Anatomy of an insurance scam: How a lawyer allegedly defrauded insurers
Based on claims from the Florida Bar, how did this alleged scam work, and what red flags should insurers monitor?
Before the Florida Bar filed an ethics complaint against Coral Gables litigator Scot Strems, he was already a familiar name in the insurance industry.
Accused by the Florida Bar of sitting “at the head of a vast campaign of unprofessional, unethical and fraudulent conduct” across the state, Strems has new legal troubles: a suit from Citizens Property Insurance, accusing him of conspiring with third parties to defraud the insurer out of millions. He is also facing a putative class action from former clients.
Strems has repeatedly denied any wrongdoing and is presumed innocent, as the Florida Supreme Court is yet to rule.
But based on the bar’s claims, how did this alleged scam work, and what red flags should insurers monitor/?
Several insurers suspicious
One manager of a special investigation unit, or SIU, for a major insurance company, who preferred to remain anonymous, said his team has known about Strems for about four years, and every major insurance carrier has had their own investigations into him.
And that investigator said that in a 20-year career, the Florida Bar’s complaint against Strems was the harshest he’d seen.
The investigator said a typical Strems case is usually based on water damage, and often involves two types of claims: damages that appear to be exaggerated but based on a real event, such as a hurricane, and damages that appear to have been fabricated completely. He said the trend lately has been to file an influx of hurricane claims before the statute of limitations ends.
“What I’ve observed with those types of claims, it’s either the policyholders or homeowners [who] are oblivious and innocent, for lack of a better word, or they’re sort of involved in the scheme, perhaps,” the SIU manager said. “And this isn’t proven, but perhaps getting a kickback or guaranteed a large amount of money or whatever.”
Though this is not exclusively the case, he said it often appears that homeowners in South Florida are savvy to the scheme, while those in northern Florida cities, such as Jacksonville, are less so — often elderly or not fluent in English.
In such schemes, the SIU manager said public adjusters or contractors working with a law firm tend to go door-to-door in certain communities, asking homeowners if they’d like a free inspection to see if they have any damage that could form the basis of a claim. When they’re told they won’t have to do anything or spend any money, it can seem like a good idea.
“The homeowner thinks they’ve got nothing to lose,” the SIU manager said. “But the person at the door makes them sign a piece a paper, and that could be a retainer that they’re hiring the law firm to represent them — that sort of thing.”
‘I haven’t hired anybody’
The SIU manager said he noticed this happened in many of Strems’s cases because they’ve spoken to some homeowners that have sued his insurance company but said, “I have no idea what you’re talking about. I haven’t hired anybody.”
He said his company is therefore not interested in going after the policyholders, believing the alleged scam is driven by the law firm, public adjusters and third-party companies.
It allegedly appears to be “a numbers game” with Strems, which is the way the SIU manager sees it.
“If you delay too long or deny anything, they file suit immediately,” he said. “And they will file suit so much and, in my opinion, it was to throw so much stuff to the wall to see what sticks. … We would never consider throwing $500 to make it go away. We’re continuing to be aggressive with them.”
And they’re not cheap claims, according to the source, who said most are in the five- or six-figure range. And there are often multiple lawsuits for the same loss, one from Strems and one from a third party.
“We even joked that everything comes in pairs,” the SIU manager said. “If you call them up to look at your roof, you’ll get a lawsuit for your roof and the kitchen sink leaking.”
But where it backfired for the firm, in his view, is many Florida SIUs became wise to these alleged tactics and began defending the lawsuits and showing up in mediations.
“They didn’t have the manpower to attend all the things they were filing,” the SIU manager said. “They weren’t showing up at hearings. They would continuously postpone examinations under oath or mediations because, quite frankly, we called their bluff and they don’t have the staff to attend these things.”
The catalyst
Paul Handerhan is president of the Federal Association for Insurance Reform, a national trade association that has a board of directors that includes representatives from insurance companies, public adjusters, contractors, rating agencies, and plaintiffs and defense attorneys.
He stressed that the allegations against Strems are as yet unproven and declined to comment on them specifically, but noted they fall under a bracket of “extremely disruptive” tactics he’s familiar with.
Handerhan says understanding why this model is used means looking back a few years — specifically to Hurricane Andrew in 1992.
Before then, the bulk of the insurance market share was with national companies. But when the Category 5 storm caused massive widespread losses and threatened a major rate shock for policyholders, things changed.
The state negotiated with reinsurers, ultimately creating the Florida Hurricane Catastrophe Fund as “a barrier or speed bump to slow down those rate increases that were coming from the private reinsurance market” and requiring insurers to purchase a certain amount from the state.
Florida also blocked national companies from raising rates to the level they wanted, so they began gradually reducing their presence and separated work in the Sunshine State from their national business to reduce risk.
Handerhan said that resulted in many policies having nowhere to go, so most ended up with the state’s residual insurance program, now known as Citizens Property Insurance Corp. But that meant more risk exposure, so the state incentivized the private market by lowering the capital requirements for starting an insurance company.
But when a flurry of hurricanes unexpectedly struck Florida within weeks of one another in 2004, many of those domestic companies became insolvent and sought relief, such as moving to percentage-based deductibles instead of specific amounts.
“After all these storms, you find there’s a lot of third parties,” Handerhan said. “These are contractors, loss consultants, people who had made a lot of money now through this first rash of storms that are like, ‘This is a great way to make a living.’ ”
They began using assignment-of-benefits agreements, Handerhan said, which allowed them to stand in the shoes of the policyholder and sue on their behalf after offering to do repairs for free.
“ The problem with that is, and maybe it’s through ignorance or maybe it’s more nefarious, but they don’t disclose to the homeowner, ‘Listen, if you file more than three insurance claims within a certain period, you become uninsurable,’ ” Handerhan said. “ So you have these contractors who are feeding on these policyholders to handle these claims. And I understand we’re in a capitalist society, people want to make money, but it was very disruptive to the insurance market and adversely impacting policyholders.”
That also attracted attorneys focused on AOB cases, which Handerhan says compounded the problem.
“It’s so easy to find just a minimal amount of damage on every roof in South Florida,” Handerhan said. “They were saying every single damage was hurricane damage, and there’s no way to disprove it.”
That ultimately resulted in a law limiting the use of AOBs, which Handerhan said has reduced related litigation.
But he says he suspects it’s inadvertently triggered a different kind of litigation model.
“I can’t prove this, but anecdotally, what I believe happened is that these contractors didn’t go out of business. What they’ve done now is they’ve just changed their pitch and their business model,” Handerhan said. “They go to the homeowner and they say, ‘I can get you a new roof, but I need to introduce you to my favorite attorney. And instead of me filing a lawsuit, he’s going to file a lawsuit on your behalf, and when he gets the money he’s going to give it to me and I’m going to do your roof.’ ”
Only a small subset of contractors, loss consultants and lawyers do this, in Handerhan’s experience, but it’s a problem he says needs to be fixed with legislation.
“ These contractors and loss consultants who are not licensed insurance professionals should not be holding themselves out to policyholders telling them that they can help them with their insurance claims,” Handerhan said. “Everybody in the insurance industry, from the agent to the insurance company adjuster to the public adjuster, to the insurance company and customer service representative, they all have to be licensed because insurance is complex and one little thing you do has a reaction on something else.”
Since the bar filed its complaint against Strems, the number of claims coming from his firm has dropped, according to the SIU manager.
“Instead of getting 50 a week, we get 20 a week, that sort of thing. But it’s amazing that the firm is still operating,” the SIU manager said. ”If I was a young attorney that got my degree and is trying to work hard in South Florida and this is going on at the firm, I’d be out of there.”
Some of Strems’s employees resigned following his suspension, while others have stayed on to run the firm, which changed its name to The Property Advocates on July 1. And the firm is hiring, according to this LinkedIn post, which says it’s looking for a full-time associate attorney.
According to SunBiz, Hunter Patterson is serving as president of The Property Advocates, while Cecile Mendizabal is director, Christopher Narchet is treasurer and Orlando Romero is secretary. They did not respond to a request for comment.
There could be more ethics cases to come, as the SIU manager said Strems isn’t the only firm that appears to have used this tactic.
He says a handful of firms in Florida appear to be following a similar model. “I’m guessing and I’m hoping they’re watching the news regarding the Strems operation and maybe they’ll be deterred from continuing to do so.”
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