From our 2019 Florida RIMS Educational Conference Session in Naples, Florida
The insurance claims process and the relationship between the insured and the insurer has changed drastically over the last 20 years. We are seeing more and more materially interested parties involved in the insurance claims process, especially in claims involving large commercial losses. For example, many carriers are relying on independent adjusters, auditors, and third-party claims administration (TPA) firms to be their eyes and ears on a claim, rather than handling this in-house. The more parties who get involved in a claim, adding additional layers between the insured and insurer, the more complicated and lengthier the insurance claims process can become.
Another challenge stems from the contractors. While there are many qualified, experienced, and honest restoration and related contractors out there, there are almost as many without integrity who employ unscrupulous business practices or simply don’t know what they are doing. Some of them take advantage of legal or policy loopholes to ensure they get paid the maximum amount. To combat these issues, carriers often rely on their own preferred restoration contractors, engineers, indoor hygienists, and other specialists to perform the work, and require insureds to utilize these firms. However, these relationships can bring additional challenges because these firms are now working for the carrier rather than the insured and, especially in the case of national franchises, there is an issue of quality control between locations.
This industry demands companies to have the ability to scale during regional catastrophes. Contractors and TPA firms may be faced with unique external challenges if they are not properly prepared to scale, or if their plan is not executed well. They may not be able to provide the proper training to new hires, increasing the margin of error when working losses. Inexperienced adjusters and TPAs might miscalculate scopes and the total cost of the claim. Contractors may put people in project management positions for a large loss who have never manager a project before. We have even seen crane operators who have never operated a crane before. These issues are even more common when the economy is strong and unemployment rates are low.
Not all insureds are honest either, there are plenty of insureds who will try to line their pockets from a claim. They may attempt to take advantage of certain coverages such as contents or business interruption. Or, they may falsify damages from the start. Insurance fraud is a big problem. These customers are usually the ones who talk about litigation early on. They don’t even give the claims process a chance.
With so many changes in how insurance claims are handled, the increasing number of materially interested parties, and the increased frequency and severity of CAT events, it’s more important than ever for all parties involved to understand their respective roles and communicate with each other regularly. Without good communication, it is much more likely that the claim’s process will turn sour – ultimately leading to a slower recovery, possible lack coverage or denial, and in some cases costly litigation.
In this panel discussion, we explored a few of the common challenges and red flags you may encounter when dealing with property damage. Our goal was to provide you with information to help the claims process go more smoothly.
Topic # 1 Assignment of Benefits Changes in Florida
A hot topic in Florida recently is assignment of benefits (AOB) reform. For those who aren’t familiar, an assignment of benefits is when a policyholder grants a third party, such as a restoration contractor, permission to directly bill an insurer to settle a claim. While some contractors that use the AOB may be credible, there are many that misuse the practice by conducting unnecessary work or charging extraordinary amounts, then file lawsuits against insurance companies that deny or dispute the claims. This ultimately costs consumers billions of dollars through increased premiums to cover these needless repairs and legal fees.
Earlier this year, the Florida Legislature passed an Assignment of Benefits reform bill which went into effect on July 1, 2019. The main purpose of the bill is to help cut back on abusive AOB claims. Below are some highlights of the AOB reform bill shared by Harvey Cohen, an attorney with Cohen Law Group, and how he expects the bill to impact the property claims process:
- Before this law, there were AOBs, but there was no law written about an AOB.
- The new law still allows contractors to use the assignment, but it has a bunch of restrictions.
- To utilize an AOB, there are certain requirements which must be met, similar to lien law, including certain verbiage, fonts, deadlines, etc.
- Failure to follow the rules of the new law will make your entire contract null and void/unenforceable.
- Contractors using AOB contracts must have a provision in their contract that says they will indemnify the property owner for anything else that goes on with their claim – whether or not it’s related.
- We don’t know how it’s going to ultimately play out. For example, there are caps – $3,000 or 1% – for any emergency or urgent circumstances, but emergency services and urgent circumstances is not defined. There’s likely going to be a lot of litigation on that to determine exactly what is included.
- Another area restricts the way that people use the AOB pertaining to a power of attorney and states that in order to have POA you must be a management company, a guardian, a family member, or someone similarly situated , but it doesn’t say what kind of managing company. So, what does that mean? Nobody knows, that’s going to cause some confusion in the courts.
- Companies that use AOBs are trying to figure out how to either work with the new law, or just don’t plan to use AOBs at all going forward. They are trying to figure out how it is going to affect them, their billing procedures, their collections, and their relationship with insurance companies and their clients.
- Any type of litigation within Florida that involves your insurance company has a fee shifting statute which allows the homeowner’s or property owner’s attorney to be paid by the insurance company.
- Any consumer who is asked to sign any type of document that says, “assignment of benefits,” is to first make sure it follows the law perfectly.
Topic # 2 Challenges of Selecting Commercial Insurance Policies
Commercial policies tend to be more complex than most residential policies and can be difficult for the average insured to understand. They can even be difficult for inexperienced risk managers, adjusters, and brokers to interpret. Commercial policies contain an abundance of inclusions, exclusions, and generally a lot of hidden or difficult to understand verbiage.
Too often, the insured unknowingly purchases an insufficient policy that does not cover all the risks they are exposed to. Usually, they don’t realize there was a lack of coverage until they file a claim which ends up being denied. Stan Merrell, a Commercial Lines Broker with Willis Towers Watson, discussed some best practices for choosing commercial insurance policies:
- The market has changed, you’re seeing premium increases of 10% or 12% annually. If you’ve had losses, that could be 15%, 20%, or 25%.
- Forms and policies are becoming more restrictive with more exclusions and changes in the deductible language.
- Don’t take anything for granted. Don’t assume that the same coverage is there.
- It comes down to best practices and partnering with your broker and your internal risk management team, so you’ve got to be proactive. We’ve got to be informed buyers.
- You don’t want to be interpreting policy terms and conditions when you’re in the middle of adjusting a claim, so take the time to review your policy now, and again every year when it’s time for renewal. This review should involve your risk management team, your broker, and the claim specialists within your brokerage.
- Ask about real-life scenarios – if this happens, what happens? Any ambiguity should be cleared up in writing from the underwriters and from your broker before the coverage is bound.
- We should have the binder to you before your expiration date, because it never comes back 100% accurate.
- Your primary layer of coverage is the most expensive, increased coverage amounts beyond that primary coverage get substantially less expensive.
- There’s a law in the state of Florida that says if an insurance carrier is going to drop you or if there’s going to be a substantial change to the policy, they’ve got to provide 60 days written notice.
- Adjusters and third-party reviewers often take the heat for coverage issues, however, most times the lack of coverage is due to the policy that the customer has purchased, or a lack of documentation from emergency service providers. Make sure that you are pushing to review policies with your broker, and you are using contractors that will communicate with all parties and provide the necessary documentation.
- It’s important to not only have disaster response plans, but to complete drills for these plans. You need to know where your resources are, where your assets are, and in what priority are we going to do things.
Topic # 3 Billing and Payment Challenges
Adjusters and third-party reviewers are commonly utilized by insurance carriers to assist the carrier in reviewing contractor invoices and making recommendations to approve or deny payment based on a comparative estimate they create. They typically create their estimates based on standardized pricing through programs such as Xactimate, and often never see a job site in person. The problem with programs like Xactimate is the unit pricing and rate of production is based on averages primarily from residential losses rather than commercial, which doesn’t consider the additional complexities involved in commercial losses.
In addition, these programs tend to be slower to adjust for market pricing increases that occur following regional disasters. Pricing on labor, materials and equipment tends to rise due to supply and demand after these events. While some of these price increases can be expected, and, in some cases, are unavoidable, there are contractors who take advantage of the situation and charge extraordinarily high rates without providing documentation to back it up. Often, these situations lead to the reviewer’s estimate being significantly less than the contractor’s invoice.
When there are discrepancies between a contractor’s invoice and what the adjuster, auditor, or reviewer recommends for payment, the insured is usually the one who suffers. If the insured is assuming the contractor is relying on the carrier to pay their invoice, and the contractor has not made it clear that the customer is ultimately responsible for the bill, then there is the potential for this situation to lead to unnecessary liens and litigation. We asked Rob Foster, a Water Mitigation Analyst with Engle Martin, to talk about some of these challenges.
- It’s about supply and demand, so it’s normal to see some price increases following large-scale disasters.
- The adjuster or reviewer should be taking averages for the area and be able to determine if the pricing is significantly higher than normal, or what is normal in the area at that time.
- Xactimate, a commonly used unit price estimating software within the insurance industry, doesn’t take into effect regional disasters so pricing isn’t always up-to-date after CAT events.
- Most of the contracts in regional disasters and for large losses tend to be time and material based.
- We need to see good documentation. Most of the documentation contractors provide to support their billing is insufficient. For example, the contractor should be able to provide the list of activities that each person performed, in a specific location, during a specific time. We typically see notes that 15 people worked from 8:00AM to 12:00PM, with no other documentation. This is not enough for us to justify payment.
- The IICRC S500 is the industry standard guide for performing water restoration and is references by most contractors performing this type of work. Chapter 9 is about documentation and describes exactly what should be recorded for each employee.
- The contractor should be giving a price list upfront and submitting frequent, preferably daily, billing and documentation. They should also be able to provide a rough estimate based on scope of work.
What about emergencies? When the need for services is urgent, should an insured wait for the adjuster to review invoices before paying out any contractors?
- If the affected business needs emergency services, the business should ask themselves, “if my insurance doesn’t cover this, what am I going to do?” The insurance coverage should not be the deciding factor on that company moving forward with that service.
- You have the obligation in the insurance policy to mitigate your losses, so waiting for an adjuster’s approval can lead to denial of the claim if you don’t do something promptly.
- The industry standard for receiving an advance payment from an insurance carrier after signed proof of loss is a minimum of 30 days, but it is often longer.
- Be wary of contractors that state “don’t worry about the money, we will bill your insurance company directly.” Often this leads to unnecessary liens on the property and litigation while the contractor fights with the carrier to be paid. The insured should stay involved in the billing and payment process – know what the contractor is doing, why they are doing it, and what they are charging.
- Watch your cashflow and make sure you understand how much a service is costing. There is only so much coverage in any policy, and you want to make sure that the emergency services do not deplete those funds if you need additional repairs.
- Communication between all materially interested parties is the key to avoiding bad situations.
Topic # 4 Identifying Reasonable Services
Sometimes contractors take advantage of their client who may be unfamiliar with how to handle a loss. They may charge outrageous prices, perform unnecessary work, or bill for equipment they didn’t use. For example, a new trend that has emerged is placing excessive/unnecessary equipment in a building for extended periods of time for climate control. Climate control is a process that is used when HVAC units are damaged, or the power is out for an extended amount of time. The purpose is to keep occupants comfortable and/or prevent secondary damage from increased humidity. But when a contractor places excessive equipment or when climate control isn’t really necessary, this could drive up costs and take money away from the policy that should be used for rebuilding and repairs.
We asked Jim Thompson with Jim Thompson Co., who has worked on both the contractor and insurer side of the claims process, to discuss how a customer can determine if the work a contractor does is necessary or excessive and how they can protect themselves from dishonest contractors.
- While the IICRC S500 standard of care is great for residential and smaller jobs, it is not as useful with larger commercial projects. In large warehouses or shopping malls, for instance, the recommended amount of equipment is likely excessive and unnecessary.
- However, the standard is useful for some circumstances on larger losses. Such as the protocol for removing damaged building material and cleaning up before drying. While some equipment should be used for humidity control, the final determination for additional drying equipment should be made after the demo/cleaning phase.
- Ask your adjuster for approval before allowing a contractor to provide long-term climate control. This is usually beyond the original scope of work to mitigate damages and dry the building.
- Emergency service contractors should be able to provide a drying plan with goals, estimated time frames, and demolition and cleaning procedures early in the project.
- Documentation should be provided daily and be made accessible to any materially interested parties.
- Read the contract thoroughly and review the plan. Look for red flags such as mitigating the damage, then drying, then demolishing the affected building material. If it takes 3 months for the drying to take place, all the insurance proceeds may be extinguished, and the business may not have the funds to rebuild.
- Companies may charge excessive amounts for mobilization from remote parts of the country even though the equipment was being transported to that area before the contract was signed. Or they might include the same charge to another customer in the same area rather than splitting the total mobilization costs. Ask your contractor about their mobilization charges before a contract is signed.
- Ask your contractor about weekly and monthly rates on equipment rentals before they begin, and make sure it’s in the contract if they agree to these rates.
- Talk to your restoration contractor, find out what you’re being charged for, what mobilization you’re being charged for, what the equipment on your site that is not plugged in is being charged or not.
- If you experience a major loss, have someone from your organization check off on the amount of equipment, laborers, etc. that contractors are providing. That person can even help verify if moisture is present in some of the building materials. This can help keep contractors in check and alleviate allegations at the end of the project.
- Even reputable contractors might not know all the associated costs if there are external variables out of their control that will hinder the process, but they should be able to a provide a plan along with a daily billing rate upfront.
- Know what your insurance policy covers and its limitations.
- Understand what the policy requires of the insured throughout the claims process.
- Watch out for unscrupulous, unqualified contractors. Best to research and choose your vendors ahead of time.
- Learn about all the parties who may be involved in a claim and understand their roles.
- Good documentation provided by the contractor can speed up the claims resolution process and get them paid.
- COMMUNICATION among all interested parties is key to a successful and prompt claim resolution.
About the Panelists
Stan Merrell is a Vice President and Managing Producer at Willis Towers Watson. He specializes in working with clients with large real estate portfolios that have complex and catastrophic exposure.
Harvey Cohen is an attorney with Cohen Law Group. His career began as a state prosecutor for the state of Florida and now he’s one of the leading attorneys for insurance related cases for property restoration.
Jim Thompson began his career as one of the first restorers that handled these large commercial projects. He’s now a consultant for many different insurance carriers, an OSHA outreach trainer, and has been in the industry for almost 40 years.
Rob Foster has been in the industry since ’87. He worked with an international commercial restoration company for five years before he started his own company. Currently, he is with Engle Martin Associates and is a Senior Water Mitigation Analyst.
Logan York is the Director of Operations for Flood Zone Disaster Recovery Solutions and has been in the disaster recovery industry for over 10 years. Logan was the moderator for this panel discussion.
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