Policyholders with “Replacement Cost Value” property insurance have the right to reimbursement for all costs necessarily incurred in repairing or replacing the lost structure with materials of like kind and quality. (See California Insurance Code section 2051). Although a portion of that is payable up front, it is not usually, nor designed to be, the full cost necessary to repair or replace. Thus, unless an insurer makes voluntary cash advances or the policyholder can replace for substantially less than estimated, the policyholder must go out of pocket for at least some of the repair costs.
One option to avoid that is hiring a contractor who is willing to work on an assignment of benefits (“AOB”). An AOB agreement is one in which a policyholder agrees to legally transfer their right to the insurance claim proceeds to a contractor in exchange for the work. AOBs are generally legal in California for claims under homeowners policies. (California Insurance Code section 520; Fluor Corp. v. Superior Court, 61 Cal. 4th 1175 (2015)). But, they may not be for commercial policies, which depends on the specific policy language. For commercial policyholders, the conditions section of the policy should contain the pertinent information, and the policyholder should always check with the insurer before engaging in an AOB even if there is no pertinent policy language.
Assuming an AOB is permissible, policyholders should be cognizant of the risks involved, and should pay careful attention to the AOB agreement with the contractor. Here are four common concerns to look out for:
First, what happens in the event the insurance company refuses to pay some or all of the claim? Typically, contractors will want the AOB agreement to give them the option to sue both the insurer or the policyholder. Policyholders should be cautious of this, and try to negotiate so that the AOB agreement limits the situations in which the contractor can come after the policyholder to instances where the non-payment or underpayment are the policyholder’s fault, not the insurer's. An ideal AOB agreement would also give the contractor the right and duty to sue the insurer in that situation so the contractor cannot force that upon the insured.
Second, policyholders need to carefully compare the estimated cost to repair or replace with the policy limits, and continue to monitor the actual costs incurred by the contractor to ensure the policy is sufficient to pay for everything. Despite the fact that Replacement Cost Value policies are supposed to come with high enough limits to cover the full cost to repair and replace, they often are far too low, which can leave an unscrupulous policyholder with substantial liability on top of the claim.
Third, policyholders need to be very careful that the work they are requesting the contractor perform is actually covered by the policy. Replacement Cost Value policies only pay to put the policyholder back in the place they were in before the loss. (See California Insurance Code section 2051). Optional upgrades that the policyholder chooses to make, but which were not part of the lost structure, are not covered. Policyholders should not count on the contractor to tell them that.
Fourth, policyholders should be cognizant of the additional coverages and their limits, to ensure contractors’ work falls within them. For example, policies often have separate coverages and limits for costs incurred to do work that was not part of the lost structure but which is now required by new codes -- often known as law and ordinance coverage. The policyholder could end up being liable to the contractor for amounts incurred to comply with new codes that are above and beyond the separate limit.
In the event that the contractor has a dispute with the insurer, and the contractor demands the money from the insured instead, the insured should be careful to see where the blame actually lies. For example, most insurance policies contain specific time limitations that must be complied with. Those deadlines do not reset just because there has been an assignment of benefits.
A contractor hired to repair home damage caused by a racoon infestation recently learned this the hard way. (A+ Restorations, Inc. v. Liberty Mutual Fire Insurance Company, 2017 U.S. App. LEXIS 20743 (11th Cir. 2017)). In that case, when a homeowner discovered raccoons made a home in his attic, he hired a contractor and assigned his insurance claim in order to repair the damage. After receiving the bill, the insurance company only paid the contractor part of the money. The contractor then sued the insurer, but failed to file its complaint for underpayment under the assigned homeowners policy within the time-frame required by the policy. The court held that under the clear language of the assigned policy, the loss date was when the infestation was discovered.
Deciding whether to assign your insurance claim to a contractor should not be taken lightly. Even if you are leaning towards assigning your claim, it is important to do your homework on that contractor. Check up on the status of their license and whether they have any history of discipline with the California Department of Consumer Affairs, here.
At Kerr & Wagstaffe LLP, our attorneys specialize in insurance policyholder rights. To learn more about the attorneys and their insurance practice, please explore the links at the top of this page.