Gustav’s Aftermath: Post-Storm Scams (A Three Part Series)

Gustav’s Aftermath: Post-Storm Scams (A Three Part Series)

On September 1, 2008 Author By Scott Wolfe Jr

This is part of a three part series about Gustav’s legal aftermath, including a discussion on (1) insurance disputes; (2) increased construction demand; and (3) the risk of fraud.

Valuable lessons about post-disaster scams were learned by New Orleans residents post-Katrina. It’s with first-hand knowledge and recent memory, therefore, that we echo an alert of the Louisiana Attorney General’s office post-Katrina to victims of the Gustav hurricane: Beware of Scams.

If you were affected by the recent storm, it is very important to remain cautious during these trying times. In the aftermath of Hurricane Katrina, thousands of New Orleans’ residents were scammed for millions of dollars.

Our New Orleans office has represented many of these individuals in lawsuits against their “contractors.” Unfortunately, in nearly every case, the victims of this fraud experienced long delays in repairing their damages, unnecessary legal expenses and serious cash flow concerns as insurance money was spent for construction work not completed. In some cases, even with a judgment, finding and collecting from the illegitimate contractors is trying, slow and expensive.

Why Getting Scammed Can Happen To You and Why You’ll Be Faced with Tough Decisions
If the price is too good to be true, it probably is. Victims of disasters are vulnerable to scams because of the attractiveness of low bids and problems with their insurance.

From our experience, the hands-down number 1 reason why some New Orleans residents ended up with an illegitimate contractor, and a bad disaster recovery experience, was because of money. Go figure.

The price quoted by an illegitimate contractor will always be cheaper than the price quoted by a more reputable outfit. After all, without a less expensive bid, it’s impossible for a scamming contractor to compete with reputable outfit.

An abnormally low bid, therefore, should be your first red flag that you might be getting scammed. Unfortunately, however, disaster victims are pressured by a number of factors to turn their heads from these “warning signs” and accept the low bidder for their project.

The uninsured or under-insured victim
One reason why low bids might be attractive and tempting to disaster victims is because they could be under-insured or uninsured. In this situation, a nice gentlemen with a low price, who seems to have good intentions, can be convincing.

While financial times might be hard, and the low-bid offer might be tempting, a construction nightmare might be awaiting you if you fail to adequate investigate the contractor and take precautions before hiring.

The insurance problem – Why even those with adequate insurance are vulnerable
Many argue that we have a problem with the insurance industry here in America. Without weighing in on the debate, we will highlight some of the reasons why those with adequate insurance coverage and limits might still find themselves financially pressured to select an abnormally low price:

  • Insurance is not immediate. Let’s face it, before you get any money from your insurance company, you’ll have to make your claim, wait for your adjuster, wait for the adjuster’s estimate and then wait for the payment. The entire process can easily take sixty days. Victims find themselves unable to sustain the financial burdens of the wait.
  • The first check from your insurance company is rarely enough. First, in the aftermath of a disaster it is common for construction costs to increase. It is not safe to assume that the insurance company’s price lists will increase with the times. Further, many insurance policies will cover you for “Replacement Cost Value,” but only pay its insureds the replacement costs after replacement! From our experience, with the inaccurate insurance price list and the payment of only the depreciated value of your losses, your first insurance check might only be 20-40% of your damages! Try paying a contractor $100,000.00 for work performed when you’ve only received $30,000.00 from insurance.

As you can see, the next few months can be very trying to victims of disasters. When a victim has its back against the wall in these financial conundrums, it is difficult for them to even entertain hiring a reputable contractor with its “high” prices. And as a result, unfortunately, illegitimate contractors looking to make a quick dollar have a very large customer base, and a customer base full of victims with broken spirits and few choices.

The sad part, is that these “illegitimate” contractors may not always be con artists or criminals. In some instances, they are even fellow-victims.

With millions or billions of dollars being poured into a disaster area, many consider it a golden opportunity to get into construction and take a share. While these individuals proceed with good intentions, it’s their lack of construction knowledge and inexperience that results in the “scam.”

For example, an inexperienced and unlicensed contractor with good intentions may have a low bid because they’re too inexperienced to properly bid a job. Mid-way through construction they’re asking to double the cost, or they’re abandoning the project amid embarrassment and cash flow problems.

If you’re a victim of a disaster, times will be tough, and you’ll be faced with difficult decisions in your quest to rebuild your home, business and/or life. Unfortunately, because of scams and bad situations, its important to move forward with caution.

How to Avoid Scams and Bad Construction Experiences
Your Top 10 Red Flags

From our experience in the construction market post-Katrina, we’ve compiled a list of the top 10 things to be weary of when hiring a contractor in a post-disaster environment.

1. If the price is good to be true, it probably is.
One of the most common red flags is a low bid. It’s important to never over-pay for a project, and its common to hire the lowest bidder in the construction industry, but its critical to ensure that your low bid is a responsible low bid. One of the most tell-tale signs that you might be dealing with an illegitimate or illegal contractor is when you receive an abnormally low bid.

If the price is too good to be true, it probably is, and you may end up paying exponentially more than your highest bid in defective work, legal fees and heartache.

2. Don’t let your contractor find you, find your contractor.
It’s very common for illegitimate and inexperienced contractors to solicit its customers. Take a deep breath and perform some research on the person who solicited you before allowing them to sell you on their services at your door. Spend time looking for contractors in your area online, and compare different companies.

You’re embarking on a large and likely expensive purchase, and the job will go smoothly if you do s
ome homework and select your contractor.

3. A permit is not a license. Insurance is not a license. A license is a license.
Illegitimate contractors looking for work learn very quickly that they’ll be asked to provide a license to potential customers. They also learn very quickly that most customers aren’t exactly certain as to what a “license” is or looks like.

As a result, many victims of scams find themselves thinking their contractor is licensed because they were showed a work permit or an insurance policy.

Research your contractor’s license. It is possible for someone to get insurance or a permit without a construction license, and its even possible for someone to forge a Washington construction license.

Fortunately, there are resources on and offline for you to research your contractor’s license.

Check a contractor’s registration with Louisiana State Board of Contractors at http://www.lslbc.louisiana.gov/.

Talk to someone if you don’t understand the licensing systems and requirements, look into when the contractor was licensed and what type of license they hold. It is possible that they are licensed to fix your toilet, but not rebuild your living room. It’s also possible that the person was a science teacher last week and a contractor after the disaster.

If you know someone is unregistered and passing themselves as a contractor, report them to the Louisiana State Board of Contractors at http://www.lslbc.louisiana.gov/.

4. Payment Demands and Problems
Even without the backdrop of a disaster, payment procedures in construction is complex. During a disaster, however, things are even worse as contractors across the region will be busier than ever before and cash flow problems will be omnipresent.

It’s difficult to advise you to never pay an upfront deposit (because many legitimate contractors will require a draw before work begins), but it is something to handle very delicately.

You should never pay more than 10-15% of the project costs before work begins, and once work begins you should avoid making payments for portions of work that is not already completed.

Scamming contractors are very skilled in collecting nearly 70-90% of the job’s costs when only 0-30% of work is complete, and by the time you’re catching onto the problems, they’re already left town.

Payment terms and procedures in construction are complex, but use fiscal sense and trade money for work performed.

5. Nothing Good Can Come from Dealing in Cash.
Another tell-tale sign of an illegitimate contractor is one who seeks payment in cash. Nothing good can come from dealing in cash.

Make sure that you triple-check those who request cash payments, and when you do pay your contractor, keep detailed records of the payments, and be sure you can get copies of cashed checks or other evidence of payment in case of a dispute.

6. Contractors Who Promise to Work With Your Insurance Company or Who Promise that you’ll receive Insurance Coverage
Even legitimate contractors are not insurance adjustors, lawyers or experts in reading or applying insurance policies. Accordingly, you should be weary when a contractor claims they will assist you in your insurance claim.

Contractors build things, and when they are promising to get you more insurance money, they’re likely going to fail at both.

7. Insurance Certificates Do Not Equal Insurance Coverage, and Insurance Will Not Cover Against Bad Work
In the post-Katrina construction environment, illegitimate contractors will produce fake, expired or otherwise invalid insurance certificates in an effort to fool their potential customers. Construction insurance is quite expensive, and in order for these illegitimate outfits to compete in price, cutting down on overhead in this area is quick and easy.

If you ask for proof of insurance, accept a copy of their insurance, but look a little deeper into whether the contractor has coverage. You can make a phone call to the insurance company to ensure that the policy exists and is in effect, and you can even request from your contractor that your name be placed on the policy as a “certificate holder” during the progress of the construction project.

One common misunderstanding about construction insurance is that it covers bad or faulty construction work. This is not true. Construction insurance simply protects against “accidents” at the job site (i.e. injuries).

Do not make the mistake of hiring a questionable contractor because he is insured. His poor performance as a contractor will likely not be covered by the insurance policy.

8. Contractor who cannot get a building permit, may not be a contractor.
Many unlicensed or illegitimate contractors request that the owner – you – secure the building permit for the construction project. They may represent that this will “save on costs,” or is “required,” or any number of excuses – the simple fact is, however, that in 95 out of 100 occasions when this request is made, it is because the contractor is not properly licensed and is unable to get the building permit.

9. You should get a written contract, and the contract should be more than an “estimate” or an “invoice.”
A written contract is important for a heap of reasons: it memorializes the parties’ agreement, it provides critical information about the progress of the project, it imposes clear obligations on both parties to perform under the contract, etc.

Construction projects can be complex, involve multiple parties and disputes are very common. We cannot stress enough how important it is to sign a written contract with your contractor.

One indication that your contractor is illegitimate or not properly licensed is if he doesn’t want to sign a contract, provide or contract or otherwise “doesn’t use a contract.”

10. Hiring an Attorney is a prudent investment
Rebuilding after a disaster is challenging, and there are many traps for the unwary. You may potentially be dealing with large amounts of money provided by insurance companies and/or construction loans, and rebuilding your home or business can be a monumental task.

While hiring an attorney is an additional expense during the difficult time, in many circumstances it can be a money and headache saving decision.

Before committing to a contractor, have an attorney with construction law knowledge review the contractor’s credentials and the contract provided.

In regards the contractor, an experienced construction law attorney should quickly recognize any “red flags” that would indicate that this contractor is a potential liability.

In regards to the project as a whole and the contract, an experienced construction law attorney can review the terms and provisions of the supplied contract and help you enter into a contract that is fair to all parties, and a contract that will help the project run smoothly.

About Us
Wolfe Law Group, L.L.C. is an experienced construction law practice with offices in both Seattle, WA and New Orleans, LA. In the aftermath of Hurricane Katrina, we represented homeowners, contractors, architects and eng
ineers in projects of all shapes and sizes to help residents rebuild their lives. We bring a wealth of post-disaster construction and insurance legal knowledge to Western Washington in its post-disaster environment.

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