily collected revenue and to keep yourself and your homeowner compliant, you have options:

  • Ask for/request a check to cover the deductible. This generally does not end well in securing the project.
  • Ask for a credit card to cover. Same result.
  • Secure financing for your customer. Many consumers are comfortable with this. But some are not open to this for a number of various reasons.
  • Carry the deductible on your books and create a promissory note for documentation of the deductible being paid as well as send monthly billing statements to your homeowners and do the collecting.
  • Use a third party to handle the funding, billing, insurance documentation and collections.

The choices are simple. Secure your revenue and stay compliant, or play roulette with insurance companies, lawmakers and regulators.