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As a New Orleans resident, I know the devastating effect that Hurricanes can have on the landscape. As a construction lawyer in this area, I know the effects that natural disasters have on the construction industry. This blog is targeted to all those contractors, suppliers and equipment lessors helping rebuild after a disaster.
There is a positive effect with regards to the amount of work that needs to be done to rebuild. Much of the cost of this work is borne by the insurance industry regarding claims that are being paid for damaged property. There is a nice influx of money into the local economy from claims payments. Contractors need to beware of certain risks from the “if it seems too good to be true, then it probably is” line of thought. There have been a number of good articles as to the positive effects of the rebuild.
Beware of the Timing of Insurance Checks
All contractors love the idea of doing work where the homeowner is not completely funding the project. The contractor puts in an estimate to the owner, then owner submits it to the insurance company then the insurer approves of the work and sends payment along. Many times there are progress payments but other times the insurance company will pay a lump sum.
Nevertheless: These checks rarely arrive quickly.
Many times they will come after the local lien period has expired. At this juncture subcontractors and suppliers only have recourse against the general contractor for payment. Had these entities filed a lien, then they would have an encumbrance on the property and they could sue the owner for non-payment.
Timing is everything.
It is a best practices policy to file your lien before the lien deadline therefore preserving your right to be paid timely. Odds are, if you are the competent contractor who files his lien, you will be paid faster than those who do not file because the owner wants the title of the property cleared.
If you’re curious about your state’s lien deadline or notice requirements, we’ve got a resource just for you: State-by-State Construction Payment Resources.
File Your Lien Even If Payment Has Been Promised?
Many contractors do not like to file a lien because they have been promised by the homeowner or general contractor that payment is forthcoming and they will be paid. This is operating on a “hand-shake” and may have worked well in the past.
Unfortunately, human nature has proven itself to be more greedy than giving. These are thousands of (and sometimes hundreds of thousands) dollars which are being promised and hopefully exchanged.
Filing your lien timely will not harm anyone in the process and will assure that you will get the compensation that your construction company deserves. Liens are very powerful tools when it comes to getting paid at the end of the job. Once you file your lien, you can then get back to work on other projects and rest assured that you are in the best possible position to get paid on that particular project.
Other Factors: Deductibles, Upgrades & Insureds Pocketing Insurance Proceeds
Having a lien filed will not let the property owner get away with this shortfall. There are other hazardous issues to be mindful of when dealing with a rebuild that is funded by insurance proceeds. First and foremost is the dreaded insurance deductible.
An insurance company may accept a quote from a contractor and agree to pay it, but many times they will subtract the deductible from that amount, leaving the owner to fund the remainder. This can be a great way for a contractor to get shorted out of that amount of money.
Having a lien filed will not let the property owner get away with this shortfall. Having the lien filed allows for no more financing on the property until the contractor is paid. It also prevents the homeowner from selling the property until the contractor is paid.
Many times during the construction process the property owner will want to do an upgrade or make a change order which will up the contract amount. Most times the insurance company will not authorize this upgrade and therefore not pay for it.
This is an out-of-pocket expense borne by the homeowner and is very prone to not getting paid in full. Not paid in full unless there is a lien filed of course. File your lien to secure that all funds are collected rather than just a portion paid by the insurance company.
Owner Scamming You
There were lots of instances here in New Orleans after Hurricane Katrina, where homeowners would either pocket all the insurance proceeds or a large portion of it.
Leaving the contractor handing and unpaid. Its very tempting for an owner to control all this money without keeping some. Having the proper security devices in place such a lien will give a contractor, supplier or equipment lessor protection.
Take New York for example, generally a lien needs to be filed before eight months after work is done or materials supplied (See: New York Mechanics Lien Law Resources).
This is a long time, but in the New Orleans post-Katrina landscape, there were months and even years that went by before payments were tendered. All potential lien claimants need to make those filings in a timely manner so that payment will happen rather than just hoping it will.