One of the things that makes the restoration industry unique is that payment for services is usually made by a third party, the insurance company, whereas payment for services provided by other industries is usually made by the recipient of the service. The restoration industry relies heavily on proceeds from property insurance policies as compensation for restoration services. Too frequently, restorers accept greatly reduced prices for their work, just to make payroll and keep the lights on. This needs to change.
Restorers report to me that they often feel disempowered because they are on the outside of the insurer-insured relationship, and the flow of money. Fortunately, there is a way to put the restorer into a legal relationship with the insurance company. An enforceable assignment of insurance rights fundamentally alters the dynamics of property insurance claims, negotiations, and settlements.
Restorers can relieve their customers from some of the burden of the insurance claims process by obtaining an assignment that allows the restorer to collect directly from the insurance company. A properly-drafted assignment can empower the restorer to compel the insurance company to pay fair market value for services rendered, to employ reasonable claims handling practices, to comply with the terms of the policy and the law, and to pay the restorer directly to prevent policyholders from misappropriating policy proceeds. This has been a game changer for many of my clients, and the reason why most them have broad assignments in all their contracts. (If you run a franchise or work on vendor programs, check your agreements to determine what types of assignments are allowed.)
What is an assignment? An assignment is the transfer of legal ownership of a right from one party to another.
In the American legal system, nearly every kind of right can be transferred to another party. Many restorers falsely believe that their contracts contain assignments of benefits, when in fact, all they include is an unenforceable direction to the insurance company to name the restorer on checks. Insurers routinely ignore those requests. A “direction to pay” is not an assignment of legal rights and usually will not solve the many payment problems that plague the restoration industry.
What should an assignment include? Many restorers’ assignments merely state that the policyholder is assigning the right to “proceeds,” and are silent about the right to sue the insurer for bad faith. In that case, if the carrier commits bad faith and refuses to pay the claim, the carrier may try to argue that the restorer has no rights to sue because no “proceeds” were issued. In other words, if you only have an assignment of payments that are issued, the carrier could decide in bad faith not to make a payment, and then claim that you have no right to sue because your right is not triggered until a payment is made. This is why restorers should use an Assignment of Insurance Rights instead of a mere Assignment of Benefits.
To maximize the power of an assignment, it should include much more than just the right to “proceeds.” It should transfer legal ownership of all the policyholder’s rights against the insurance company with respect to your scope of work. An assignment of “insurance rights” is much broader than an assignment of “benefits.” Strong assignments transfer to the restorer the right to appraisal, and the right to take legal action against the carrier. They also include a direction to pay, which is an instruction to name the restorer on the check.
The right to appraisal. Property insurance policies typically state that if the insured and the insurer are unable to agree as to the amount of the loss, the dispute may be submitted to appraisal. The purpose of appraisal is to quickly and economically resolve a dispute as to the amount of a loss. I believe the insured’s right to appraisal can be assigned to the restorer.
Appraisal works a lot like arbitration. The insurer and the insured each appoint an “independent” appraiser to determine the amount of the loss. The appraisers choose an umpire. If the appraisers don’t agree on the amount of the loss, the umpire decides. The decision is binding. No one goes to court and no one pays a dime to lawyers.
Appraisal is starting to get a little attention in the restoration industry, and I think it should be explored as an efficient claim resolution process, because it is fast and requires no attorneys.
However, since restorers are not original parties to the insurance policies, they have no legal right to compel appraisal, unless that right is assigned to them.
Appraisal and litigation are not mutually exclusive. For example, appraisal does not generally address coverage issues in most states. Appraisers cannot award punitive damages or attorneys’ fees. They do not rule on legal liability for breach of the contract of insurance or insurance bad faith. In most states, all they can do is “set the amount of the loss.” Other issues can be resolved in court, if needed.
Get a seat at the table. Obtain an assignment of the right to appraisal.
The right to take legal action against the carrier. If an insurer breaches the contract of insurance or mishandles the claim in bad faith as to the restorer’s scope of work, a well-drafted assignment may give the restorer the right to pursue legal claims against the insurer for breach of the contract of insurance and bad faith. In those cases, many states allow the holder of an assignment to recover attorneys’ fees, punitive damages, or both.
When to use an assignment. In the vast majority of states, the best practice is to obtain an assignment on every property damage job. Although there is no deadline to
execute an assignment, the best practice is get an assignment executed concurrently with the execution of the restoration contract. Do it sooner rather than later, because an insurance company is not bound by an assignment of which it has no notice. Once the insurance company is on formal notice of an enforceable assignment, it must name the restorer on the check. If it fails to do so, it could be forced to pay again if the policyholder runs off to Hawaii with the money, or uses it to pay off the mortgage. We have forced major insurers to pay a second time without having to file suit.
Ignore the naysayers. Don’t judge assignments by Florida history. Florida used to have a system that encouraged litigation over assignments. That’s history and no other state had a system like that. Insurance industry propaganda alleges that insurance assignments allow contractors to make repair decisions. Assignments of insurance rights have nothing to do with repair decisions; they only deal with insurance rights. The only way property owners could lose the right to make repair decisions is if they affirmatively relinquish that right. Assignments simply do not function that way. Similarly, assignments do not create a right to charge excessive prices. Insurers are not required to pay more than the fair market value of the work.
Thus, the value of a claim is set by a free and competitive restoration market, where contractors with reasonable prices succeed, and contractors with excessive prices fail.
Check out RIA’s AOB Reference Guide! The Restoration Industry Association has published a 50-State Reference Guide to the Law of Assignments of Benefits and Insurance Bad Faith, available at www.RestorationIndustry.org. The object of this publication, and the Association’s Advocacy & Government Affairs (AGA), is to improve communication among stakeholders, minimize claims disputes, reduce cycle times, and streamline the claims settlement process for all involved. This will allow restorers and insurers to earn a reasonable profit while providing timely and fair service to the consumer, all of which are crucial to create and maintain a healthy and sustainable restoration ecosystem. The Guide does not contain assignment forms. Instead, it is a valuable collection of legal research that restorers can take to their lawyers to formulate an assignment strategy.
To enforce the right to fair market value for restoration services, and get paid even when a policyholder runs off with insurance proceeds, I highly recommend the use of a carefully-crafted Assignment of Insurance Rights. It is the key to unlocking insurance funds for many restorers.
Disclaimer: This article is intended for general information purposes and is not intended to be legal advice. Legal issues should be presented to qualified counsel licensed to practice law in the jurisdiction where the events occurred.