Getting Paid: How Assignments of Insurance Proceeds can Protect Contractors Against Non-Payment
Published on February 5, 2015
Attorney at Frantz Ward LLP
By Thomas E. Cardone, Esq.
When property is damaged by water, wind, hail, fire or a number of other occurrences, the restoration of the property is often funded by the proceeds of an insurance policy. Many restoration professionals do not realize that, without an express agreement, restoration contractors have no right to demand payment directly from the insurance company. Generally, the insurance company is obligated to pay the property owner. The property owner—the party who traditionally enters into a contract with a restoration professional—is then obligated to pay for remediation and restoration work. If the property owner misuses insurance proceeds or refuses to pay after work has been performed, restoration contractors often find themselves with little recourse. Liens may not provide adequate security, and lawsuits against property owners may result in uncollectable judgments. Assignments of insurance proceeds are an answer to how remediation and restoration professionals can protect themselves against non-payment.
What is an Assignment of Insurance?
An “assignment” is a transfer of an interest or right to another. Once a right has been “assigned,” the recipient, or transferee, stands in the shoes of the prior owner, or transferor, and obtains the rights the transferor had prior to the assignment. Almost any right can be assigned, including the right to insurance proceeds. When insurance proceeds are assigned to a restoration contractor, the contractor has the right to demand payment directly from the insurance company. Just as an insured property owner would have the right to file a lawsuit against an insurance company to enforce an insurance policy, if the insurance company refuses to pay a contractor who has obtained an insurance assignment, the contractor has the right to sue the insurance company to receive payment.
How Do Assignments Work?
Traditionally, after a property is damaged, the property owner requests an estimate for remediation and restoration services. The insurance company or third-party representatives may assist with locating potential contractors and estimating restoration costs. When inspecting the loss and drafting an estimate, the restoration contractor communicates with the property owner, insurance adjuster, and any third-party representatives to identify applicable insurance policies. The restoration professional presents the property owner with a written contract for services, which includes a properly drafted assignment provision. The property owner signs the contract for restoration services and consents to the insurance assignment. At this point, the assignment is complete.
The next step, however, is putting the insurance company on notice of the assignment. Generally, a brief letter to the insurance company, or “notice of assignment,” will suffice. The notice should include the contractor’s name and contact information, as well as instructions for the insurance company to pay the contractor directly. Restoration professionals are well advised to review applicable insurance policies, if available, for specific notice provisions. If the insurance company is not put on proper notice, the assignment will have no effect.
What is the Effect of an Insurance Assignment?
Restoration contractors are always entitled to payment, usually from the property owner, pursuant to the terms of their contracts. By obtaining an assignment of insurance proceeds and putting the insurance company on notice of an assignment from the property owner, however, a restoration contractor is legally entitled to payment directly from the insurance company. Explained differently, the insurance company is legally obligated to pay the contractor—instead of the property owner—for covered remediation or restoration work. If the insurance company refuses to acknowledge the assignment and continues to pay the property owner, or otherwise refuses to pay the contractor, the restoration professional has the right to enforce the assigned insurance policy and the insurance company can be held liable for non-payment. Liability exists even if the insurance company has already paid the owner, for example, in situations where the property owner refuses to release funds to the restoration contractor.
The benefits of insurance assignments are substantial. Assignments of insurance proceeds allow restoration contractors to control project funding. Professionals who obtain insurance assignments avoid the potential for the misappropriation of insurance proceeds and the possibility of performing work for “judgment-proof” property owners. Although property owners continue to be liable in accordance with the terms of their restoration-services contracts, assignments of insurance proceeds open the door to recovery directly from the insurance company.
In some situations, property owners would pay for restoration work but insurance companies have wrongfully denied benefits or otherwise wrongfully withheld payment. In these cases, property owners may not have the financial means to pursue their insurance companies. If a restoration contractor has obtained an assignment, the contractor may have the right to litigate coverage and payment disputes directly with the insurance company.
Anti-Assignment Clauses in Insurance Policies do not Prevent Assignments
Almost every standard-form insurance policy includes an anti-assignment clause. Anti-assignment clauses generally state that insured property owners may not assign or in any way transfer any rights or benefits of their insurance policies to third parties without prior written consent. Insurance companies commonly rely upon these provisions to argue that insurance assignments to restoration professionals are ineffective. Under Ohio law, assignments of insurance executed after a covered loss are valid notwithstanding an anti-assignment clause in an insurance policy. This means that even though the policy may have an anti-assignment clause, it is ineffective to prevent an insured from assigning the benefits of the policy to a restoration professional.
Protecting your Right to Payment
It is important to consult with knowledgeable legal counsel if you are considering using assignments of insurance benefits to protect against non-payment. Assignments should be properly worded, proper procedures should be followed, and insurance companies should be put on proper notice. Additionally, mortgage companies, banks, and other third parties may have competing claims to insurance proceeds. And it is important to remember that insurance assignments to do increase or change coverage. Restoration contractors are only entitled to payment in accordance with the applicable insurance policy. Assignments of insurance benefits to restoration contractors have not been a popular subject of legal interpretation in Ohio, therefore, guidance from the courts is limited. An attorney knowledgeable of restoration law will be able to guide restoration and remediation contractors through the assignment process, explain their rights and potential pitfalls, problems or concerns, and fight for payment when owners and insurance companies refuse to honor their policies and contracts.
This article was written by Attorney Tom Cardone. Tom is an attorney with Frantz Ward LLP’s construction group. He focuses his practice in the areas of construction law, government contracts, and commercial litigation. Tom is licensed as an attorney in Ohio and Georgia. Prior to becoming an attorney, Tom served as a U.S. Marine.
If you are interested in speaking with Tom or another construction lawyer at Frantz Ward about any legal matter, please call (216) 515-1639or email firstname.lastname@example.org.