Most people do not have the tens or hundreds of thousands of dollars it takes to repair their property after a major loss just laying around. So, contractors who specialize in repairing from losses due to weather, fire, or flood often will agree to work for the insurance proceeds. This can create some tension when the carrier has a different view of what work is covered or what the price for that work should be. Contractors understandably want to push back when their work is undervalued or the carrier is telling them to do work that won’t pass inspection.
Colorado law is murky on the question of how much arguing the contractor is allowed to do. On the one hand, Colorado courts have recognized that contractors do have the right to pursue bad faith claims on behalf of the policyholders. On the other hand, the act of negotiating with a carrier on behalf of a policyholder is described by Colorado statute as requiring a public adjuster’s license. So, when does a contractor’s pursuit of the proper scope and cost for repairs cross the line into improper negotiation?
Many in the industry draw the line at whether the negotiation addresses questions under the insurance policy or not. From this view, the contractor is free to raise concerns with the facts concerning the necessary scope of work or the price needed to do that work, but is not free to argue policy questions such as coverage. This view of the law is probably familiar to those who work in it. The problem is, it is not necessarily settled law and so there are risks involved in pushing the issue.
In light of this uncertainty, there are many possible solutions various companies or auctioneers have tried:
Hire a public adjuster.
This may be the easiest and most obvious way to solve the problem. But, it comes with a few complications. The big one is that someone has to pay the public adjuster and most of these professionals charge a contingency fee that is a fixed percentage of the insurance claim. So, when a public adjuster is brought in, it is extremely important to have a three-way discussion between the contractor, the public adjuster, and the policyholder concerning pricing and expectation. Can the work be done if 10% of whatever the carrier pays is paid out to the adjuster?
There is another complication, and it can be a touchy subject. By law, the public adjuster cannot have control or a financial interest in the contractor. Some commentators go further and suggest that this prohibition probably goes both ways, and the two should be free from each other’s control. Unless both the adjuster and the contractor on the same page, then, this can lead to misunderstandings, issues with the chain of command, and other problems. I have seen this lead to hard feelings where one professional dislikes something done by the other or where the policyholder – in good faith or not – takes sides with whichever professional is promising them a better deal.
In both cases, clear communication at the outset and during the claim is absolutely key. The contractor, adjuster, policyholder, and attorney (if any) need to make sure they are coordinating so everyone understands the chain of command and the financial realities of the claim.
Fixed price contracts.
One solution to the problem of how a contractor can argue with the carrier without ending up doing public adjusting without a license is to dodge the issue entirely by using a fixed price contract. There are some lawyers out there – you know who you are – that advocate this strategy as the best possible solution to this and other problems facing contractors who do disaster mitigation.
To an extent, they’re right. If a contractor can get a customer to pay you up front for all of the work needed to restore the property to pre-loss condition and leave it up to the customer to deal with the insurance carrier, that’s great for the contractor. Not so much for the policyholder, necessarily, as the risk of the project has been pushed back on the policyholder.
But, can you market this kind of system effectively? Contractors are competing with other professionals who will not be asking the customer to pay up front and who will, instead, work for insurance proceeds. How can you close a sale under those circumstances? It’s bad enough that you have to compete with people who are breaking the law by waiving deductibles. If you look like you’re charging more than all of your competition, you will likely lose some number of sales.
Proponents of fixed rate contracts will argue that the policyholder benefits because the fact that a fixed price was agreed to is an “incurred cost” under the insurance policy and this strengthens the policyholder’s position in negotiating the claim. Perhaps it does, but the carrier is never going to agree that it lacks all ability to question the reasonableness and necessity of the repairs and costs. At the end of the day, the policyholder still bears the risk, even with a stronger hand.
Assignment of Claim
Some contractors in Colorado try to take control of the claim handling process and avoid being accused of public adjusting without a license by taking an assignment of claim. This idea has its merits but I am skeptical that it is the best idea for most contractors.
The primary benefit of taking an assignment of claim is that, in theory, the insurance carrier now has to deal with the contractor as if it was the policyholder. Thus, the contractor can do anything the policyholder could do, including suing the insurance company for bad faith delay or denial.
Not every insurance carrier agrees, though. Colorado caselaw is fairly clear that the benefits of an insurance policy can be assigned regardless of what the policy says, but some carriers argue that there is not yet clear law rendering other parts of the policy, like the ability to demand appraisal, to be assigned. So, the carrier may refuse to cooperate and require legal action in some cases.
The more serious problem, in my view, is that a policyholder may view the assignment of claim (rightly or wrongly) as making the contractor a fiduciary who is supposed to be handling the claim for the benefit of the policyholder. This raises all sorts of questions including whether the contractor has a fiduciary obligation to the customer or is functionally acting as a public adjuster without a license. State agencies may question the relationship accordingly.
So, if your company uses assignments of claim, you will have to think very carefully about when they are used, what language they contain, and what exactly is being assigned. A company interested in doing this should consult an attorney beforehand.
Utilizing Corporate Counsel
Another way to avoid being accused of public adjusting without a license while arguing with the carrier over cost and scope is for the policyholder or the contract to hire an attorney. Attorneys can argue over the policy and law with the carrier, albeit with some limitations I’ll explain below.
Since a contractor can act on behalf of a policyholder under Colorado law at least for purposes of insurance bad faith delay and denial, in theory the contractor’s attorney can represent the contractor alone arguing with the carrier in a way that may benefit the policyholder. The policyholder can be advised of this situation so that it knows the attorney is not representing him or her, but probably should be involved to at least some degree as a witness.
Unlike a public adjuster, an attorney can be working directly for a contractor as counsel. And, attorney-client privilege attaches to appropriate conversations. And, as I mentioned above, it is important to establish and respect a chain of command to keep all of the professionals on the same page. An attorney who is familiar with this can take affirmative efforts to coordinate between these other professionals to minimize disputes on the back end.
There are drawbacks to using counsel, of course. Lawyers are not adjusters. They (usually) lack the level of industry experience and skills that allow them to craft their own adjustment and will be relying on the contractor or other experts to tell them what the scope of work and price may be. So, this strategy is most appropriate where the contractor is confident that it has all of the necessary skills and experience internally to produce a correct scope of work and price.
The attorney involved should be careful to delineate who is being represented and the limits of the representation. There may be cases in some jurisdictions, but not yet Colorado that I have seen, that view a contractor who uses an attorney to argue over a claim as still meaning the contractor might still be acting as a public adjuster, albeit under specific facts.
And, of course, someone has to pay the attorney, usually on an hourly rate or contingency. If a contractor employs counsel, does the contract allow this to be charged back to the customer as a job cost? Should it? Luckily, some attorneys like Underhill Law can provide this kind of service at an affordable rate, which makes it easier to rely on as a way to minimize the risk of being accused of improper adjustment.