True Crime of Insurance Fraud Video Number 48

The Contractor and the IRS

Barry Zalma, Esq., CFE presents videos so you can learn how insurance fraud is perpetrated and what is necessary to deter or defeat insurance fraud.

The Failing Fire Reconstruction Contractor

Fire reconstruction is a competitive trade. Work, rebuilding burned out businesses, commercial structures and homes requires specialized skill. Obtaining payment from insurers for this specialized work requires a gregarious personality, a talent at marketing, and the skill to do the work to perfection.

Willis Rafter was not gregarious, had no talent at marketing and was a sloppy and unskilled builder. For Willis to be successful as a fire reconstruction contractor required imagination and a lack of morals. Willis found he obtained few construction jobs because of his lack of skill. He never received repeat business. He anticipated bankruptcy.

Rafter Construction was dying. His best friend in the business, an adjuster, advised him tell the adjuster that he will give you 10% of the next job I bid he will receive the job. on will I get it?”

“Of course, silly, I though you would never catch on.” Louise responded, giggling.

He found, although slightly more expensive, additional sources of referral in the community of Public Insurance Adjusters. When he obtained referrals from them, he found it necessary to increase his unit costs to cover the extra fee. Rafter Construction became a power in the fire reconstruction business in his community. He had ten estimators working for him and always operated with four to ten construction projects going twelve months a year. He cursed his own stupidity for not learning the simple fee-based method of obtaining business.

Louise, as his best friend in the business — the person who taught him how to be a success — always received an annual $5,000 bonus.

Willis was shocked when, after a routine IRS audit — six years into his business career as a successful fire reconstruction contractor — he was arrested for tax evasion. The IRS concluded that since the payments to the adjusters and supervisors were illegal in California [a violation of California Penal Code § 550] he could not deduct them as business expenses.

ZALMA OPINION

Insurance fraud is fairly easy. Willis, by paying a 10% bribe to adjusters saved his business. Although not a big time criminal, like Al Capone, his scheme was brought to an end by the IRS because they found he deducted the bribes as a business expense.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

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