In Texas, To Proceed or Not To Proceed? Restoration “Insurance Pricing & Proceeds” Contingency Contracts
I will preface this blog post by stating that I am not an attorney and I am not offering legal advice. If you are a property owner or a contractor I would suggest consulting an attorney prior to signing an “insurance pricing & proceeds” contract. I am a Texas Public Insurance Adjuster who assists property owners with insurance claim disputes.
“In Texas, To Proceed or Not To Proceed?”
That is the million dollar question. Both Texas property owners & insurance restoration contractors should be wary of such contracts by proceeding with much caution. Property owners must be aware that contractors soliciting insurance proceeds contracts as “insurance claim experts, claim negotiators,” may be in violation of Texas House Bill 1183 & Texas Insurance Code Section 4102. In addition to that, it may be insurance fraud for a contractor to “waive” the deductible & then submit the final invoiced price inclusive of the deductible to collect the recoverable deprecation. These potential fraudulent activities puts both the property owner & the contractor at risk for prosecution.
Many Texas insurance restoration contractors should question whether the “insurance
pricing & proceeds contract” is a good fit for their business. A smart contractor will be looking at all scenarios regarding legality, enforceability & profitability of these types of contracts with property owners. On the up side, an insurance pricing & proceed contract can be very lucrative with high profit margins but to what liability is that worth it. What happens when the insurance company does not pay for a proper scope of work & price? Is the contractor then obligated to perform sub par work? So many hail storm chasers use the “insurance pricing & proceeds” contract to do the project at insurance claim scope, pricing, & proceeds. One of the many economical downsides to this contract is that if the client’s insurance company breaches their contract with policyholder in many states the contractor has no rights to enforce their “insurance pricing & proceeds” contract.
In one recent example I was hired by a Texas policyholder to resolve a dispute over general contractor’s overhead & profit (GCO&P). The contractor introduced me to the policyholder because they are a general contractor & the insurance company would not pay the GCO
&P. Although I was successful at getting the insurance company to pay for the GCO&P, the insurance company refused to release the recoverable deprecation that they agreed in advance was owed at completion of the construction work. This was a dispute that I had not anticipated to happen. The contractor did the work & the insurance company was holding back around $60,000 in recoverable deprecation. The contractor was on an “insurance pricing & proceeds” contract & informed the claim department of this agreement. So after the work was complete the insurance company wanted to re-adjust the claim. They asked for labor, material, & any proof of job cost. Not just the final invoice from the general contractor, but what that contractor paid his sub-contractors & material vendors. Their intention was to remove the profit within the base line items & to not pay the agreed upon price.
The Texas general contractor was in a precarious position because the client had turned over all insurance proceeds to them for the project & was in compliance with the “insurance pricing & proceeds” contract. So the contractor had potentially no standing to enforce the contract or file a lien here in Texas because the contract did not have a price. In this instance the contractor was at a huge contractual disadvantage & economical loss due to the “insurance pricing & proceeds” contract. On the flip side the property owner got their property repaired & didn’t have a bad experience with the “insurance pricing & proceeds” contract.
Let’s look at other side of the coin, when the property owner doesn’t have a good experience with an “insurance pricing & proceeds” contract by trying to cancel it. The Office of the Texas Attorney General went after a contractor who was trying to enforce these contingency contracts when the property owner wanted to use a different contractor by penalizing them with a percentage % cancellation clause. In this case many property owners who tried to cancel these “insurance pricing & proceeds” contingency contracts received bills to pay these unenforceable penalties & threats of lawsuits to collect said penalties. The Office of the Texas Attorney General went after this contractor with civil penalties for $20,000 per violation of the Texas Deceptive Trade Practices Act. This cost the contractor dearly.
In another situation for which a contractor signed a Texas property owner with an “insurance pricing & proceeds” contract things went downhill when the contractor didn’t agree on a final price with the insurance company before they replaced the roof. The property owner’s policy required that property owner must give access to such damage for inspection & permanent changes/final price authorized in advance. The insurance company denied the claim & the contractor sent the bill to the property owner with multiple threats from a collection agency. The property owner sued the contractor because they felt that they did not owe for the roof per their “insurance pricing & proceeds” contract since the insurance company denied the claim. The federal court agreed with the property owner that the “insurance pricing & proceeds” contract was illegal, void and unenforceable because it violated the Texas Insurance Code Section 4102 in that a company or individual cannot both negotiate an insurance claim on behalf of an insured
and make the repairs. The federal court held that the property owner did not owe the contractor for the roof invoice & ordered the contractor to pay more than $225,000 in actual damages, mental anguish and attorney fees for it’s conduct. This is a huge liability for the contractor & court orders to pay such damages can put a contracting company out of business.
Now that we have seen what can happen from both sides of the coin when dealing with an “insurance pricing & proceeds” contract let’s go back to the original million dollar question.
In Texas, To Proceed or Not To Proceed?
I would have to say if I were a contractor my choice would be NOT TO PROCEED. I am not a contractor & haven’t been since the summer of 2008. Just for purposes of discussion if I were a contractor I would sign a contract for a price & listed work to be performed for that price. In Texas, it seems to be too risky to do construction work with an “insurance pricing & proceeds” contract. The liabilities to continue to write “insurance pricing & proceeds” contractors are too great & do not outweigh the benefits. There are existing & new laws in effect that regulate this exact issue. We are all waiting to see how they will be enforced. This hail season has produced another round of high damaging events in metropolitan areas. My guess is that the State of Texas will starting enforcing these laws with more intensity this year & I am sure they are going to get pushed to do so from the insurance companies themselves. Of course the insurance companies interest is not to protect the property owners, but to limit or reduce the financial impact these storm chasing contractors have on their bottom line.