Storm Damage Wipe-out in Nebraska

Insurance restoration contracting tends to be good work. No matter the season, no matter the economy, pipes break, kitchens burn, trees fall over, roofing gets blown away. With the insurance carrier funding repairs, payment is virtually guaranteed – or should be.

If you agree with that statement, keep reading. There’s more to understand. 

Twenty states (AL, AZ, CO, GA, IL, IN, KY, LA, MI, MO, MS, NE, NY, OK, SC, SD, TN, TX, UT, WI, WV) now set standards for insured repair contracts. These laws vary. But all require a very specific notice in the contract. The owner has at least a few days to cancel after any part of the insurance claim is denied. The contractor can not offer to rebate the deductible. And the contractor is prohibited from acting as the adjuster -- advocating for the owner, setting the scope of work.

Another difference: Property loss jobs have many more moving parts. The homeowner, the insurance adjuster, city and county officials if it’s a fire loss. If the site is a crime scene, law enforcement will be involved. And everyone comes with their own lawyer: the insurance company, the real estate company, the driver who hit the house, the owner, the city, the building department. Any time lawyers are hovering, you better have the best possible contract. 

A case decided earlier this year makes the point. RAD Services v. State Farm.

Here’s What Happened

Storms damaged twenty Nebraska homes, all insured by State Farm. State Farm's policy provides two payments:

1. Until repair or replacement is complete, State Farm pays only Actual Cash Value of the property before it was lost or damaged. ACV is the depreciated value based on age and condition. That’s like a tire warranty. If your 50,000 mile tires give out at 40,000 miles, you get a 20% credit on new tires.
2. When repair or replacement is complete, State Farm pays the cost to remediate damage less what was already paid as ACV. Replacement cost is usually far more that ACV. The owner gets a new roof to replace a roof many years old. That’s called “betterment” in insurance jargon. Not all home insurance policies cover betterment. 

State Farm made the first payment, value at the time of loss. When work was done, the contractor filed a claim for the second installment -- and discovered an expensive mistake.

There were no construction contracts. Instead, each of the 20 owners had assigned their claim rights to their contractor. Worse, the assignments didn’t show any contract price or scope of work.

That makes perfect sense – sort of. The scope of work should be whatever State Farm was willing to cover. The owner had to pay the deductible. The contractor and State Farm would settle up on the rest. No construction contract needed.

The court didn’t like that. In the opinion of the court, an assignment without an agreement on either scope of work or the price isn’t an assignment at all. As a matter of law, the 20 assignments were too vague to be enforced. Case closed. The contractor didn’t collect the second payment. Wipe-out.

If you do insurance repair work, you probably don’t agree. Property loss adjusters are very good at settling claims – both the scope of work and the price. Insurance carriers, owners and contractors need flexibility to negotiate settlements once scope of work is known. But until courts find a way to agree, you better have a good contract, especially on property loss jobs.

The best tool I know for drafting construction contracts is Construction Contract Writer. That’s true no matter the type of job or the site. The trial version is free.

If you’re new to property loss work, I can recommend another reference, Insurance Restoration Contracting by Paul Bianchina. Now available as an E-book from Craftsman.