Insurance Coverage Disputes

The Arranged Marriage

Eric Gilkey
September 21, 2012

Solving the Relationship Issues Facing Restoration Contractors and Insurance Carriers

Following a catastrophe, many types of relationships form between the affected parties. Claims managers watch carefully over their staff in the trenches, adjusters form working bonds with homeowners, temporary housing providers connect insurers to the community, and restoration professionals provide repairs and closure to insureds.

While literally providing a roof over someone’s head requires a team effort, restoration contractors and insurance carriers have had what might be described as an arranged-marriage relationship rather than love at first sight, with issues of trust and communication long complicating matters. To get to the bottom of how these two entities can better work together, we sent two industry professionals to “marriage counseling” to talk it out: Kevin Hromas, an experienced carrier and independent catastrophe adjuster, and Pete Consigli, the Restoration Industry Association’s (RIA) industry advisor.

What is the single biggest hurdle to get over in the insurance carrier/restoration contractor relationship?

Hromas: Communication is by far the biggest hurdle. It is vitally important to have a clear delineation of responsibilities and level of authority to authorize repairs between the carrier/homeowner/contractor.

Consigli: I agree that communication is critical to developing trust on insurance damage repair projects. I call this unique relationship between the homeowner, carrier, and contractor the “restoration triangle.” I believe that once the homeowner chooses a contractor, good communication can make the repair process a better experience for all.

Is the relationship different for restoration contractors who are in carrier “preferred vendor” programs as compared to those who are not?

Hromas: Contractors in a preferred vendor program usually have had to submit to a fairly rigorous vetting process that covered their expertise, financial stability, background checks on employees, customer service reputation, and so on. These are necessary because the carrier is usually guaranteeing the repairs if policyholders use that contractor.

Consigli: The relationship for a non-vendor contractor with an adjuster is based on many factors, including: company reputation; experience and stability in the marketplace; and pricing structure for insurance repair work. I believe non-vendor contractor estimates and invoices should be evaluated on their own merits.

Are there reasonable alternatives to the current payment requirements within the insurance policy requiring the inclusion of mortgage companies as additional payees?

Hromas: What needs to happen is that the mortgage company is brought into the conversation at the very on-set of the claim rather than just when a check is issued.

Consigli: I generally agree with Kevin’s assessment on this issue, but in my experience a mortgage company might be named on a draft even if the loss doesn’t require the policy to name them as a payee. I believe carriers can influence mortgage companies and bring them to the discussion about ways to facilitate the release of funds for contractor repairs in a timely manner.

Hromas: Because there are literally thousands of mortgage companies, crafting policy language that would suit their requirements would be impossible. I think that better and closer involvement by the adjuster during the repairs would help.

How do you address pricing differences between preferred vendor contractors and those who are not in the program?

Hromas: Carrier adjusters need to realize that pricing structures used by preferred contractors are determined as part of a negotiated agreement between the carrier and the contractor and are not necessarily reflective of the competitive marketplace. The use of standardized estimating systems should take into account that prices don’t always reflect the actual marketplace itself.

Consigli: I believe that non-vendor contractor pricing differences should be part of a fair and equitable negotiation. The economies of scale for approved vendors shouldn’t penalize a non-vendor contractor who has performed a satisfactory restoration project.

Who should be responsible for writing the technical aspect of the scope for a restoration, remediation, or reconstruction project?

Hromas: A lot will depend on the expertise and training of the adjuster. The typical homeowners’ policy does not state who will estimate the costs of repairs generally, only that the policy will pay for covered damages. If there are substantial technical issues involved, the adjuster should consult with experts in that field.

Consigli: A loss can be under-scoped with open supplements, which delay the processing of the claim, or over-scoped for ease of moving on to the next claim. If the contractor and adjuster are able to scope the loss with the insured and agree on what is appropriate to return the structure and contents to a pre-loss condition, this is usually the best case scenario.

What standard of care should be used when writing a scope and how does an adjuster determine if a restorer is competent?

Hromas: This is where communication is crucial. All three parties need to clearly understand that the insurance policy is for covered damages only. There may be other substantial damages or conditions that need to be addressed that fall outside of coverage and would not be included in the scope of repairs under the policy.

Consigli: I agree that restoration contractors sometimes cross into areas that they shouldn’t regarding coverage issues and policy interpretation. An experienced restorer uses a basic knowledge of the insurance policy in the same manner an experienced adjuster uses his basic knowledge of construction. The industry has moved towards standards regarding water, mold, fire, and other restoration-related activities. The certification process is moving towards third-party accreditation, which will provide a higher level of assurance to the general public when selecting a restoration contractor.

When an independent expert’s evaluation is required, with whom should their duty of loyalty and care be?

Hromas: Every claim should be addressed individually, so I don’t think there is a checklist that would come into play. Ultimately, everyone owes the duty of loyalty and care to the homeowner/property owner.

Consigli: Industry standards provide some guidance on when an independent evaluation would be required on projects. In situations where litigation is possible, the duty of loyalty might change based on who requested the evaluation, under what circumstances, and the client relationship. 

What are some best practices for resolving disputes between the parties involved in a property insurance claim?

Hromas: It is important to realize that an insurance policy is a contract between a carrier and a homeowner with an assignment protecting the mortgage holder. Those are the only parties who can ultimately have a dispute in a claim.  A restoration contractor has a contract with the homeowner to do the repairs. Again, it all comes back to communication.

Consigli: Disputes can arise from poor communication, execution of a one-sided contract, failure to comply with the terms of the “deal,” or just from poor workmanship. Many restorers include arbitration or mediation clauses in their contracts as a means to settle disputes that cannot be amicably resolved, rather than resorting to a legal alternative.

Is there a need for assignment of benefits (AOB) language in restoration contracts? Do insurers honor these AOB contracts and similar contract language with a direction-to-pay clause?

Hromas – The problem with an AOB clause is that it tries to modify the insurance contract retroactively. That won’t happen, regardless of any good intentions that form the basis for the premise. The property owner themselves are responsible for any payments to be made to the contractor of their choice. From a business perspective, it is the responsibility of the contractor to make sure that they will be paid.

Consigli: I agree that the restoration contactor must take steps to ensure he is paid. Some states have laws in place for the use of an AOB clause in contracts that also provide for fee-shifting statues. An AOB or direction-to-pay clause gives the contractor assurance of getting the bill paid and allows for prompt service to the policyholder during a difficult time.

Hromas: This is where the process of issuing payments as repair work progresses better serves everyone involved. The home is restored to pre-loss conditions so the mortgage company’s interest is protected; the contractor gets paid promptly; and the insured does not necessarily have to cover the costs while they wait on a payment from the carrier. State regulatory requirements may need to be “tweaked” regarding prompt payment requirements, but this is doable—if politicians stay out of the discussion!

Do field adjusters today have adequate training?

Hromas: (Laughing) Only if they are experts in law, engineering, environmental air quality, seismology, medical issues, construction, damage analysis and a whole host of other fields.

Consigli: The same might be said of a contractor engaged in damage repair. If contractors shouldn’t overstep their areas of expertise regarding policy coverage, then adjusters shouldn’t overstep when it comes to writing a repair scope or estimate. Damage repair has gotten to be a sophisticated process as the industry has matured.

Why hasn’t there been greater collaboration between trade groups in the restoration and insurance industries to provide better service to a common customer?

Hromas: None of the trade groups for either industry has the authority to establish parameters for addressing these issues. Every policy and every carrier has their own requirements and standards. What they all need to do is have better education and better—here we are at that word again—communication.

Consigli: The industry is establishing a forum that will encourage better communication between all sectors of restoration. This is one of the goals of the newly launched Property Industry Conference (PIC). Better communication through education will help make it better for insurers, restorers, and the customers they both serve.

Hromas: (Laughing) If it waddles like a duck and quacks like a duck, calling it a chicken won’t change the bird! Let’s look at the solution as one of “collective education” for all parties involved. Generally, I have seen that when good, intelligent recommendations are made, professionals will step back and say, “Hey that makes good business sense for my company and my bottom line.” They incorporate these recommendations in a practical way that benefits everyone.

SOURCE: claims-management.theclm.org

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