Merlin Law Group knowledge manager Ruck DeMinico sent me recent North Dakota legislation pertaining to Assignment of Benefit contacts. This topic was also hotly debated two weeks ago at the Windstorm Insurance Conference in Orlando. Insurance restoration contractors, their lobbyists and attorneys are desperately trying to prevent any changes that would make such contracts more difficult to enter into or enforce. The insurance lobbyists and their public relation firms are doing everything they can to show contractors and their lawyers as evil and greedily taking advantage of the public trust.

The Florida politician primarily responsible for overseeing insurance is Jimmy Patronis. Here is a news article describing his view on the situation:

Technically we have a law on the books that is being legally exploited,” said Chief Financial Officer Jimmy Patronis.

The law the CFO is talking about is Assignment of Benefits. It allows homeowners to sign into an agreement with a third party, such as a water extraction company, or a plumber, and allows the third party to act as the homeowner and seek payment for their work directly from the insurance company.

Patronis believes this should be allowed to happen but says bad actors in the business are taking advantage of it. So much so that in 2006 he says the state had 400 lawsuits involving AOB, in 2018 he says there were 31 thousand.

“You are taking their claim from them and giving them the comfort that you’re going to solve all their problems.” Patronis continued saying, “when essentially now you’re at the mercy of who you’ve just given your claim benefit to. But the bad attorneys and contractors that exploit it we should bury them under the jail.”

Patronis says the easiest way to combat it is to just have the insurance companies do their job.

“I have challenged the insurance carriers through multiple conference calls and just demanding to them do your job, pay the claims, answer the phone calls, take care of the customer.” Patronis says, “If that is being done, if we are doing that then the consumer who is under duress is not looking for solutions that are outside the normal insurance process.”

The CFO says if insurance companies aren’t responding to their policyholders quickly enough, he understands why they are seeking outside help. But he had this message for the bad actors he calls scoundrels.

“What you’ve done is you’ve taken this law on the books and you’ve twisted it and you’re doing nothing but driving up rates and driving out insurance carriers out of the state of Florida,” said Patronis.

At least Patronis sees that the issues, in part, as a two-way street. Not all politicians do.

The National Association of Insurance Commissioners noted the rise of Assignment of Benefit contracts increasing litigation in Florida in a 2017 paper, Emerging Issues Within the Assignment of Benefits Clause:

Over the past decade, the extension of assigning benefits has become seriously magnified in the state of Florida with a plethora of claims involving homeowners assigning their right to recover costs associated with first-party emergency physical damage repairs. Jay Neal, Florida Association for Insurance Reform (FAIR) President and CEO, estimates that in the past decade, lawsuits filed by restoration contractors using an AOB provision have increased more than 1,000% (Neal, 2015). The past five years, however, represents the steepest increase in filed claims.

An article, A Few More Thoughts About Assignments of Benefits, written by Patrick Wraight, who is the director of the respected Academy of Insurance, stated the positive versus negative aspects of the Assignment of Benefit contracts:

The premise of the AOB

Let’s reset again and make sure that we’re all on the same page. An assignment of benefits is a document, or clause in a contract, that allows another party (a contractor, water mediation company, your doctor’s office) to file for, and receive insurance benefits. This process allows the insurance company to negotiate and pay the assignee for the claim, rather than the customer having to pay their contractor first and then file the claim.

In theory, it’s a great way to operate. Think about it. The customer takes one link out of the claim chain. Without the AOB, the process is centered on the customer who spends their time getting an estimate, sending it to the insurance company, negotiating with the adjuster about the most fair claim payment, receiving the payment, getting the contractor to start the work, paying the contractor, and then finalizing the claim (or reopening the claim if the repairs take more money that initially paid, which means starting over almost from the beginning).

The AOB makes it so that the insured can hire a contractor and then remove themselves from the process. All they have to do is drink their coffee, wait for the contractor to finish the work, and pay their deductible. OK, that might be an oversimplification, but you get the point. The insurance company works directly with the contractor to get the repairs going.

The problem with the AOB

As you know by now (because you’re daily Insurance Journal readers), it just doesn’t work that way. Not every insurance company pays the claims that they probably should as easily as they should (sorry insurance people, but it’s kind of true). Not every repair contractor files the correct amount for their claim. Sometimes they inflate the costs. What happens when the insurance company doesn’t want to pay for the costs as presented by the contractor? That’s right, the contractor calls their attorney and (you know it) the insurance company contacts their legal team. What happens with the customer?

The customer finds themselves in the middle of a feud, which might leave them waiting for the work to be done, or worse yet, they find that they are on the hook for the balance if the insurance company wins against the contractor. For the customer, the best case is that they get their repairs paid for and find out later that their insurance premiums go up (along with the rest of us, thanks) to make up for the extra expenses that the insurance company had.

I am not certain where all this is going to lead, but the issue is not just in Florida. Insurance lobbyists, state legislatures and Departments of Insurance have Assignment of Benefit contracts being used by insurance restoration contractors on their national radar.

Nothing ever stays the same. It is easy to predict that the law and use of Assignment of Benefit contracts will not be the same in many states five years from now.

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“Everyone thinks of changing the world, but no one thinks of changing himself.”
—Leo Tolstoy

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Photo of Chip Merlin Chip Merlin

Since 1983, Chip Merlin has served as a plaintiff’s attorney with a focus on commercial & residential property insurance claim disputes and bad faith insurance litigation. Chip is a noted national authority on insurance bad faith, lecturing to national trade groups and publishing a number of papers and articles on the subject for organizations such as The American Association for Justice, The Florida Justice Association, The Windstorm Insurance Network, and Trial Magazine.

As founder and president of Merlin Law Group, Chip has dedicated his practice to the representation and advocacy of insurance policyholders in disputes with insurance companies nationwide.

Chip served as Chair for the Bad Faith Insurance Litigation Group and Secretary for the Fire and Property Insurance Litigation Group for the American Association for Justice (formerly known as the Association of Trial Lawyers of America). He was also Vice-Chair for the Subcommittee on Property Insurance Law for the American Bar Association.