Contractors face an endless stretch of legal and business hurdles on a daily basis. They have to deal with weather, safety, personnel, material acquisition, permits, and needy homeowners. But, getting paid on residential construction work covered by a homeowner’s insurance policy should not be one of those hurdles because there is an easier way for contractors to get paid.
When a homeowner suffers a loss covered by their insurance policy, they have the right to assign their insurance benefits to the contractor making the repairs to their home. By doing this, the homeowner authorizes the insurance company to make the contractor a co-payee for that loss.
In most states, the law permits contractors to ask homeowners to assign their post-loss benefits to the contractor for the work they bid. This allows the contractor to receive payment directly from the homeowner’s insurance company. And, most importantly, helps the contractor avoid those dreaded situations where a homeowner receives their insurance payout but refuses to pay their contractor for its work.
Contractors, however, must beware of the many pitfalls that they can fall into with these post-loss assignments of benefit agreements. Failure to follow laws designed to protect insured homeowners can lead to a contractor’s entire contract becoming voided.
For example, a post-loss assignment of benefits has to be a written agreement. That agreement must contain certain language as set forth by statute, and the contractor has to place the homeowner’s insurance on notice of the assignment within a certain number of days depending on the jurisdiction.
Contractors also have to be careful not take certain forbidden actions on behalf of the homeowner. Some states like Iowa forbid a contractor from negotiating with a homeowner’s insurance company on the homeowner’s behalf. Other states strictly forbid a residential contractor from offering rebates on their deductible as an incentive for choosing their construction company for their job. Mistakes like these can cause a court to find the residential contractor’s entire agreement is void and unenforceable.
Finally, post-loss assignment of benefits under an insurance policy must include specific language depending on the jurisdiction that the contract is contemplated. For example, in Nebraska, a contractor must include the following language in all caps and in 14 pt. font for its assignment to be proper:
YOU ARE AGREEING TO ASSIGN CERTAIN RIGHTS YOU HAVE UNDER YOUR INSURANCE POLICY. WITH AN ASSIGNMENT, THE RESIDENTIAL CONTRACTOR SHALL BE ENTITLED TO PURSUE ANY RIGHTS OR REMEDIES THAT YOU, THE INSURED HOMEOWNER, HAVE UNDER YOUR INSURANCE POLICY. PLEASE READ AND UNDERSTAND THIS DOCUMENT BEFORE SIGNING.
THE INSURER MAY ONLY PAY FOR THE COST TO REPAIR OR REPLACE DAMAGED PROPERTY CAUSED BY A COVERED PERIL, SUBJECT TO THE TERMS OF THE POLICY.
IT IS A VIOLATION OF THE INSURANCE LAWS OF NEBRASKA TO REBATE ANY PORTION OF AN INSURANCE DEDUCTIBLE AS AN INDUCEMENT TO THE INSURED TO ACCEPT A RESIDENTIAL CONTRACTOR'S PROPOSAL TO REPAIR DAMAGED PROPERTY. REBATE OF A DEDUCTIBLE INCLUDES GRANTING ANY ALLOWANCE OR OFFERING ANY DISCOUNT AGAINST THE FEES TO BE CHARGED FOR WORK TO BE PERFORMED OR PAYING THE INSURED HOMEOWNER THE DEDUCTIBLE AMOUNT SET FORTH IN THE INSURANCE POLICY.
THE INSURED HOMEOWNER IS PERSONALLY RESPONSIBLE FOR PAYMENT OF THE DEDUCTIBLE. THE INSURANCE FRAUD ACT AND NEBRASKA CRIMINAL STATUTES PROHIBIT THE INSURED HOMEOWNER FROM ACCEPTING FROM A RESIDENTIAL CONTRACTOR A REBATE OF THE DEDUCTIBLE OR OTHERWISE ACCEPTING ANY ALLOWANCE OR DISCOUNT FROM THE RESIDENTIAL CONTRACTOR TO COVER THE COST OF THE DEDUCTIBLE. VIOLATIONS MAY BE PUNISHABLE BY CIVIL OR CRIMINAL PENALTIES.
The contractor must have the homeowner sign and date below this language as well. Then, after the post-loss assignment of benefits is executed, a residential contractor in Nebraska must provide a copy of the assignment to the homeowner’s insurance company within five business days.
By taking advantage of post-loss assignments of rights under an insurance policy, contractors can keep revenue streams open cand collections moving. And often times, these simple assignments can help a contractor avoid the headache of executing liens as well. Residential contractors, however, should remember that contracts can be tricky. Assignments like the one described above need to be properly incorporated into the contractor’s underlying contract and those contracts need to meet all necessary formalities under the law to be binding. Therefore, contractors should never hesitate to reach out to a construction lawyer who is familiar with construction contracts and litigation when they have questions about their contracts.