The construction industry and the insurance industry are tightly connected. Contractors carry insurance; they require subcontractors to do the same; and many contracts mandate minimum insurance coverage by owners, architects, contractors, and subcontractors. But a significant number of projects are paid for using insurance proceeds as well. From sinkhole remediation to disaster/water recovery to certain negligent construction practices, the contractor performing the repair work is often being paid using a property owner’s insurance proceeds.
One of the more common problems contractors run into in these situations is how to ensure the property owners use the proceeds to pay them. Once a payment problem arises, the contractor likely has lien rights than can be used to encourage payment, but wouldn’t it be preferable to avoid that process altogether before the project even starts? One way to do this is through a preemptory assignment of insurance benefits.
An assignment of insurance benefits is an agreement between the contractor and the property owner by which the property owner agrees to give the contractor the property owner’s rights to any benefits or payments under the relevant policy. Many times these agreements also authorize the direct payment of insurance proceeds to the contractor. Sounds great, right? So let’s discuss how this works in the real world.
The assignment of insurance benefits can be a stand-alone document, signed by the contractor and the property owner, or it can be a provision in a broader construction agreement. Utilizing a separate document may generally be preferable though, because in addition to entering into the assignment with the property owner, the contractor should require key information about the insurer and policy and should send a copy of the assignment to the insurer. Insurance companies are much more likely to read and understand a stand-alone assignment rather than having to search a construction agreement for relevant assignment language.
In two recent cases, Florida’s courts have reaffirmed the use of assignments of insurance benefits by contractors and provided guidance on enforceable language. In one of those cases, the court examined an assignment that read in part “I hereby assign any and all insurance rights, benefits, and proceeds pertaining to services provided by [CONTRACTOR] under the above referenced policy to [CONTRACTOR]. I hereby authorize direct payment of any benefits or proceeds to my property . as consideration for any repairs made by [CONTRACTOR].” The court upheld the contractor’s right not only to payment by the insurer pursuant to the assignment, but also the contractor’s right to sue the insurer directly, as opposed to having to sue the homeowner first.
Any assignment of insurance benefits should also make specific reference to the insurance policy, the insurer, policyholder, and policy number. Still, the language of any assignment of insurance benefits should be crafted to fit a contractor’s specific industry, typical scope of work, and typical insurance benefits. One size does not necessarily fit all, and a contractor should consult with appropriate legal counsel to craft the assignment contract that best fits the contractor’s particular needs.
It also bears noting that in the cases mentioned above, the contractor’s rights were upheld only following a loss under the relevant insurance policy. The results might have been different had the contractor attempted to take action under the assignment before any loss occurred. While it would be rare that such an assignment of insurance benefits would exist prior to a loss occurring, it is important to understand that the timing of any action in relation to a loss could have an impact on the success of the contractor in enforcing the assignment. In conducting its own inquiry into whether or not a loss has occurred before starting remediation work, the contractor should be careful not to attempt to render advice to the property owner on potential insurance coverage issues or other matters unrelated to the contractor’s expertise.
The benefits of an assignment of insurance benefits are substantial. As noted at the outset, instead of having to ask the property owner for payment at the completion of work, the contractor can submit a request directly to the insurance carrier in much the same way it would submit a construction draw request to a lender. And by cementing that right in place at the beginning of a project, the contractor avoids the problem of a property owner being unwilling to assign or pay over insurance proceeds at the end of the project or trying to hold the proceeds for leverage over the contractor.
As an illustration of the importance and positive impact of an assignment of insurance benefits, we recently represented a contractor in a payment dispute. The contractor did not have an assignment of insurance benefits, and the resulting dispute took over a year to resolve and cost the contractor thousands in legal fees and costs. During this time, the contractor remained unpaid by the property owner. Much of that could have been avoided if an assignment of insurance benefits had been in place.
While not every construction project involves payment by insurance proceeds, those that do should be performed under an assignment of insurance benefits. This protects the contractor and provides a more certain avenue to payment at the conclusion of the project.