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.

Insurance Work in Indiana

Storm damage repair can be good business for home improvement contractors. Two reasons: (1) It’s easy to find homes that need repair after a storm. (2) Owners with insurance coverage are a good credit risk. That makes the industry ripe for abuse. If you do work in Tornado Alley, you’ve heard the stories.

In response, twenty states have enacted laws that regulate casualty loss repair. AL, AZ, GA, IL, IN, KY, LA, MI, MO, MS, NE, NY, OK, SC, SD, TN, TX, UT, WI, WV. All of these storm damage repair laws are similar: Any contract for an insured loss must include specific disclosures, including a statement that the owner can cancel if the insurance claim is denied, either in whole or in part.

Fine. Laws like that put an end to the worst abuses. Storm damage specialists have to write bullet-proof contracts and be especially careful when developing the scope of loss. But contractors aren’t the only problem. This street runs two ways. The Indiana case of Hoosier Contractors v. Sean Gardner offers an example.

Damage to Gardner’s Indianapolis home was covered by a Cincinnati Insurance Company policy. Gardner had Hoosier Contractors inspect the roof and write an estimate for repairs. Before doing the inspection, Hoosier required Gardner to sign a contract titled "Replacement Work Agreement." The contract included the language required by Indiana storm repair law. If Gardner’s insurance company didn’t agree to pay, the contract would be "null and void." Hoosier inspected the roof and wrote an estimate of loss – $50,619.46 (later adjusted to $59,489.78).

Gardner submitted his claim to Cincinnati Insurance. Cincinnati issued a "Scope of Work" to both Hoosier and Gardner, listing the work Hoosier would perform and the estimated cost for each item. Cincinnati settled the claim, paying Gardner in several installments. So far, so good. But this is where traffic started to run in the other direction.

With proceeds of the claim in hand, Gardner paid another company approximately $18,000 to repair his roof. Hoosier was left out in the cold. They had estimated the job, advanced several thousand dollars to a claim service to negotiate with the insurance carrier – and had nothing to show for it – except a signed contract. Hoosier did the only thing they could, file suit for breach of contract.

Gardner’s attorney insisted the contract violated Indiana’s Home Improvement Contractors Act and was a "scheme, artifice, or device . . intended to mislead Indiana residents into executing home improvement contracts.” That would be a violation of Indiana’s Deceptive Consumer's Sales Act (DCSA) and entitle Gardner to three times actual damages plus attorney fees.  Gardner’s attorney moved to certify a class action on behalf of:

All persons who entered into a Home Improvement Contract with Hoosier Contractors, LLC from February 12, 2014 until such time that Hoosier stopped utilizing said Contract(s) and began utilizing a Home Improvement Contract that was in compliance with the [HICA].

Obviously, the fat was in the fire.

By any account, Hoosier’s contract with Gardner had problems. There was no price and no description of the work. Both are required under Indiana’s Home Improvement Contracts Act (HICA).

This case is still in the courts. Issues yet to be decided:

• Does Hoosier’s contract violate Indiana’s HICA?
• If so, is that violation an incurable deceptive act under the DCSA?
• Is the Gardner contract null and void because Cincinnati didn’t approve the full scope of work?
• Did Gardner breach the contract when he gave the work to another contractor?

For Hoosier Contractors, the Gardner job was a financial black hole. But it’s easy to imagine another result. Suppose the Gardner contract had complied in every respect with Indiana law. Hoosier Contracting would have escaped years of litigation and mounting legal bills.

Don’t make Hoosier’s mistake. Construction Contract Writer drafts letter-perfect construction contracts for any type of construction and for any job site. The trial version is free.

 

Changes in Construction Law for 2016

Nineteen states have changed their construction contract law in the last few months. Some of these changes are trivial. Others will affect contractors throughout the state. In several cases, legislatures are simply falling in line, writing new statutes to mirror law adopted recently in other states. Highlights are below.

Florida’s Notice and Right to Cure Act was revised effective October 1, 2015 to clarify the date of completion, impose additional requirements on the notice of claim, revise the content of the response and identify records to be produced when a homeowner has a complaint about the work. Owners can still opt-out of the act by signing a statutory waiver. Florida Statutes §§ 558.001 to 558.004.

Minnesota was the first state to give owners the right to cancel a contract for storm damage repair if the owner’s insurance carrier denied any part of the claim. That law went into effect in May of 2011. The original law applied only to roofing and siding repairs. On May 19, 2015, Minnesota Statutes § 326B.811 was revised to give owners the right to cancel a contract for any type of storm damage repair (not just roofing and siding) if any part of the insurance claim was denied.

Nevada Statutes § 624.609 was revised to limit subcontractor retainage on commercial jobs to 5%. Before January 1, 2016, prime contractors on commercial jobs could retain 10% of the amount due their subs.

New Jersey Administrative Code § 13:45A-17.3 was amended on April 21, 2015 to allow licensed home elevation contractors to do home improvement work.

Rhode Island now requires a written contract showing the contractor’s registration number on all jobs valued at $1,000 or more. Code of Rules § 01-030-001 Division 3.1.5 (1 & 2) was revised on May 14, 2015.

Virginia had allowed subcontractors and suppliers to waive their lien rights before work was done. For example, an agreement offered to a subcontractor could include a blanket lien waiver. For subs, that took the teeth out of Virginia’s mechanics’ lien law. Virginia Code Annotated Section 43-3-C was changed on April 15, 2015 to void any attempt to require subs or suppliers to waive lien rights before work is done or supplies delivered.

West Virginia became the 18^th state to give an owner the right to void a storm damage repair contract if the insurance carrier denied any part of a roofing repair claim. West Virginia Code §§ 46A-6M-1 to 46A-6M-6 were changed on July 15, 2015 to require both a statement in the contract explaining the right to cancel and a detachable cancellation form in duplicate. After denial of any part of the insurance claim, the owner has five days to cancel the work. The other 17 states requiring storm damage repair contracts: AL, AZ, GA, IL, IN, KY, LA, MN, MO, MS, NE, OK, SC, SD, TN, UT and WI.

It’s easy to be sure your contracts comply with these and other changes in state and federal law. Get Construction Contract Writer. The trial version is free. If you’re already using Construction Contract Writer, your program will update automatically when changes in the law affect your jobs.