In the wake of a hurricane, flood, fire or a similar natural disaster, you may be facing large repair bills for damage to your home. Homeowner’s insurance is designed to minimize your out-of-pocket costs in these scenarios, but a problematic trend could make that coverage less affordable. In states that are prone to natural disasters, contractors may be driving up homeowner’s insurance costs using assignment of benefits (AOB) contracts. (See What Is and Isn't Covered by Homeowners Insurance.) Every homeowner should understand what these contracts are and how they can affect a whole range of costs.
How Assignment of Benefits Contracts Work
An assignment of benefits contract essentially opens the door for contractors to sue your insurance company for homeowner’s insurance benefits when repairing your home after a disaster. When you sign an AOB contract, you’re transferring the rights of your policy to a contractor or another entity. The contractor makes the repairs, then bills the insurance company for the cost. In some cases, the price could be two to three times the actual cost of fixing the damage. Misuse of AOB contracts is a type of contractor fraud.
As the homeowner, you may not even be aware that you’ve signed off on an AOB contract, since they’re often included as part of a work-authorization agreement. You may think you’re giving the contractor permission to work on the repairs only – but in reality, you’ve agreed to the AOB. This can be dangerous for two reasons.
First, the contractor can place a lien on your property or even initiate foreclosure actions if the insurance company doesn’t pay the bill to the contractor's satisfaction. That can come as an unpleasant surprise if you thought all you were getting was a new roof or repairs for water damage. The other issue centers on how AOB contracts can affect the cost of homeowner’s insurance.
According to the Florida Office of Insurance Regulation, current AOB trends are set to push the average statewide annual homeowner’s insurance premium for a $150,000 new home to $1,595.07 by 2022, an increase of 29% over 2017 numbers. Homeowners in North Carolina, South Carolina and Georgia may face similar increases, since these states also allow AOB contracts.
The increases in insurance costs are fueled by an uptick in the number of contractors filing lawsuits in connection with AOB contracts. While AOB contracts and their resultant lawsuits are not a new phenomenon in Florida, their frequency has spiked dramatically. In 2006, there were 405 AOB lawsuits filed across all 67 Florida counties. In 2016, there were 28,200. The costs to insurance companies of dealing with these lawsuits are then passed on to consumers.
Mitigating the Impact of AOB Contracts
Lawmakers in Florida have tried to curb AOB abuse, although proposed bills have thus far failed. Texas law stipulates that an insured person can’t assign an insurance claim if their policy has a non-assignment clause. In Louisiana, insurers can include a clause in the homeowner’s policy that prohibits post-loss assignments. However, for the clause to be enforceable it must be clearly and unambiguously worded to show that it applies to post-loss assignments.
If you are a homeowner who lives in a state that allows AOB contracts, the first line of defense begins with calling your insurance company as soon as possible following a disaster. You may have roofers or water-extraction companies making unsolicited offers for services, but your insurer can refer you to a qualified, licensed contractor. (See The Financial Effects of a Natural Disaster.)
Once you connect with a contractor, read through the work-service agreement carefully to look for wording that may suggest an AOB is included. Ask the contractor outright if it requires an AOB or if there’s something you don’t understand. Be wary of contractors that use pressure tactics or offer incentives that seem too good to be true in order to get you to sign. And remember, you can refuse to sign a work agreement if it includes an AOB contract.
The Bottom Line
Assignment of benefits contracts can have serious financial implications for both insurers and homeowners. While it may seem like a contractor has your best interests in mind – or that signing an AOB can simplify the insurance claims filing process – it could create unnecessary headaches down the line. As with any contract, be sure to read the fine print carefully to understand what you’re agreeing to.