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.

Virtual Claims Handling Quickly Delivers Accurate Results

Susan Egeland and Sara Inman | Faegre Drinker biddle & Reath

Property and casualty insurers are integrating drones and other means of virtual claims handling as part of their routine property inspections. But, in litigation, virtual claims handling is unfairly getting a bad rap from plaintiffs’ attorneys who try to pass it off as solely a cost-cutting measure by insurers.

In actuality, virtual claims handling works to the benefit of both insureds and insurers because it allows an insurer to handle a claim sooner without compromising accuracy. The current COVID-19 pandemic is proving the value of virtual claim handling capabilities. Major metropolitan areas have “shelter-at-home” policies in place to minimize in-person contact. Even where such policies are not in place, cities across the country are practicing social distancing. Under such circumstances, an insured may not want an adjuster to come to their property to handle a claim. But, an insurer that utilizes virtual claims handling can send a drone to a property, control it remotely and capture images of damages for an adjuster to review without any in-person contact.

Some plaintiffs’ attorneys may argue drone images are not fully capable of capturing damages present on a property. However, the accuracy of such images has already been established. A virtual imagery system known as Eagleview has long been the industry standard for measuring properties by both contractors and insurers. Eagleview takes aerial, high-resolution images of properties that are so comprehensive they can be used to measure the pitch of a roof and determine the exact number of squares on a roof.

Similarly, aerial images taken by Google are detailed enough to reflect the history of repairs to a property and the general condition of a property. Through such images, one can determine whether a roof has been replaced in subsequent years, the number of metal appurtenances on the roof, whether any appurtenances have been changed and whether any new construction has been completed at the property.

Now consider that, in virtual claims handling, the images are taken in much closer proximity than aerial images. The details of any existing damages are easy to see. The skepticism regarding virtual property inspections is simply unwarranted. Virtual claims handling is the claims handling of the future, and insureds are fortunate if their insurer is one of the carriers leading the transition. This has become even more apparent under recent circumstances such as the COVID-19 pandemic.

STOP in the Name of Releases, Before They Break Your Claims

Amy Elizabeth Garber | Buildsmart

Given the uncertainty that COVID-19 has brought to federal projects, it is imperative now more than ever that contractors preserve rights to potential claims at all turns. Fortunately, with careful reading and documentation, contractors can satisfy the government’s desire for releases while preserving their claims. A recent Armed Services Board of Contract Appeals decision is yet another caution for any contractor that signs a release without preserving claims (see Horton Construction Company, Inc., ASBCA 20-1 BCA ¶ 37,622 (June 2, 2020)).

In Horton, the general contractor for a concrete crushing and erosion control project signed several modifications that stated: “Contractor unconditionally waives any charge(s) against the Government arising under the revised statement of work of this contract.” At final payment, the contractor signed a certification releasing the government “of and from all liabilities, obligations, claims, and demands whatsoever under or arising from the said contract, other than claims in stated amounts as listed below.” The contractor did not list any claims on the document. Nevertheless, the contractor did, in fact, have a claim based on the fact that it priced its production rate based on the government’s estimate of 69,000 tons of concrete on site, when only 30,000 tons were available. The contractor later argued before the board that its project manager who signed the modifications did not have authority to do so. The board disposed of that argument based on the fact of the project manager’s evident authority to act on behalf of the contractor during the project.

Horton is a reminder that any contractor personnel who sign any document containing a release should stop in their tracks, read, and consider what they are releasing. In Horton, the release provided space to list claims, but space or not, a contractor should repeatedly list any pending claims that it wants somewhere on the release every time a release is signed.  Consistency is key: Carving out a pending claim in one progress payment release may be insufficient to preserve that claim if the next release does not do so. Keep in mind that a contractor (or subcontractor) may also want to be sure it excepts unpaid retainage, agreed but unfunded change orders, and claims.

Now more than ever, contractors need to provide for contingencies and preserve future claims. Contractors can, and should, make a habit of negotiating a general reservation of rights for every single release. And do not let the government tell you otherwise: The FAR expressly permits contractors to do so. If all else fails, while not guaranteed to preserve a claim, it may be possible to preserve claims by including reservation of rights language with the release.

Read Before You Sign: Claim Waivers in Project Documents

William E. Underwood | ConsensusDocs

Not all claim waivers are appropriately titled “Waiver of Claims.”  In fact, claim waivers can be found “hiding” without any advertisement or fanfare in a number of project documents, including change orders and applications for payment.  So although getting work quickly approved and paid for is important, taking time to read the specific language in your project documents is just as important.  Failure to pay close attention to this language could result in the waiver of key, unresolved project claims. 

Further, and although it should go without saying, it is also just as important to read all of the terms of your contract.  Important waiver language might not exist on the face of form project documents, but rather might be contained in the general and/or supplemental conditions of your contract and automatically incorporated into your form project documents. And these types of incorporated waivers can be just as enforceable.

So it is critically important to understand what you are signing and the implications it might have on future claims.  This article will explore some of the common types of claim waivers that can be found in project documents so that you are better positioned to avoid inadvertently waiving claims in the future.

Change Orders

Change orders will frequently contain language waiving claims for any and all costs or schedule impacts incurred prior to the date of the change order that are not specifically identified within the change order.  For example, a change order may state:

Owner and Contractor attest and agree that the Price and/or Schedule adjustment provided herein constitutes compensation in full for any damages, costs, expenses, delays, acceleration, or loss of efficiency encountered by Contractor in the performance of the Work through the date of this Change Order.  Notwithstanding the attestations above, Contractor reserves and does not waive its rights under the Contract to seek price and/or schedule adjustment for the following impacts: ________ (if blank, none).

In other words:  this Change Order fully compensates you for every impact incurred to date unless otherwise specifically noted.  So if it is not noted, any future claim is waived.

Generally, these waivers are enforceable.  So it is critical to read and understand the “fine print” contained in your change orders before signing and submitting them.  This is particularly true when multiple changes or scope revisions may be up for discussion and negotiation at the same time.  In many instances, a contractor may present multiple changes to an owner or general contractor at the same time.  Some of these changes can then be dealt with quickly, while others may take extended amounts of time and negotiation to resolve.  If you are not careful when executing change orders to address resolved claims, you may inadvertently waive your right to recover additional time and money for the other unresolved claims.

Admittedly, this can be difficult during the day-to-day grind and overall commotion of project execution.  But the importance of this task should not be lost in the mix.  So make sure to carefully read the language in your change orders.  And continue to carefully review this language, as change order forms may be subject to revisions as the project progresses. 

Pay Applications

In addition to change orders, applications for payment or contractual invoice forms may also contain waiver language.  For example:

Contractor, by signing this application, also waives all claims, including but not limited to any statutory claims, liens, and/or privileges which in any way arise out of work, labor, equipment and materials furnished by Contractor in connection with the Project up through the date of the previous Applications for Payment, except those claims previously made in writing, remain unsettled, and are specifically identified as follows (none, unless otherwise specified here): ____.

In other words: by submitting this request for payment, you waive any unresolved claims not specifically noted in the application. 

Again, as a basic starting point, waivers like this are enforceable.  Because receiving timely payment is a vitally important business component, contractors will sometimes hastily prepare, sign, and submit their payment applications.  But in doing so, they may inadvertently waive claims for additional compensation.  So in the rush to get money now, contractors may be costing themselves more money in the future.  As a result, it is critical to carefully review all of the language contained in your payment applications and ensure that you do not inadvertently waive any claims for additional compensation.

Other Contractual Provisions Incorporating Waivers into Project Documents

Waiver language can also be incorporated into contract documents, like change orders, through other general or supplemental provisions in your contract—meaning that your change order might effectively operate as a waiver without explicitly stating that in the actual document.  For example, the general provisions of your contract might state:

Contractor’s failure to request a cost or time adjustment in connection with a Change Order for impacts incurred  prior to the date of the Change Order shall constitute a representation by Contractor that no such adjustment is required and shall constitute a waiver by Contractor of its right to any such adjustment.

This language has the same practical effect of placing a waiver directly into the Change Order itself, as discussed above—except that here the Change Order will not even have this language printed on it!  And language like this can be incorporated into any number of other project documents, including pay applications, without ever appearing in the document itself.

Similarly, technical scheduling specifications contained in your contract may provide a list of items that must be submitted to obtain a schedule extension, and that the failure to provide these items will operate as a waiver of the claim for schedule relief.  Stated differently, the failure to provide this information will constitute an acknowledgement by the contractor that it is not entitled to schedule relief.  Again, this waiver language will not appear directly on any project submittal, but rather can be found within the contract itself.  But the effect is still the same.

So in addition to carefully reading your project submittals, read your contract!  Its language may incorporate waivers that might not otherwise appear on the surface of other key project documents.

Final Thoughts

Claim waivers can be hiding anywhere.  So closely read your contract and its associated documents.  It is far easier to deal with waiver issues contemporaneously when project documents are being executed than it is to fight over the enforceability of a claim waiver down the road.  In this case, an ounce of prevention is worth a pound of cure.