Legal and Regulatory

Assignment of Benefits Agreements Are Subject to New Legislation

When emergency repairs are required, an assignment of benefits lets contractors perform work and file a claim directly with the insurance company. Some states have implemented new regulations for AOBs.
By Nate Budde
September 20, 2019
Topics
Legal and Regulatory

While Florida recently avoided a worst-case scenario with respect to Hurricane Dorian, the heart of hurricane season generally brings with it an up-tick in restoration projects. Restoration work, or other projects involving assignment of benefits agreements (AOBs) are not limited to hurricane prone states, however. Recent legislation in Florida and North Dakota may fundamentally change the way that restoration companies, or anyone involved in assignment of benefit contracts, approach potential jobs. AOBs in general have been under scrutiny by insurance companies and regulators and the increasing examination of this type of agreement, and the potential headaches associated with them, may alter the speed at which restoration work can be undertaken, or, at the very least, require contractors to exercise much more caution when doing insurance work.

What is an Assignment of Benefits Contract?

An Assignment of Benefits, or AOB, is an agreement that transfers rights to a third party. Specifically, with respect to a construction project, an AOB generally transfers insurance claims benefits under the policy to a contractor or restoration company. The AOB streamlines the process, and gives the contractor the ability to get paid directly, by providing the authority to file a claim, decide about the required work, and collect insurance payments without needing to further involve the property owner. For example, if emergency repairs are required to a property, an AOB can be signed so that the contractor can perform work and file a claim with the insurance company to be paid directly. An assignment of benefits contract removes one link in the payment chain, and theoretically decreases the time to payment for work covered by the insurance policy.

When Can an Assignment of Benefits Contract be Used?

Generally, AOBs may be entered into at the whim of the insured and the contractor. Freedom of contract allows an insured to give up some of their rights to whomever they want to – and the insurance company is generally required to accept it. Overall, if an insured wants to give their rights to payment to a third party, it is within their legal right to do so. It is important to consider, however, that many states have public adjuster licensing requirements, and a contractor who handles a claim for the property owner, including determining the extent of damages and appropriate coverage, may bump up uncomfortably against these rules. In fact, a recent case in the Iowa Court of Appeals 33 Carpenters Construction, Inc. v. The Cincinnati Insurance Company, held that a contractor working under an assignment of benefits to repair wind and hail damage acted as an unlicensed public adjuster.

Since an AOB adds an additional party to the mix, some insurers attempt to circumvent this ability by issuing policies with express language that the benefits may not be assigned. In order to do so, insurance companies may now make separate policies available that completely restrict the ability to assign benefits (restricted policies), as long as they also offer the ability to purchase an “unrestricted” policy. However, since restricted policies are cheaper to obtain than unrestricted ones, it’s not a stretch to think that many newly obtained insurance policies will significantly lower the number of policies on which an AOB is allowable. Even when the policy allows for an AOB, however, there are new rules and requirements springing up across the country for contractors to consider.

Insurance companies’ successes in lobbying state legislators and insurance commissions to set strict regulatory requirements in Florida, North Dakota and Iowa, may represent a growing trend in tightening AOB regulation, and squeezing contractors and homeowners under the guise of consumer protection.

Florida and North Dakota Have Dramatically Modified Assignment of Benefits Regulations

The Florida assignment of benefits rules dramatically with recent legislation, and all contracts entered into after July 1, 2019 are subject to the new rules and requirements. Similarly, North Dakota also created an entirely new section of law related to contracts between insured homeowners and residential contractors, including “[p]ost-loss assignment of rights or benefits.”

While the stated goal in both states was to protect property owners by fighting off AOB abuse and stifling unnecessary litigation, the changes can dramatically impact construction businesses. For contractors who perform post-storm recovery work, and others who routinely use AOBs there are new things to keep in mind. No matter where the work is being performed, it is imperative that the contractor doing work makes sure that the AOB and their work pursuant to the AOB doesn’t breach state public adjusting laws. Additionally, however, contractors must be careful to pay attention to recent legislation, and talk with a lawyer to make sure that all of their i’s are dotted and t’s are crossed with respect to AOB rules and regulations. While an in-depth examination of AOB rules throughout the country is much too in-depth for this piece, a short examination of the recent Florida modifications can provide a helpful checklist of things all contractors should be aware of when contemplating AOB work in any state.

New Requirements

For the “unrestricted” policies where an assignment of benefits is still available there are many new requirements that contractors must consider. The new rules, requirements, and regulations can be broken down into three general topics:

  • the form of the contract;
  • the work that may be included; and,
  • contract cancellation.

The Form of the Contract

AOB agreements are specifically required to be in writing. In addition, the contract must include certain provisions and meet specificity requirements. In an AOB agreement, the contractor must include an itemized, per-unit breakdown of the materials and services that are to be provided. This means that lump sum agreements are prohibited. This is to allow the property owner and the insurance company to track and keep tabs on the specific costs of the project with better insight into the value and timing of the work. Further, there are additional requirements related to what work may be included.

The only work that is allowable in the AOB is work that is directly related to the repair of the property, including work performed to protect, repair, restore, replace or to mitigate further damage. There are also terms and clauses that are specifically disallowed from inclusion in AOB agreements. These prohibited clauses generally relate to penalties and fees, including penalties for properly terminating the contract, check or mortgage processing fees and other administrative fees. The new requirements go beyond just the document itself. It is now statutory Florida law that an owner be given the opportunity to rescind an AOB contract within 14 days of executing the agreement (regardless of whether any work has been performed), or within the later of 30 days after the agreement is signed or 30 days after work was scheduled to begin if substantial work has not yet been done on the project.

In addition to the other contract requirements, all assignment of benefits contracts must include a specific notice provision. This notice must be included word-for-word, and Florida legislators must really want property owners to see it, because it also must appear in 18-point, uppercase, bold font. The notice to be included is:

“You are agreeing to give up certain rights you have under your insurance policy to a third party, which may result in litigation against your insurer. Please read and understand this document before signing it. You have the right to cancel this agreement without penalty within 14 days after the date this agreement is executed, at least 30 days after the date work on the property is scheduled to commence if the assignee has not substantially performed, or at least 30 days after the execution of the agreement if the agreement does not contain a commencement date and the assignee has not begun substantial work on the property. However, you are obligated for payment of any contracted work performed before the agreement is rescinded. This agreement does not change your obligation to perform the duties required under your property insurance policy.”

Benefits to Insurers

It’s not just property owners who are supposed to be protected by the new rules and requirements. The overhaul of the AOB statutes are also specifically designed to benefit insurers. Specifically, contractors must give notice to the insurer when the work is being performed pursuant to an AOB. This notice must be given within three days after the earlier of the AOB being executed or the commencement of work and must include a copy of the executed agreement. If the contract or scope of work changes, the contractor is obligated to update the insurer with respect to those modifications.

In addition to the providing the AOB contract itself, contractors must keep detailed records of all services provided under the contract and they must make those records available to the insurer, if necessary. Making the records available includes cooperation with the insurer during the investigation of a claim or other issue. If an insurer requests certain documentation or records relating to the project, the contractor must provide them.

What if Insurer Isn’t Paying?

In the event that there is a dispute over payment for work done pursuant to the AOB agreement, the contractor must provide the insurer with written notice at least 10 days before filing suit to recover payment. And, like the contract requirements above, there are very specific content requirements for this notice.

The notice must include:

  • specific damages in dispute;
  • the amount claimed;
  • an updated, detailed, itemized written invoice or estimate of services;
  • the number of labor hours;
  • proof that the work performed was done up to industry standards; and
  • a settlement demand.

It’s crucial for a contractor’s notice to contain all required information, and for the settlement demand to be fair and accurate. Otherwise, a contractor could get stuck paying the insurer’s legal fees.

Recovery from Owner Barred?

Once all of the above has been digested and dealt with, there is an additional twist to a contractor’s ability to recover for work done pursuant to an AOB agreement. If a payment dispute arises with an insurer during a project where the work was undertaken pursuant to an AOB, the contractor (or any party down the chain also working on the project) is generally not allowed to attempt to recover payment from the owner. This is somewhat limited by the fact that an owner can be held responsible for payment up to the deductible, and for work that they have specifically approved, but other than those limitations, contractors are only allowed to proceed against to insurer to recover payment.

This brings up some interesting questions with respect to mechanics liens. Since Florida does not allow parties to preemptively waive lien rights through contract, it would appear that the above prohibition would not be allowed. However, mechanics liens are technically a claim against the property itself, not the owner. While the new regulations attempt to prohibit mechanics liens it is unclear how that will play out, since the ability of sub-tier parties to claim a mechanics lien to protect payment is strong public policy in Florida, and Florida does not allow third parties to waive others’ lien rights. Accordingly, the “no right to pursue the owner” and “no liens” portions of the new regulations may end up being of little practical use to owners. Also, it appears that the owner’s approval of the work in order to be obligated could be something easily obtained through artfully drafted contracts.

Any party who engages in AOB work must pay careful attention to public adjusting rules and requirements, and make sure that the specific regulations regarding AOB contracts themselves have been met. Whether working in disaster recovery, or any other work, contractors must pay attention to the new requirements, and come up with a new game plan about undertaking that work, and getting paid for it. With the current trend of limiting AOBs in an effort to protect homeowners and business owners (and insurance companies) it is conceivable that many contractors will be forced out of this type of work. The recent successes of the insurance lobby in creating additional hoops through which contractors must jump may kick-off an even more widespread trend of such regulations. No matter where AOB work is performed, it is now likely a good idea for contractors to have some legal oversight of both the contract and the process to make sure the ability to get paid is protected.

by Nate Budde
Nate Budde is an author for The Lien and Credit Journal and works as the Chief Legal Officer at zlien. The leading nationwide mechanics lien service, zlien provides services to help contractors reduce their credit risk through the management of mechanics lien and bond claim compliance. He is a licensed attorney in Louisiana, a graduate of Stanford University (B.A.) and Tulane Law School (J.D.). Connect with him via LinkedIn and Google+.

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