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Missouri Laws > Chapter 426 – Assignment for Benefit of Creditors

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Terms Used In Missouri Laws > Chapter 426 - Assignment for Benefit of Creditors

• Affidavit : A written statement of facts confirmed by the oath of the party making it, before a notary or officer having authority to administer oaths.
• Answer : The formal written statement by a defendant responding to a civil complaint and setting forth the grounds for defense.
• Appeal : A request made after a trial, asking another court (usually the court of appeals) to decide whether the trial was conducted properly. To make such a request is "to appeal" or "to take an appeal." One who appeals is called the appellant.
• Assets : (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
• Attachment : A procedure by which a person's property is seized to pay judgments levied by the court.
• Contract : A legal written agreement that becomes binding when signed.
• Damages : Money paid by defendants to successful plaintiffs in civil cases to compensate the plaintiffs for their injuries.
• Deed : The legal instrument used to transfer title in real property from one person to another.
• Evidence : Information presented in testimony or in documents that is used to persuade the fact finder (judge or jury) to decide the case for one side or the other.
• hereafter : means the time after the statute containing it takes effect. See Missouri Laws 1.020
• Heretofore : means any time previous to the day when the statute containing it takes effect. See Missouri Laws 1.020
• In vacation : includes any adjournment of court for more than one day whenever any act is authorized to be done by or any power given to a court, or judge thereof in vacation, or whenever any act is authorized to be done by or any power given to a clerk of any court in vacation. See Missouri Laws 1.020
• Jurisdiction : (1) The legal authority of a court to hear and decide a case. Concurrent jurisdiction exists when two courts have simultaneous responsibility for the same case. (2) The geographic area over which the court has authority to decide cases.
• Liabilities : The aggregate of all debts and other legal obligations of a particular person or legal entity.
• Month : means a calendar month, and "year" means a calendar year unless otherwise expressed, and is equivalent to the words year of our Lord. See Missouri Laws 1.020
• Oath : A promise to tell the truth.
• Obligation : An order placed, contract awarded, service received, or similar transaction during a given period that will require payments during the same or a future period.
• person : may extend and be applied to bodies politic and corporate, and to partnerships and other unincorporated associations. See Missouri Laws 1.020
• Property : includes real and personal property. See Missouri Laws 1.020
• Prosecute : To charge someone with a crime. A prosecutor tries a criminal case on behalf of the government.
• Settlement : Parties to a lawsuit resolve their difference without having a trial. Settlements often involve the payment of compensation by one party in satisfaction of the other party's claims.
• State : when applied to any of the United States, includes the District of Columbia and the territories, and the words "United States" includes such district and territories. See Missouri Laws 1.020
• Trial : A hearing that takes place when the defendant pleads "not guilty" and witnesses are required to come to court to give evidence.
• Trustee : A person or institution holding and administering property in trust.
• Writ : A formal written command, issued from the court, requiring the performance of a specific act.

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ASSIGNMENT OF CONTRACT

Assignment of contracts is the legal transfer of the obligations and benefits of a contract from one party, called the assignor, to another, called the assignee.3

What assignment of a Contract?

Assignment of contract is the legal transfer of the obligations and benefits of a contract from one party, called the assignor, to another, called the assignee. The assignor must properly notify the assignee so that he or she can take over the contractual rights and obligations. This can be done using a document called an assignment agreement, which allows you to protect your legal rights while transferring the contract.

An assignment agreement is appropriate for your needs if the following are true:

You want to transfer your contractual rights, responsibilities, and obligations to another individual or company. You or your business are taking over a contract from another person or business. The assignment agreement includes the names of the assignor and assignee, the name of the other party to the contract in question (known as the obligor), the contract’s title and expiration date, whether the obligor needs to consent to the transfer of the rights based on the original terms of the contract, when the obligor consented, when the assignment agreement takes effect, and what state will govern the transferred contract. The assignment agreement may also be called the contract assignment, assignment contract, or assignment of contract.

While assignment contracts are typically only used for amounts of less than $5,000, you can assign a higher profit contract when both the buyer and seller agree. You cannot assign a contract if the original contract prohibits doing so.

If you are assigning a contract, you may want to ask the obligor to sign a release or waiver agreement that releases you from contract liability. In addition to transferring rights and obligations, you can also use an assignment agreement to transfer an income stream to an assignee. However, when transferring rights to intellectual or personal property, it’s best to instead use a trademark assignment, bill of sale, or assignment of a trade name.

How Do Assignments Work?

The procedure for assigning a contract depends on the language of that contract. For example, some contracts may disallow assignment, while others may allow it only when the obligor consents. In some cases, the assignor is not relieved of contract liability. This occurs when the original contract has a clause that guarantees performance regardless of assignment.

If you want to buy a contract, look for sellers in newspaper ads, online marketing, and direct mail. In most cases, it makes the most sense to use multiple strategies. For real estate contracts, make sure you conduct a title search on the property in question to make sure there are no liens. You can hire a title company or real estate attorney to ensure that a title is clean before signing an assignment contract.

After you sign the assignment contract, you have an interest in the property and can sell it to an end buyer. Market the property through a dedicated website. Once you find a potential buyer, require an earnest money deposit. This is nonrefundable and allows you to make a profit whether or not the deal is successfully completed. If the deal is completed, the end buyer wires funds to cover the sale price of the property along with your stated fee.

In some cases, you can make a profit just by referring a buyer to an appropriate property and taking a finder’s fee. With this strategy, you assign your rights to the buyer, allowing them to close on the property, after which you receive your fee. This is a low-risk endeavor if you have detailed information on exactly what each buyer is looking for. You’ll also need to have the resources to locate great properties before they hit the market. With those two components, you’ll be able to make money as a real estate investors without risking your own capital.

You can also close on the property yourself and immediately flip it to another investor.

When Are Assignments Not Enforced?

An assignment agreement is not enforced if the original contract contains a clause that prohibits assignment. If performance is affected, value is decreased, or risk is increased for the obligor, few courts will enforce the assignment. These circumstances are referred to as a material alteration in the contract.

Contract assignments are also prohibited by some state laws. In many states, an employee is prohibited from assigning future wages. Certain claims against the federal government are also prohibited from an assignment. Some assignments violate public policy rather than law, such as the assignment of a personal injury claim. This is not allowed because it could encourage litigation.

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SUBROGATION VS. ASSIGNMENT IN MISSOURI: When Can You Subrogate Property Damage?

• SUBROGATION VS. ASSIGNMENT IN MISSOURI:…

In the June 20, 2023, Missouri Court of Appeals decision in Thomas v. Ramushi , the court held that, absent a “direct assignment”, an auto insurer has no authority to seek a subrogation payment from the tortfeasor without the insured’s consent. [1] Without an assignment of a property damage claim against a tortfeasor, a subrogated insurance company has no right to make a direct claim against the tortfeasor or his insurer for reimbursement of the sums it paid to its insured. This comes as quite a surprise to a number of our clients who have been contently subrogating property damage cases in Missouri just as they have in most other states.

The rule in Missouri is somewhat unique compared to other states, however. Missouri law distinguishes between subrogation rights and assignment rights and the subrogation of property damage claims is problematic because of this distinction. An insured holds the proceeds of any tort recovery for the insurer and the insurer has no right to directly sue, arbitrate, or settle the insured’s claim directly. [2] Unless the insured assigns his cause of action directly to the insurer, the insurer has no power to seek a payment or settlement without the insured’s consent. [3]

In auto property subrogation, it is the insured’s exclusive right to sue the tortfeasor for damages. [4] If the insured obtains a double recovery, the auto insurer may pursue its reimbursement right against its insured, but the unauthorized subrogation actions of the auto insurer do not divest the insured of his ability to seek a full recovery from the tortfeasor. An insured holds the proceeds of any recovery for the insurer and the insurer has no right to directly sue, arbitrate, or settle the insured’s claim directly. [5] Unless the insured assigns his cause of action directly to the insurer, the insurer has no power to seek a payment or settlement without the insured’s consent. [6] With subrogation, the insured retains the legal right to its claim and “the insurer cannot sue the tortfeasor directly but must wait and assert its subrogation interest against any recovery the insured makes against the tortfeasor.” [7]

In Thomas v. Ramushi , the insured’s auto carrier (Liberty Mutual) subrogated (via arbitration) property damage from a total loss it paid together with the insured’s deductible and collected both. It paid the deductible to its insured, who then sued the tortfeasor on its own for other uninsured losses. The tortfeasor prevailed because of the carrier’s subrogation claim. The court of appeals determined that the insurer had no power to seek a payment or settlement without the insured’s consent because she did not assign her claims to it. The court held that, unless the insured assigns their claim to the insurer, the insurer’s only interest is an equitable right to subrogation. The deductible was not Liberty’s claim to recover and there is nothing suggesting the insured authorized the settlement of her claims. In Hagar v. Wright Tire & Appliance, Inc ., the court said,

In a subrogation situation,” the insured retains the legal right to their claim and “the insurer cannot sue the tortfeasor directly but must wait and assert its subrogation interest against any recovery the insured makes against the tortfeasor. [8]

Without an assignment, the insurer has “no right to make a direct claim” against the tortfeasor or his insurer for reimbursement of the sums it paid to the insured and it “certainly [has] no right to arbitrate and settle the claim directly,” without the plaintiff’s consent. The exclusive right to pursue the tortfeasor remains with the insured, and the insured holds the proceeds for the insurer. [9] If the interest of the insurer is derived by subrogation, the action must be brought by, or at least in the name of, the insured, even though the insurer is subrogated to the entire cause of action. If the entire cause of action is assigned to the insurer, the action must be brought by the insurer, even though the insurer has paid only part of the loss and is subrogated to the extent of the payment. [10] Causes of in action for property torts may be assigned. Causes of action for personal injury, however, are not assignable. [11]

Assignment v. Subrogation

All of this begs the question of whether an insurance policy provides for “subrogation” or “assignment.” This is where the terms of the policy become so important. Whether or not there is an assignment of a claim for damage to property depends on the wording of the policy. In Travelers v. Chumbley , the subrogation clause of the policy in question provided:

 * * * the insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights * * * the insured shall have against the tort-feasor. [12]

The court held that Travelers’ status, in legal effect, was that of an assignee of a portion of Chumbley’s cause of action. When determining whether an insurance policy creates an assignment or a right to subrogation, the rules governing the interpretation of insurance policies are important. If a policy is not ambiguous, it is enforced as written. However, if it is ambiguous, the policy is construed against the insurer, which drafted the policy. [13] The subrogation clause found in Travelers v. Chumbley appears to be stronger than the subrogation language we typically see within conventional Missouri policies. Carriers should ensure they have included specific assignment language which clearly establishes the assignment of an insured’s right of subrogation. However, it must be remembered that Missouri law prevents a carrier from receiving an assignment of an insured’s right of subrogation when in the realm of a personal injury claim. A traditional assignment of rights is effective in Missouri for property damage cases only. This is true even with the most clear and specific assignment language.

An “assignment” is “a transfer or making over to another of the whole of any property, real or personal, in possession or in action.” [14] When there is an assignment of an entire claim there is a complete divestment of all rights from the assignor and a vesting of those same rights in the assignee. In the case of subrogation, however, only an equitable right passes to the subrogee (insurer) and the legal title to the claim is never removed from the subrogor (insured) but remains with him throughout. [15]

The controlling difference in Missouri between the assignment of a claim and subrogation to a claim is that when there is an assignment of an entire claim there is a complete divestment of all rights from the assignor (insured) and a vesting of those same rights in the assignee (insurer). In the case of subrogation, however, only an equitable right passes to the insurer and the legal title to the claim is never removed from the insured but remains with him throughout. [16]

Subrogation professions handling Missouri claims should look closely at the policy language they are dealing with and make subrogation decisions based on this language and Missouri’s strange subrogation/assignment dichotomy.

For questions regarding property subrogation in Missouri, contact Lee Wickert at [email protected] .

[1] Thomas v. Ramushi , 674 S.W.3d 112 (Mo. App. 2023), reh’g and/or transfer denied (July 24, 2023), transfer denied (Sept. 26, 2023).

[2] Hagar v. Wright Tire & Appliance, Inc ., 33 S.W.3d 605 (Mo. App. 2000).

[4] Farmers Ins. Co., Inc. v. Effertz , 795 S.W.2d 424 (Mo. App. W.D. 1990) (citing Jessee , 523 S.W.2d at 834) (“The exclusive right to sue for the entire loss remains with the insured …. though he will hold the proceeds for the insurer.”).

[5] Hagar v. Wright Tire & Appliance, Inc ., 33 S.W.3d 605 (Mo. App. 2000).

[7] Effertz , supra .

[8] Hagar, supra .

[9] Knob Noster R-VIII School Dist. v. Dankenbring , 220 S.W.3d 809 (Mo. Ct. App. 2007).

[10] Warren v. Kirwan , 598 S.W.2d 598 (Mo. Ct. App. 1980).

[11] Scottsdale Insurance Company v. Addison Insurance Company , 448 S.W.3d 818 (Mo. 2014).

[12] Travelers Indem. Co. v. Chumbley , 394 S.W.2d 418 (Mo. App. 1965).

[13] Keisker v. Farmer , 90 S.W.3d 71 (Mo. 2002).

[14] Kroeker v. State Farm Mut. Auto. Ins. Co. , 466 S.W.2d 105 (Mo. App. 1971).

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Assignment of Benefits for Contractors: Pros & Cons of Accepting an AOB

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Insurance , Restoration , Slow Payment

When a property owner files an insurance claim to cover a restoration or roofing project, the owner typically deals directly with the insurance company. They may not have the funds available to pay the contractor out of pocket, so they’re counting on that insurance check to cover the construction costs.

But insurance companies often drag their feet, and payments can take even longer than normal. Contractors often wish they could simply deal with the insurance company directly through an assignment of benefits. In some circumstances, an AOB can be an effective tool that helps contractors collect payment faster — but is it worth it?

In this article, we’ll explain what an assignment of benefits is, and how the process works. More importantly, we’ll look at the pros and cons for restoration and roofing contractors to help you decide if an AOB is worth it . 

What is an assignment of benefits? 

An assignment of benefits , or AOB, is an agreement to transfer insurance claim rights to a third party. It gives the assignee authority to file and negotiate a claim directly with the insurance company, without involvement from the property owner. 

An AOB also allows the insurer to pay the contractor directly instead of funneling funds through the customer. AOBs take the homeowner out of the claims equation.

Here’s an example: A property owner’s roof is damaged in a hurricane. The owner contacts a restoration company to repair the damage, and signs an AOB to transfer their insurance rights to the contractor. The contractor, now the assignee, negotiates the claim directly with the insurance company. The insurer will pay the claim by issuing a check for the repairs directly to the restoration contractor. 

Setting up an AOB

A property owner and contractor can set up an assignment of benefits in two steps: 

• The owner and the contractor sign an AOB agreement
• The contractor sends the AOB to the insurance company

Keep in mind that many states have their own laws about what the agreement can or should include .

For example, Florida’s assignment of benefits law contains relatively strict requirements when it comes to an assignment of benefits: 

• The AOB agreements need to be in writing. The agreement must contain a bolded disclosure notifying the customer that they are relinquishing certain rights under the homeowners policy. You can’t charge administrative fees or penalties if a homeowner decides to cancel the AOB. 
• The AOB must include an itemized, per-unit breakdown of the work you plan to do. The services can only involve how you plan to make repairs or restore the home’s damage or protect the property from any further harm. A copy must be provided to the insurance company. 
• A homeowner can rescind an AOB agreement within 14 days of signing, or within 30 days if no work has begun and no start date was listed for the work. If a start date is listed, the 30-day rule still applies if substantial progress has not been made on the job. 

Before signing an AOB agreement, make sure you understand the property owner’s insurance policy, and whether the project is likely to be covered.

Learn more – Assignment of Benefits: Ultimate Guide for Contractors & Policyholders

Pros & cons for contractors

It’s smart to do a cost-benefit analysis on the practice of accepting AOBs. Listing pros and cons can help you make a logical assessment before deciding either way. 

Pro: Hiring a public adjuster

An insurance carrier’s claims adjuster will inspect property damage and arrive at a dollar figure calculated to cover the cost of repairs. Often, you might feel this adjuster may have overlooked some details that should factor into the estimate. 

If you encounter pushback from the insurer under these circumstances, a licensed, public adjuster may be warranted. These appraisers work for the homeowner, whose best interests you now represent as a result of the AOB. A public adjuster could help win the battle to complete the repairs properly. 

Pro: More control over payment

You may sink a considerable amount of time into preparing an estimate for a customer. You may even get green-lighted to order materials and get started. Once the ball starts rolling, you wouldn’t want a customer to back out on the deal. 

Klark Brown , Co-founder of The Alliance of Independent Restorers, concedes this might be one of the very situations in which an AOB construction agreement might help a contractor. “An AOB helps make sure the homeowner doesn’t take the insurance money and run,” says Brown.  

Pro: Build a better relationship with the homeowner

A homeowner suffers a substantial loss and it’s easy to understand why push and pull with an insurance company might be the last thing they want to undertake. They may desire to have another party act on their behalf. 

As an AOB recipient, the claims ball is now in your court. By taking some of the weight off a customer’s shoulders during a difficult period, it could help build good faith and further the relationship you strive to build with that client. 

Learn more : 8 Ways for Contractors to Build Trust With a Homeowner

Con: It confuses payment responsibilities

Even if you accept an AOB, the property owner still generally bears responsibility for making payment. If the insurance company is dragging their feet, a restoration contractor can still likely file a mechanics lien on the property .

A homeowner may think that by signing away their right to an insurance claim, they are also signing away their responsibility to pay for the restoration work. This typically isn’t true, and this expectation could set you up for a more contentious dispute down the line if there is a problem with the insurance claim. 

Con: Tighter margins

Insurance companies will want repairs made at the lowest cost possible. Just like you, carriers run a business and need to cut costs while boosting revenue. 

While some restoration contractors work directly with insurers and could get a steady stream of work from them, Brown emphasizes that you may be sacrificing your own margins. “Expect to accept work for less money than you’d charge independently,” he adds. 

The takeaway here suggests that any contractor accepting an AOB could subject themselves to the same bare-boned profit margins. 

Con: More administrative work

Among others, creating additional administrative busywork is another reason Brown recommends that you steer clear of accepting AOBs. You’re committing additional resources while agreeing to work for less money. 

“Administrative costs are a burden,” Brown states. Insurers may reduce and/or delay payments to help their own bottom lines. “Insurers will play the float with reserves and claims funds,” he added. So, AOBs can be detrimental to your business if you’re spending more while chasing payments. 

Con: Increase in average collection period

Every contractor should use some financial metrics to help gauge the health of the business . The average collection period for receivables measures the average time it takes you to get paid on your open accounts. 

Insurance companies aren’t known for paying claims quickly. If you do restoration work without accepting an AOB, you can often take action with the homeowner to get paid faster. When you’re depending on an insurance company to make your payment, rather than the owner, collection times will likely increase.

The literal and figurative bottom line is: If accepting assignment of benefits agreements increases the time it takes to get paid and costs you more in operational expense, these are both situations you want to avoid. 

Learn more: How to calculate your collection effectiveness 

AOBs and mechanics liens

A mechanics lien is hands down a contractor’s most effective tool to ensure they get paid for their work. Many types of restoration services are protected under lien laws in most states. But what happens to lien rights when a contractor accepts an assignment of benefits? 

An AOB generally won’t affect a contractor’s ability to file a mechanics lien on the property if they don’t receive payment. The homeowner is typically still responsible to pay for the improvements. This is especially true if the contract involves work that wasn’t covered by the insurance policy. 

However, make sure you know the laws in the state where your project is located. For example, Florida’s assignment of benefits law, perhaps the most restrictive in the country, appears to prohibit an AOB assignee from filing a lien. 

Florida AOB agreements are required to include language that waives the contractor’s rights to collect payment from the owner. The required statement takes it even further, stating that neither the contractor or any of their subs can file a mechanics lien on the owner’s property. 

On his website , Florida’s CFO says: “The third-party assignee and its subcontractors may not collect, or attempt to collect money from you, maintain any action of law against you, file a lien against your property or report you to a credit reporting agency.”

That sounds like a contractor assignee can’t file a lien if they aren’t paid . But, according to construction lawyer Alex Benarroche , it’s not so cut-and-dry.

“Florida’s AOB law has yet to be tested in court, and it’s possible that the no-lien provision would be invalid,” says Benarroche. “This is because Florida also prohibits no-lien clauses in a contract. It is not legal for a contractor to waive their right to file a lien via an agreement prior to performance.” 

Learn more about no-lien clauses and their enforceability state-by-state

Remember that every state treats AOBs differently, and conflicting laws can create additional risk. It’s important to consult with a construction lawyer in the project’s state before accepting an assignment of benefits. 

Best practices for contractors 

At the end of the day, there are advantages and disadvantages to accepting an assignment of benefits. While it’s possible in some circumstances that an AOB could help a contractor get paid faster, there are lots of other payment tools that are more effective and require less administrative costs. An AOB should never be the first option on the table . 

If you do decide to become an assignee to the property owner’s claim benefits, make sure you do your homework beforehand and adopt some best practices to effectively manage the assignment of benefits process. You’ll need to keep on top of the administrative details involved in drafting AOBs and schedule work in a timely manner to stay in compliance with the conditions of the agreement. 

Make sure you understand all the nuances of how insurance works when there’s a claim . You need to understand the owner’s policy and what it covers. Home insurance policy forms are basically standardized for easy comparisons in each state, so what you see with one company is what you get with all carriers. 

Since you’re now the point of contact for the insurance company, expect more phone calls and emails from both clients and the insurer . You’ll need to have a strategy to efficiently handle ramped-up communications since the frequency will increase. Keep homeowners and claims reps in the loop so you can build customer relationships and hopefully get paid faster by the insurer for your work.

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Enforcement Action Shuts Down AOB’s and Contractor’s Negotiations For Repair Costs

Insurance restoration contractors play an important role in a policyholder’s, and often community’s, recovery following a disaster. Many restoration contractors have contracts calling for them to be paid what the insurance company agrees to pay on a claim. Those same contractors have Assignment of Benefit contracts (AOB’s) to ensure payment of claims monies for the repair work they do. This is a normal method of operation throughout many states after disasters happen. Policyholders want to immediately start with their repairs but have not finalized the amounts owed to do the repair work with their Insurance carriers.

A recent enforcement action in California 1 declared these business methods illegal and found AOB’s to be unenforceable. This December enforcement decision should be read carefully by insurance restoration contractors to make certain that they are not in violation of a particular state’s unfair business practices laws and public adjuster laws. It calls into question the legality of many typical insurance restoration contracts and the ability to enforce liens through AOB’s.

The Order preventing the contractor from using and enforcing AOB’s is quite clear:

Seeking or accepting any assignment of the insurance benefits of any person, partial or complete, for whom the defendants are making repairs to real property, or seeking to enforce any assignment of benefits the defendants have already received from any person with whom the defendants have contracted to make repairs to real property.

Like most states but not all, California construction contracts are required to state the total amount of monetary consideration of a construction project and what is specifically going to be done by the contractor. Since this may be costly and difficult to determine the exact amounts required to make repairs immediately following a loss, many contractors make agreements with policyholders that say they will do the work for the amounts ultimately paid by the insurance company or have placeholder monetary amounts listed in contracts. The California Court found this practice illegal:

[T]he People have proven by a preponderance that the defendants violated the FAL, by promising homeowners who had suffered re damage to their homes that the defendants would negotiate with the homeowners’ insurers regarding what the insurers would pay on the claim. This was false or misleading because the defendants could not lawfully negotiate with the insurers regarding the homeowners’ insurance claims. The defendants also included repair costs in contracts which were presented to homeowners which were untrue, because the defendants did not actually intend in good faith to complete repairs for the included cost, instead intending to use those contracts to negotiate increased cost with the homeowners’ insurers. Mr. Nordeman even testified the numbers were just ‘placeholders’. These false costs were false and misleading statements meant to sell the defendants’ services to those homeowners who were presented the contracts.

The second set of violations involved similar actions but centered on contractors offering claim negotiation and insurance coverage interpretation services which only licensed public adjusters can legally perform:

The People’s second cause of action alleged violations of Business and Professions Code §17200 et seq. Section 17200 denes ‘unfair competition’ to include any ‘unlawful, unfair or fraudulent business act or practice’. . .the People needed only prove the defendants committed either an unlawful, unfair or fraudulent business act or practice…. [T]he People have proven by a preponderance that the defendants violated each of the underlying laws at issue in this case by making false or misleading statements in violation of the FAL, engaging in unlawful public insurance adjusting in Violation of the Public Insurance Adjuster Act, and by using unlawful home improvement contracts….The laws which contractors must follow are very specific, and the law public insurance adjusters must follow is specific. The fact the defendants may feel they have the expertise to negotiate with insurance carriers regarding homeowners’ insurance claims does not comport with the current status of the law.

The court made the following general statement about the evidence and how these defendant contractors illegally conducted business, including the use of AOB’s:

The evidence showed defendants are licensed contractors who solicit homeowners who have suffered fire damage to their residential properties. The defendants offer to negotiate with the homeowners’ insurance carriers ‘at no cost’, in return for the contract to make repairs, for the full proceeds paid on the homeowners’ insurance claim. Defendants advertise through their website, and by directly contacting homeowners who have suffered fires to offer their services. The defendants use flyers that describe their services, including promising to negotiate with the homeowners’ insurance carrier to increase payment for repairs. As part of their offers to negotiate with insurers, the defendants entered into contracts, as a matter of course…described as ‘consulting’ or ‘construction consulting’ contracts. These…contracts called for the defendants to negotiate with the homeowners’ insurance carriers regarding what the defendants describe as the ‘true value’ of the repairs to be paid by the insurer. This was unlawful because negotiating for or seeking to affect the outcome of an insurance claim, for profit, is public insurance adjusting, which is regulated by the Public Insurance Adjuster Act. To engage in public insurance adjusting, defendants needed to be licensed, and to comply with all conflict of interest and consumer protection regulations contained in the Public Insurance Adjuster Act. The Court finds the defendants are not and have never been licensed as a public insurance adjuster and did not comply with the applicable conflict of interest regulations or consumer protections….a contractor is not a party to the homeowners’ insurance claim, and has no business getting involved in the settlement process. However, the defendants did exactly that numerous times. … The Court has specifically considered the vulnerability of the homeowners who had suffered fire damage, the sophistication of the defendants’ business operation, the ongoing and persistent unlawful business practices, and the lengths the defendant would go to in order to circumvent the law, going so far as to have homeowners assign their insurance claim rights to him. The Court finds the defendants’ use of assignment of benefits was merely a clever way for the defendants to try to avoid the public insurance adjusting regulations.

The case is California-specific. State laws vary significantly. Indeed, Illinois allows public adjusters to be contractors. Some states have very strict prohibitions on this. A few states do not let anybody other than the policyholder or the policyholder’s attorney negotiate the insurance claim or provide insurance contract interpretation.

Insurance restoration contractors should get a legal opinion about their business methods, construction contracts, and AOB’s seeking guidance for the specific state the insurance repairs are going to be made. They should also seek advice and guidance if it is proper to hire a public adjuster to negotiate the insurance claim if they cannot do so. I can imagine that many public adjusters may find a new source of business negotiating claims for insurance restoration contractors in states where that is allowed, assuming the contractor holds a valid assignment of benefits contract.

I also warn that some states may view their public adjuster licensing laws to allow negotiation of the claim only on behalf of policyholders and not contractors holding AOB’s. This has not been raised in any administrative proceeding to my knowledge, but I have heard people privately asking the question.

Insurance restoration contractors play a very important recovery role following a loss. We need a sufficient number of quality contractors who are available after major disasters to provide communities faster and proper recovery. As I noted in, Restoration Contractors Providing Great Quality Workmanship Are Policyholder Friends But Many Insurance Companies Refuse To Pay For Quality , in a day and age where many insurance companies will only pay for “okay” rather than “quality” construction work, policyholders are in jeopardy of not receiving their promise of full and prompt payment.

The decision clearly allows insurance restoration contractors to discuss their view of the construction project’s scope, methodologies, and pricing with the insurance company. Indeed, the insurance company adjuster should always discuss this aspect of a structure loss as part of the obligation to thoroughly investigate and evaluate the amount of the loss. Good faith obligations call upon insurance adjusters to speak with the contractor. The court order stated:

This order does not prohibit a defendant from providing information in response to a specific inquiry from an insurer regarding cost, scope or materials related to a home improvement estimate or contract, provided that such conduct does not otherwise result in a violation of law, statute or regulation, or of the prohibitions found in this order.

At the same time, everybody must follow laws, especially laws made to protect the public. There is a clear distinction between one acting for a policyholder in the negotiation of the policyholder’s insurance claim and one acting as the contractor discussing construction methodologies, the scope of the work to be done, and the pricing.

It is important to note the implications of this enforcement decision. I have been critical of the insurance industry for illegally allowing its own “construction consultants” to negotiate the value of the loss. This illegal practice is becoming much greater in the field because fewer competent field adjusters exist with true expertise in construction methods and pricing. The higher cost of paying for and educating licensed adjusters versus the lower cost by insurers looking the other way and paying less for unlicensed consultants is readily apparent to those practicing in the property insurance adjustment business. Insurance companies cannot escape the fact that their independent adjusting companies are having to hire “consultants” at a much greater rate because many of the independent adjusters simply do not have the expertise or possibly the allowed time to deal with detailed nuances of construction scope, methodology, and price.

This decision, if followed by other states, is a game-changer. By implication, it raises compliance issues not only for the insurance restoration industry but for the consultant-reliant insurance adjustment industry.

Thought For The Day

If you cannot be on the project each day to check on things, then you should not try and be your own contractor. —Robert Metcalfe _______________________________________ 1 People v. Montgomery-Sansome, LP , No. 17CIV04659 {Final Statement of Decision] (Cal. Sup. Ct. Dec. 3, 2021) .

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