AOBs and Assignments of Insurance Rights
There are a multitude of hardships that Restoration Industry Association members face every day but one issue that is gaining more traction in the restoration industry is “assignment of benefits” (AOB). We talked in depth to attorney Ed Cross, RIA’s Restoration Advocate, and founding Chair of the Association’s Advocacy & Government Affairs (AGA) Committee, about the incredible opportunities AOBs present for the restoration industry — and to gather some tips when signing one.
What Is “Assignment of Benefits?”
To put it plainly, assignment of benefits is a transfer of the legal title to a portion of an insurance claim over to a service provider. When someone has a loss on their property and they make a claim using their insurance policy, that claim can be transferred to another party. This allows contractors to control their own destinies and make legal claims directly against insurance companies who fail to pay the fair market value for restoration work, or insist on using standardized price lists as universal pricing. Xactware has repeatedly made clear that its pricing data is not intended to be used as global pricing and that contractors should set their own prices.
Many people do not have the money to restore their buildings after they’ve been damaged by a flood, fire, or other instances, but they need the restoration work done immediately.
“Contractors take an assignment of benefits in order to have security that their bill is going to get paid,” Cross said. “They do this in exchange for the assurance of immediate payment. So, there's an expectation that the insurance company is going to pay the bill.”
A Game of Cat and Mouse
According to Cross, many times when the policyholder receives the insurance money, they aren’t interested in paying for anything. This puts the restoration contractor in a bind.
“Sometimes the policyholder will use it to pay off the mortgage on their house,” Cross said. “So now, not only do they have essentially a brand new house, it's also paid for, free and clear, at the expense of the restoration contractor who is not in a position to take back the work.”
Unlike a car being repossessed if you can’t make the payments on it, a restoration contractor isn’t in the position to take back their work. A contractor could file a lien, but that is a long, complex, and expensive process which could one day put a property into foreclosure, but that’s a rare outcome.
To increase the chance that the contractor’s name will appear on an insurance check, contractors in most states may obtain ownership of the portion of the insurance claim they were hired to address. This frequently allows the contractor to step into the shoes of the policyholder and collect directly from the insurance company. If the insurance company does not name the contractor on the check and the insured runs with the money, the contractor may be able to force the insurance company to pay again. Cross has done this many times against major insurance carriers.
Restoration contractors have the resources, the energy, and the wherewithal to pursue this collection and to press the insurance company to pay fair value, whereas a typical policyholder doesn't have the resources, the expertise, or the desire to ensure that the contractor gets paid in full. This can leave the restoration contractors in a rough spot: those needing work will go with whatever the policy will pay, and if it pays too little, who should they go after?
“Many contractors agree to work for the amount of insurance proceeds,” Cross said. “And if the insurance company decides it wants to pay little or nothing, as they often want to do, the contractor gets left holding the bag. It places them in the predicament of trying to decide, do I sue my customer? Or do I try to go after this insurance company?”
Assignments got a bad rap because of an extraordinary law in the State of Florida that encouraged litigation by allowing the holder of an assignment to collect attorney’s fees in a lawsuit against an insurance company, even if there was no wrongdoing by the insurance company. The insurance lobby put an end to that when F.S. 627.7152 was passed. Among other things, it says that the holder of an assignment waives the right to collect money from an insured. It also greatly limited the scenarios when the holder of an assignment could collect attorney’s fees. This effectively eliminated assignments in State of Florida. Cross warns contractors against using assignments in the State of Florida, but points out that the issues there are present nowhere else in the country. Assignments should not be judged by unique circumstances in Florida that ended three years ago.
The States of Texas and Oregon generally refuse to enforce assignments of benefits, but they allow the assignment of a legal claim. Thus, if the insurance company breaches the insurance contract by underpaying on a claim, for example, or commits insurance bad faith, the contractor may be able to take ownership of the legal claim and sue the insurance company directly. But in most other states, contractors can and should seek assignments.
When policyholders either run off with the insurance money or use it to pay something off, (such as their mortgage), with a well-executed AOB you can go back to the insurance company and demand that they pay a second time.
“Ultimately, they write a second check when they're unable to get the policyholder to pay out the money,” Cross said. “And we're often able to do that without filing a lawsuit.”
Unfortunately, the insurance industry does not train adjusters to know that assignments of benefits need to be honored. Adjusters are often dismissive of them and give all the money to the policyholder — which is when things get out of control.
The AGA is out to change all of that. It will be releasing a 50-state Summary of the Law of Assignments regarding the enforceability of assignment of benefits which contractors can use in their communications and negotiations with stubborn insurance companies. At the RIA Convention in Orlando on June 29, 2021, Cross will present the first session of the AGA Academy, which will teach contractors how to prepare, present, and prosecute assignments using RIA’s Summary of the Law of Assignments. The event is rapidly selling out and contractors should sign up now to avoid missing this special opportunity.
Tips for Contractors and AOB’s
Cross offers three points that every restoration contractor should take into account when looking to sign an AOB.
The first is that most restorers mistakenly believe that they have an AOB, when in fact, all they have is a direction to pay.
“The typical restoration work authorization says that the policyholder instructs the insurance company to name the contractor on the check and correctly to name the contractor on the check,” Cross said. “Contractors think that's an assignment. It's not an assignment; it is merely a direction to pay.”
An assignment is a transfer of legal title, meaning that ownership of part of the insurance claim is being transferred to the contractor. This puts the contractor in “privity” (a legal relationship) with the insurer that allows the contractor to obtain remedies based on the insurance policy. A direction to pay should be included in an assignment of benefits document. But it is not, in and of itself, an assignment because it does not transfer ownership.
Second is that an assignment should include more than the assignment of “benefits.” It should also include an assignment of the right to go to appraisal. Appraisal is a process under the insurance policy where if a policyholder and an insurance company are unable to agree on the amount of loss, they can submit the matter to independent appraiser, who sets the amount of the loss.
Last, and most important, the assignment should also include an assignment of the right to sue the insurance company for breach of the policy and for insurance bad faith in jurisdictions that recognize this. This is why Cross no longer generates “Assignments of benefits” for his clients; he generates “Assignments of Insurance Rights.” A well-drafted Assignment of Insurance rights includes assignments of benefits, the right to appraisal, and the rights to sue, as well as a direction to pay.
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