General Contractor Overhead And Profit And AOB Insurance Scams

Gary Wickert | Claims Journal

A storm is rising, and it is not the type which causes damage to homes and vehicles. It causes damage of a much more insidious nature. Following a storm or other natural disaster, canvassers hired by the “hail cartel”—lawyers or opportunistic general contractors—can be found blanketing a neighborhood and knocking on doors.

“I’m here to get you a new roof,” the canvasser says. They tell the innocent homeowner that he or she has roof damage that they may not have noticed and that they are entitled to 20% more for “general contractor overhead and profit,” even if no general contractor is necessary. They locate and fabricate damages which either did not exist or were pre-existing and ask the homeowner to sign an Assignment of Benefits (AOB) and promise them a new roof at no cost and with no hassle on their part.

This is repeated thousands of times across entire zip codes. A lawsuit is quickly filed against the insurance company, even before they are given notice of a claim. Policyholders are misinformed, contractors circumvent statutory and policy guidelines, contractors and general adjusters inflate damages, and attorneys apply mass tort models with the promise of large attorney’s fees to simple property damage claims.

Claim solicitation efforts such as these have ensnared innocent homeowners in unnecessary lawsuits in recent years by promising big payouts at no cost following hail or other natural disasters. The result of the widespread scheme is higher insurance premiums and less choice in insurance companies throughout many states. AOB scams have become the largest cost-driver in the insurance industry and are having a widespread, detrimental effect on consumers across the country. The mess they create complicates and makes more difficult the carrier’s efforts to subrogate a loss if and when there is a third party responsible for contributing to or exacerbating the loss.

An Assignment of Benefits (AOB) is an agreement, signed by the insured homeowner, which transfers the insurance claim benefits and rights under the policy to a third party—usually a contractor. An AOB gives the contractor the authority to file a claim, make repair decisions and collect insurance payments without the involvement of the homeowner. They literally step into the shoes of the unwitting homeowner who then becomes captive to the scheme that unfolds. The AOB transfers the rights to:

  • File an insurance claim.
  • Make decisions about repairs.
  • Collect insurance payments.
  • File a lawsuit against the homeowners’ insurance company seeking damages and attorneys’ fees.

Following the execution of an AOB, the insurance company will only communicate with the contractor, even though it is the insured whose home sits unrepaired and/or with residual problems. Many AOB agreements even permit the contractor to collect their fees from the homeowner if the insurance policy does not cover the damage or the carrier will not pay the full claim. If the contractor tries to collect and the homeowner cannot pay, they place a lien on the insured property for the amount owed.

AOB scams and fraudulent practices are not limited to homeowners’ policies and natural disasters. They appear in auto glass claims and many other property loss insurance settings as well. The problem is that they imbue the contractor with a set of consumer protection rights that were never designed to be in the hands of contractors. Once armed with an AOB, they have the ability to charge more or less whatever they want because they can then enter into free litigation over short payments (shortpays), with the threat of attorneys’ fees hanging over the insurance companies. The ultimate goal is to enter into litigation with an insurer who balks at all the additional charges, repairs, and hefty charges known as general contractor overhead and profit (GCOP), which would otherwise be unnecessary.

When, whether, and in what amount property insurers must include a general contractor overhead and profit (GCOP) line item on first-party repair or rebuild estimates, when the insured does not engage a general contractor, remain issues of considerable confusion and uncertainty. This issue arises where the insured does not intend to repair or replace the insured property, and thus does not intend to hire a general contractor, yet still feels GCOP is properly included as Actual Cash Value (ACV) under the policy. In calculating repair or replacement cost in first-party property claims, it is often necessary to determine what must be replaced or repaired, who is qualified to perform that work, and how much that work costs. If the insured oversees the repairs or construction himself and puts in the time and resources necessary to coordinate one or more subcontractors, is the insured entitled to compensation under the policy for amounts for GCOP that otherwise would be paid to a general contractor? Usually not. But when an AOB is involved, significant GCOP charges are submitted to the unsuspecting insurance company. A chart detailing the law in all 50 states on overhead and profit (GCOP) payments in first-party ACV property damage insurance claims can be found .

Residential water losses are also becoming problematic in the light of AOBs. Water remediation companies are directing policyholders to sign work authorization contracts assigning their policy benefits. This allows the homeowner to avoid paying up front for repairs while waiting for reimbursement from their carrier or the hassle of negotiating with the insurer. In reality, the remediation company becomes the policyholder after an AOB, leading to unnecessary repairs, added fees, and higher prices. When the insurance company does the responsible thing by balking on paying these charges, they are sued. Unethical remediation companies are popping up like weeds, ready to rake in the huge profits and low risks associated with AOBs.

Unregulated and unlicensed, these firms pay exorbitant referral fees — some as much as $2,500 — to plumbers who are first on the scene of a water loss, all eventually paid by an insurer on an inflated invoice. Plumbers caught up in such schemes create opportunities to make more referral fees by loosening pipes and performing other actions that will result in a repeat visit. In Florida alone, the Office of Insurance Regulation notes that skyrocketing costs in responding to water loss claims will double some homeowners’ insurance premiums within five years.

The AOB practice does more than cost insurance companies and the premiums paid by the public. It also complicates subrogation efforts, adding to the cost of insurance by making difficult legitimate efforts to recover losses through subrogation, as insureds no longer want to be part of the process and the lawyers and/or contractors to whom benefits were assigned have no obligation to cooperate in such efforts. While hurricanes, tornados and floods do not usually lend themselves to readily-apparent subrogation potential, there are many avenues of subrogation available in such instances, including construction defects, improper repairs, product liability, etc. The unavailability of subrogation which would otherwise be automatic, translates to higher premiums. An MWL webinar entitled “Subrogating Against God” focuses on the unique subrogation opportunities which are available to the diligent carrier when natural disasters strike. It can be viewed HERE.

In the face of unscrupulous AOB practices, states are beginning to fight back. On July 1, 2019, Florida’s Governor Ron DeSantis signed SB 122, which created § 501.172 and addressed concerns regarding abusive litigation practices by contractors and their lawyers. The new law allows insurers to offer an insurance policy—at a reduced premium—that restricts an insured’s ability to assign insurance rights. The new statute defines what an assignment agreement is and what it must contain for it to be valid, including an AOB provision which warns insureds that they are giving up insurance rights by signing the agreement. It also gives the insured the right to cancel the AOB agreement under specific circumstances. It requires a contractor to serve the insured and carrier with a notice of intent to file a lawsuit against the insurer. The notice must specify the damages in dispute, the amount claimed, and make a settlement demand. The contractor must also provide a detailed written invoice along with information on equipment, materials, supplies, the number of labor hours, and proof that the work was performed in accordance with accepted industry standards. Importantly, the new Florida law also truncates a contractor’s ability to collect attorney fees in litigation. Currently, a contractor can recover all its attorney fees so long as the contractor makes any recovery—which is the reason attorneys get involved. Under the new law, a contractor’s ability to recover attorney fees is determined based on a comparison of the pre-suit offer and demand against the ultimate judgment in the case.

States are also fighting similar AOB practices in the area of auto insurance—such as involving claims windshield and glass replacement. A vehicle owner wants to get back on the road as soon as possible and easily falls prey to unscrupulous auto glass companies and vendors who promise the insured they can get their glass replaced and have somebody else deal with the headache of making and perfecting a first-party insurance claim. As with homeowners’ insurance, many of these auto policy AOBs come equipped with a suite of consumer protection clauses that were never intended to be in the hands of glass shops or other third-party vendors. Once these shops have an AOB in hand, they have the ability to charge more or less whatever they want for their services, because they can enter into fraudulent, risk-free litigation and extort large payments from the carrier. The additional cost to the industry is passed on to consumers in the way of higher auto insurance premiums. Florida and Arizona are hot spots for this scheme, but it is also growing in states such as Connecticut, Kentucky, Massachusetts, Minnesota, New York, and South Carolina. There has been protective legislation proposed in these venues—such as Arizona SB 1169, which would require deductibles on auto glass replacement claims—but so far, nothing has passed. Legitimate glass replacement companies are crying out for legislative help in restoring integrity to the segment of their industry. They are stuck between a proverbial rock and their duty of good faith in negotiating and settling first-party insurance claims.

Insurers, insureds, lawyers, and legitimate, licensed vendors should be joining forces to thwart this subversive attack on the most basic types of claims in our industry.

Seven Signs a Claim is About to Go Wrong

Louie Castoria | Claims Magazine

VETERAN CLAIMS EXECUTIVES know that sometimes lawsuits go off the rails. Juries can “run away,” key witnesses can crater on cross-examination, and judges can, occasionally, be injudicious. However, there are warning signs:

  • It’s quiet, too quiet. Most insurers have reporting intervals stated in their litigation guidelines, but these represent minimum standards, not the ideal. Ignoring reporting deadlines is bad enough, but it’s a danger sign when an attorney who has been a more frequent correspondent than the guidelines recommend goes radio silent.

It could be an illness or “nothing much doing.” Is it a high-end stakes case? Are there trial or pre-trial deadlines coming up? Those usually aren’t good times for the silent treatment; rather, times to over-communicate. Maybe counsel doesn’t want to broadcast what’s happening, hoping things will turn out fine, but forgetting Murphy’s Law. Clients hate surprises, especially ones that begin, “We regret to advise …”

  • The sudden, unexplained substitution of an expert witness. There must be 100 good reasons why counsel might need to drop an expert witness from the trial list. Even experts get sick, but substituting a new expert for the one who has worked the case up, has been disclosed as a trial witness, and has already billed a substantial amount of money can be a danger sign. The departing expert’s work, if used at all, may seem less forceful, and if the new expert relies solely on that work, his or her credibility may be questioned.

The keyword in this danger sign is often “unexplained.” Be skeptical if the explanation is so brief that it sounds more like an excuse: “She has a calendar conflict.” Really? When did it arise? Why is that case deemed more important than this one? Has the expert already written a report or expressed opinions in our case? Has the expert issued contrary opinions in other cases? If it is an illness, when will the expert again be available?

  • Unexpected motions seeking reconsideration. Sometimes a law firm’s invoice tells more than its reports. If you first learn about a motion for reconsideration on an invoice, that’s a danger sign. The outcome of the motion being reconsidered must be important to the case, and unfavorable.

Judges, like the rest of the species, can make mistakes, some of which need to be corrected. When that happens, that is the time to notify the client of the adverse ruling, provide a copy of the order, if there is one, and advise the client that motions for reconsideration have a low-percentage shot. In most jurisdictions, it must be based on a change in the law occurring after the motion was briefed and argued, newly discovered facts that could not have been known earlier, or counsel’s excusable neglect, will not support reconsideration.

  • A string of unfavorable outcomes on pretrial motions by the trial judge. Most judges decide pretrial motions on the merits, and not for settlement leverage. When the trial judge issues a string of unfavorable decisions, seemingly one-sidedly, it’s time to reassess. Are we right on the law and facts? Is our method of presentation turning the judge off — too wordy, too many issues in a single motion? This might be a time to consult with someone who has tried many before the judge and can provide a reality check.
  • Overly-optimistic reports from defense counsel. A very seasoned trial lawyer had a case before a jury and phoned in daily reports to the client and managing partner. They were too good to be true: “They didn’t lay a glove on us!” Day after day. At the end of the case, Ka-POW! It was more like an anvil than a glove. In some large-exposure trials, it may be worth the effort to bring in a neutral observer who has seen other trials, acting as the canary in the coal mine by sensing when things start to go wrong.
  • Unexplained changes in lead counsel. “Unexplained” is again the keyword. Many clients say, “We hire lawyers, not hire law firms.” Of course, they expect that lawyer to be supported by the resources of the law firm, but it is him or her they want at the helm of the case. Attorneys are vulnerable to disease, irreconcilable conflicts, or simply running out of gas. When a change in lead counsel must be made, it must be done gracefully, giving the client options of others to take the reins, and an opportunity to speak with each of them.
  • A ringer is brought in to try the case for the plaintiff. A well-known, high-stakes attorney — a “ringer”— suddenly joins as counsel for the other side. This can sometimes be a ploy, especially if the ringer does not formally associate in the case but lends his or her name to a mediation or settlement conference statement.

You could bring in your own “ringer,” though that could telegraph lack of confidence in current counsel. Another downside: some “ringers“ thrive on the battle, and may not be attuned to settlement opportunities that arise during trial. Having a ringer consult behind the scenes may provide the advantage of his or her expertise, thus empowering current counsel. Watching for the telltale signs that a case may be taking a wrong turn can be the proverbial “stitch in time that saves nine” or $9,000,000.

Fifth Circuit Holds Insurer Owes Duty to Defend Latent Condition Claim That Caused Fire Damage to Property Years After Construction Work

Jeremy S. Macklin | Traub Lieberman

Most general liability policies only provide coverage for “property damage” that occurs during the policy period. Thus, when analyzing coverage for a construction defect claim, it is important to ascertain the date on which damage occurred. Of course, the plaintiffs’ bar crafts pleadings to be purposefully vague as to the date (or period) of damage to property. A recent Fifth Circuit decision applying Texas law addresses this coverage issue in the context of allegations of a condition created by an insured during the policy period that caused damage after the policy expired.

In Gonzalez v. Mid-Continent Cas. Co., 969 F.3d 554 (5th Cir. 2020), Gilbert Gonzales (the insured) was a siding contractor. In 2013, the underlying plaintiff hired Gonzales to install new siding on his house. In 2016, the underlying plaintiff’s house was damaged in a fire. The underlying plaintiff sued Gilbert in Texas state court alleging that when Gonzalez installed the siding in 2013, he hammered nails through electrical wiring and created a dangerous condition that caused a fire three years later in 2016.

At the time Gilbert performed construction work, he was insured by Mid-Continent Casualty Company. Mid-Continent disclaimed coverage to Gonzales on the basis that the complaint unequivocally alleged that property was damaged in 2016 and there were no allegations that property damage occurred prior to 2016 or was continuing in nature.

The Fifth Circuit started its analysis by acknowledging Texas’ strict eight-corners rule for determining an insurer’s duty to defend. Relying on prior Texas and Fifth Circuit decisions (Don’s Building Supply, Inc. v. OneBeacon Insurance Co.Wilshire Insurance Co. v. RJT Construction, LLC, and VRV Development L.P. v. Mid-Continent Casualty Co.), the court narrowed its focus to “actual, physical damage alleged in the underlying litigation.” The court reasoned, “[i]f the only alleged damage occurred outside of the policy period, then there is no duty to defend. But if any of the alleged damage occurred during the policy period, then the duty to defend attaches.”

The court held that the underlying lawsuit “plainly alleges physical injury to property that occurred within the policy period.” The court identified three reasons for its holding: (1) the underlying complaint stated that the 2016 fire “relates back to [the] construction and/or installation of siding” in 2013, (2) the policy defined “property damage” to include “all resulting loss of use of that property,” so damage to the wire includes damage to the entire house, and (3) the underlying plaintiff’s claim of damages alleged that “the electrical wires were damaged in 2013.”

Judge Catharina Haynes dissented, explaining that she would hold that property damaged occurred after the policy period ended, when the fire broke out in 2016. Judge Haynes agreed that the court is bound by Don’s BuildingWilshire, and VRV Development, but she emphasized that those cases also hold that when an underlying plaintiff alleges actual, physical damage due to the insured’s negligent conduct, the alleged property damage does not relate back to the time of the negligent act when determining when the property damage occurred. Judge Haynes criticized the majority for focusing on the time of the negligent conduct.

The Gonzales decision highlights the importance of analyzing each allegation in an underlying pleading to determine when any physical injury may have occurred. The dissent also leaves the door open for a different panel of Fifth Circuit judges to distinguish or reverse Gonzales.

Owner Disgorgement Claims Against Unlicensed Contractors Given Short Statute of Limitations

Matthew T. Porter | Smith Currie & Hancock

Eisenberg Village of the Los Angeles Jewish Home for the Aging v. Suffolk Construction Company, Inc. (2020) 53 Cal.App.5th 1201.

Under California Business and Professions Code section 7031(b), “a person who utilizes the services of an unlicensed contractor may bring an action … to recover all compensation paid to the unlicensed contractor for performance of any act or contract.” The Court of Appeal held that such disgorgement claims against unlicensed contractors are (1) subject to a one-year statute of limitations and (2) accrue upon the completion or cessation of the performance of the act or contract at issue.

Eisenberg Village of the Los Angeles Jewish Home for the Aging (“Eisenberg”) hired Suffolk Construction Company, Inc. (“Suffolk”) to construct a 108-unit assisted living facility. During construction, Suffolk’s responsible managing employee (“RME”) moved to another state, no longer supervising anyone at Suffolk connected with the project. As a part of its claim for construction defects against Suffolk, Eisenberg included a claim for disgorgement under section 7031(b), alleging that Suffolk was not a duly licensed contractor at all times during the project because Suffolk was out of compliance with RME requirements. Suffolk argued Eisenberg’s disgorgement claim was barred by the statute of limitations. The Court of Appeal agreed.

Statute of Limitations for Section 7031(b) Disgorgement Claim

Because section 7031(b) does not set forth a limitation period, the court looked to the California Code of Civil Procedure (“CCP”) to determine the applicable statute of limitations for Eisenberg’s disgorgement claim. The question turned on whether section 7031(b) disgorgement was a “penalty or forfeiture.” The court noted that section 7031(b) disgorgement “deprives the contractor of any compensation for labor and materials used in the construction while allowing the plaintiff to retain the benefits of that construction.” It also noted that a plaintiff may bring such a claim “regardless of any fault in the construction by the unlicensed contractor.” For these reasons, the court held that a section 7031(b) disgorgement claim is a penalty and is, therefore, subject to CCP § 340(a)’s one-year statute of limitations.

Accrual of Section 7031(b) Disgorgement Claim

After determining that the one-year statute of limitations applies, the court turned to the question of when Eisenberg’s disgorgement claim accrued. Eisenberg argued that the “discovery rule” applied and that the statute of limitations did not begin to run until Eisenberg discovered the potential issue with Suffolk’s licensing, which was well after completion of the project. The court rejected this argument. The court reasoned that a contractor’s unlicensed status does not in itself cause harm to a plaintiff, so delaying accrual of the statute of limitations until discovery of harm would leave accrual of the limitations period open ended. The court also sought to avoid what it considered the “absurd result” of plaintiffs bringing disgorgement claims long after the successful completion of a project based on a lapse or suspension of a contractor’s license during the project.


This case significantly reduces the power of section 7031 to protect the public from unlicensed contractors. The burden is now on project owners and other participants to investigate and uncover any licensure issues of participating contractors and bring section 7031(b) claims against those contractors within one year of the contractor’s ceasing performance on the project. In some cases, this may prove to be impracticable, and in many cases—especially where subtle automatic license suspension issues are involved—this will necessitate aggressive litigation action by counsel to preserve potential disgorgement claims.

This ruling may also affect the litigation strategy of contractors in their disputes with owners. For example, contractors who are aware of potential licensure issues during the course of a project may want to consider delaying the pursuit of their claims against an owner until after the one-year statute of limitations has run on the owner’s potential disgorgement claim. Of course, this strategy may require the contractor to forego its lien rights by declining to bring an action within 90 days to perfect its lien rights.

Finally, this case is plowing new ground, and there is much room for other courts to disagree with the Eisenberg Court’s ruling.  Expect further litigation of these statute of limitations issues.

Documentation: A Key to Preventing and Winning Construction Claims

Kent B. Scott | Babcock Scott & Babcock

            Both practically and legally, a picture is worth a thousand words. In both the construction and legal industries, attempting to resolve issues based on oral conversations can be a recipe for further conflict. This is because it is inherently difficult to determine the truth in a “he said, she said” situation. A judge, jury, or owner will need to determine who seems most trustworthy. Therefore, in preventing and prevailing on construction claims, it is essential that contractors create and retain the proper documentation.

            One of the most important aspects of documentation is that it is kept on a consistent and contemporaneous basis. To properly utilize construction documentation, it must be kept as a general business practice at the time an event occurs.

            One of the most important construction documents is the daily log. Many foremen and superintendents dread the daily log because it is seen as a waste of time at the end of a long day. While a poorly kept daily log may be a waste of time, a properly kept daily log can be the key to avoiding liability. To do it right, a company should document the who, what, when, where, and why of the day. For example, who was performing what work and for how long. Who was visiting the job site and for what purpose. What obstacles or defective work arose, and where did it happened. The weather conditions. What conversations were had and with whom. By recording these items, the contractor is preserving a reliable source of information.

            A dispute over payment is common in construction litigation. One of the best ways to resolve or prevent such disputes is to properly record and keep invoices and pay applications. Proper record keeping maintains the trust relationship. Although it is tempting to hide cost overruns in different items within a schedule of values, such practices can and do result in a loss of the owner’s trust and can push a project into litigation. During the course of litigation, the truth will come out at the expense of the contractor. Avoid such issues by properly documenting costs, and keeping those documents in an organized manner.

            To resolve a dispute over delays, contractors need to be keeping and updating proper schedules. While the term CPM scheduling is common within the construction industry, many times the schedule is just a simple one page chart without the crucial relationships between tasks. Such schedules fail to provide the information needed to move a job forward and to prove actual delays. Even if a contractor starts out with a true CPM schedule, failure to preserve the baseline schedule and periodic updates as separate files negates any benefit there would have been. If the same file is used and updated, there is no historical data to show which trade caused what delays.

            Photographs and video records provide excellent evidence. No matter the type of claim, photographs and videos provide concrete proof of the status of the job at the time the photograph or video was taken. In a recent case, an owner claimed that the contractor damaged a road during the course of the construction project. Prior to beginning construction, the contractor recorded the status of the road. The contractor was then able to make a similar video at the completion of construction to affirmatively show the lack of damage.

            Like most of the types of documentation discussed, recording correspondence can be a double edged sword. While recording important conversations can be a great benefit in proving or defending against a claim, a profanity laced email, or an admission of fault can completely undermine your position. Many clients have said “we agreed to an oral change order” or “we had an agreement,” but without a record to support those conversations, it is very difficult to prove. When it comes to change orders, the Supreme Court of Utah has required strict conformance to contractual written notice requirements. See Meadow Valley Contractors, Inc. v. UDOT, 2011 UT 35. A good practice is to follow up conversations with an email summarizing the conversation. This gives you the ability to frame the conversation how you would like, and the recipient still has the ability to correct it if necessary.

            Lastly, a contractor should not over document a job. If a contractor consistently sends vague default notices to multiple subcontractors in an attempt to cover themselves for any and all minor issues, such notices hold little weight, and impacts the credibility of the party who is guilty of over documentation. So while it is important to keep and record the documents discussed above, a contractor should be cautious when making broad assertions of damages or default without specifics, and should limit such notices to when an actual default is affecting the project.