Claims fiddles by builders cost the industry an estimated £300m every year. So why isn't more being done to stop them? And what steps should insurers take? David Moore examines a shady issue

New research from Loughborough University shows builders are fiddling over £300m per year from insurance companies.

The fiddles range from scope creep, where builder and insured might add on some extra work that is not part of the claim, to complex frauds involving subcontracting out to underpaid and unqualified refugees.

Some insurers still take the view that networks of professional suppliers can drastically reduce leakage and serious repair fiddles in construction claims. However, with probably more than half of insurers currently turning their backs on network solutions, it may be time for the industry to take action against contractor frauds.

Leakage arises from a complex interlocking set of relationships involving the claims department, loss adjuster, suppliers and policyholder.

Operating cartel
Major fiddles cost the industry dear and understandably make the headlines, but, to put these one-off frauds in their context, the lesser frauds, such as scope creep and `betterment' are also considerable. These losses could be reduced by as much as 30% by implementing several key steps.

In the absence of a network of contractors, the problem usually begins with the tender. Typically, the policyholder is asked to submit two tenders for the job and, of course, there is no logical reason why they shouldn't both be way over the top in terms of price. This could be for a variety of causes: an operating cartel of local contractors, collusion with the insured or just bad luck in picking two expensive operators. The best the two-tender system can offer is the lesser of two evils.

It doesn't take much imagination to see how the whole tender system is wide open to fraud or misinterpretation. For instance, when tendering for a job, very few contractors provide detailed itemisation of costs. It is, consequently impossible to track the job and break down costs from start to completion. It is also no secret that contractors usually recover their tendering costs by uplifting all of their quotes.

Relatively innocent
Tenders also encourage a culture of collusion between policyholder and contractor, which may appear relatively innocent but can be extremely costly to the insurer.

Here are some rough translations of some of the almost legendary conversations that pass between contractors and policyholders:

"Will it be an insurance job?" means a 20% to 40% uplift in the estimate;

"I can do that little job for you too," means scope creep of up to 50%;

"The insurers always take three months to pay me," means 10% extra for the cash flow;

"My mate, Charlie, will be doing the job." means a `turn' of 15% to 20% for subcontracting the work.

InFront has carried out research in recent months, based on a wide sample of claims. It compared repair costs under separate options from the customers' own contractor to a variety of networks. The impact on the total cost of repairs (see above chart) is that customers' own contractor costs are higher than the cost of using a loss adjuster and contractor and much higher than using an independent managed network.

The areas investigated across a sample of 1,000 claims are as follows:

  • Average total labour and material cost

  • Invalid claim

  • Invalid claim detection

  • Fraudulent claim

  • Fraudulent claim detection

  • Total repudiation

  • Contractors mark-up (materials)

  • Contractors mark-up (overheads)

  • Inclusion of excess

  • Late payment allowance

  • Tender cost allowance

  • Insurance job uplift

  • Scope creep - customer service (including maintenance)

  • Scope creep - policyholder

  • Fees - repudiations

  • Fees - claims management

  • Supplier management cost

  • Claims administration cost.

    So, how are networks different? First, if they are really professional, they will be regulated by a set of stringent standards. To become a member of any professional network, contractors have to adhere to a set of standards relating to quality of workmanship, safety, financial stability and customer service.

    The latter includes pledges relating to a range of minor, but highly important, issues such as cleaning up the site at the end of each day, courtesy and noise prevention.

    Tough rules
    The contractor's service quite clearly reflects back on the insurer and the higher the standard the better the image and goodwill.

    But agreeing standards does not mean imposing a load of tough rules on reluctant contractors. Professional repairers and contractors like standards because they are part of a larger vision which benefits them. Networks offer more regular business and assured cash flow.

    They should also embrace fairer payment agreements - some insurers contract to pay within 30 days of completion of the job or in the case of works of longer duration, on an interim payment basis.

    Accuracy of "scoping" is the strength of the best networks and, according to our figures, it can reduce the costs of all building repair claims by 25% to 30%. Network contractors are not normally given to overscoping because they know they will get kicked off the network if they do.

    So, if a policyholder requests extra work, it will be itemised separately in the quote as an uninsured item. Most quotations from contractors within professional networks include an agreed cost breakdown of each task from the erecting of scaffolding to applying three coats of paint.

    The professionalism and personal contact that can flourish within networks means a large element of trust is invested in the contractor. We expect all our network contractors to take responsibility for each stage of the job as follows:

  • Onsite validation of cause of damage

  • Assessing of the scope of works and agreeing it with the customer uItemising the scope of work provided by the loss adjuster

  • Programming the works

  • Completing the repair work

  • Maintaining the site

  • Ensuring customers are satisfied with the work carried out

  • Providing a two-year workmanship guarantee.

    Of course, the system needs its own internal checks and balances, which can be system- or people-driven. Market rates throughout the country are widely published by trade bodies or universities for a range of trades from plumbers to builders and painters and decorators. Network contractors know the agreed rates and work hard to stick to them.

    The close relationship between the network manager and the claims department also discourages the temptation for collusion with the insured.

    With a plain English contract in place each party fully understands their roles and obligations within the repair process. Inclusion of excess is a typical ruse and a difficult one for insurers to track - unless they are using a network. By removing the policyholder from the tendering process, lines of communication become much clearer and cleaner.

    Contractors are directly responsible to the network management, and the policyholder is concerned only with the quality and efficiency of their work. If it is of the highest standard, the reputations of insurer as well as the builder are enhanced.

    Claims leakage is the perennial nightmare of the insurance industry; professional networks are an effective way of countering the menace. It's time we used them more widely and effectively. n

    David Moore is managing director of InFront Solutions