The sky isn’t falling, but there are a lot of changes coming that Florida contractors should be aware of. The new Florida assignment of benefit (“AOB”) regulations will affect contracts entered into after July 1, 2019, and it’s important to prepare for the changes.
Florida assignment of benefits regulations overhauled
The Florida assignment of benefits rules dramatically changed last month with when H.B 7065 passed through Florida legislature and was signed by Governor Ron DeSantis. The goal was to fight off AOB abuse and to stifle unnecessary litigation, but it will create significant changes for construction businesses.
These rule changes mark a dramatic shift, at least for those contractors who perform post-storm recovery work. Any time an assignment of benefits is involved, there will be a few things to keep in mind.
Let’s look at some of the most impactful changes. For simplicity, a policyholder assigning their rights will be called an “owner,” and a party receiving the assignment of benefits will be referred to as a “contractor.”
For some insurance policies, benefits can’t be assigned
In some instances, insurers can prohibit an assignment of benefits altogether. Insurance companies can make policies available that completely restrict the ability to assign benefits (“restricted” policies), in whole or in part. However, to offer a restricted policy, the insurer must also provide the opportunity to purchase an unrestricted policy. However, restricted policies have to be cheaper than unrestricted ones – so expect quite a few restricted policies to block an assignment of benefits altogether.
New requirements for assignment of benefits contracts
For those “unrestricted” policies where an assignment of benefits will still be available. There’s a lot going on here, so let’s break this down into three topics: (1) form of the contract, (2) work that can be included, and (3) contract cancellation.
Specific form requirements for the contract
First, every assignment of benefits contract must be in writing. Plus, it must include an itemized, per-unit breakdown of the materials and services that are to be provided under the agreement. No lump sums. This way, an owner (and the insurance company) will be able to track specific costs related to the project.
Work that can be included in the contract
Further, any work that does not directly relate to the repair of the property can’t be included in a contract, where work will be done pursuant to an assignment of benefits. Only work performed to protect, repair, restore, replace, or to mitigate further damage may be included.
On the flip side, there are specific things that can’t be included. Penalties for properly rescinding or canceling the contract (more on that below) can’t be included, check or mortgage processing fees cannot be present, and neither can administrative fees.
Contracts can be rescinded too
The new contract requirements go beyond just the document itself. An owner can rescind the contract within 14 days of executing the agreement (regardless of whether any work has been performed), and up to 30 days after the agreement is signed if substantial work has not been done.
Further, the agreement may also be rescinded up to 30 days after work was scheduled to begin if substantial work hasn’t been performed yet. That means contractors can’t sign an agreement and put off commencing work. If they do, the contract could be canceled.
The contract must contain a notice provision
All assignment of benefits contracts must include this notice provision in 18-point(!), uppercase, bold font:
“YOU ARE AGREEING TO GIVE UP CERTAIN RIGHTS YOU HAVE UNDER YOUR INSURANCE POLICY TO A THIRD PARTY, WHICH MAY RESULT IN LITIGATION AGAINST YOUR INSURER. PLEASE READ AND UNDERSTAND THIS DOCUMENT BEFORE SIGNING IT. YOU HAVE THE RIGHT TO CANCEL THIS AGREEMENT WITHOUT PENALTY WITHIN 14 DAYS AFTER THE DATE THIS AGREEMENT IS EXECUTED, AT LEAST 30 DAYS AFTER THE DATE WORK ON THE PROPERTY IS SCHEDULED TO COMMENCE IF THE ASSIGNEE HAS NOT SUBSTANTIALLY PERFORMED, OR AT LEAST 30 DAYS AFTER THE EXECUTION OF THE AGREEMENT IF THE AGREEMENT DOES NOT CONTAIN A COMMENCEMENT DATE AND THE ASSIGNEE HAS NOT BEGUN SUBSTANTIAL WORK ON THE PROPERTY. HOWEVER, YOU ARE OBLIGATED FOR PAYMENT OF ANY CONTRACTED WORK PERFORMED BEFORE THE AGREEMENT IS RESCINDED. THIS AGREEMENT DOES NOT CHANGE YOUR OBLIGATION TO PERFORM THE DUTIES REQUIRED UNDER YOUR PROPERTY INSURANCE POLICY.”
Seriously. That’s a lot.
Working with the insurer
The Florida assignment of benefits regulations overhaul features a few areas where a contractor must cooperate with the insurer.
Contractors must give notice to the insurer when benefits are assigned
Every agreement for the assignment of benefits in Florida must contain a provision requiring the assignee (contractor) to notify the insurer of the agreement. This notice must be given to the insurer within 3 business days after the agreement was signed, or after work begins – whichever date is earlier. Practically, since work usually doesn’t begin until a contract is signed, this will typically run from the date of the agreement.
A copy of the executed contract must be included with the notice, as well. What’s more, any time there are changes to the contract or to the work that’s being performed, the contractor will need to keep the insurer apprised of the changes.
Keeping records and making them available to the insurer
A contractor must keep detailed records of all services provided under the contract, and they must make those records available to the insurer, if necessary. Further, contractors are required to cooperate with the insurer during the investigation of a claim or other issue. If the insurer requests certain documentation or records relating to the project, the contractor must provide them.
Notice must be given to the insurer before the contractor can file suit
At least 10 days before a contractor can file a lawsuit against the insurer to recover payment, the contractor must send written notice to the insurer. Think of it as a “Notice of Intent to File a Lawsuit.” This isn’t just a vague requirement either – there are very specific content requirements.
The notice must include:
- Specific damages in dispute;
- The amount claimed;
- An updated, detailed, itemized written invoice or estimate of services;
- The number of labor hours;
- Proof that the work performed was done up to industry standards; &
- A settlement demand.
I’ll go into more detail below, but it’s crucial for a contractor’s notice to contain all required information, and for the settlement demand to be fair and accurate. Otherwise, they may get stuck paying the insurer’s legal fees.
Lawsuits in construction:
The insurer must respond to the demand within 10 days of receipt
Within 10 days, the insurer must provide a written response to the contractor’s notice that they will be filing suit. Practically, it behooves an insurer to respond more quickly than 10 days since the contractor can file suit 10 days after the notice is sent.
Within 10 days after receipt of the notice of intent to file suit, the insurer must respond with either: (1) a settlement offer, or (2) require the contractor to participate in an appraisal or alternative dispute resolution procedures.
An insurer must also have a procedure put in place for the quick review, investigation, and evaluation of claims received. Just like a contractor, the statute strongly encourages insurers to give fair settlement offers. Otherwise, they might be left paying the contractor’s legal fees.
Who pays for the legal fees?
This part may take a bit of algebra, and it shows why it’s important to make any settlement demand as fair and accurate as possible. But, basically:
- (1) If a contractor’s settlement demand is too high, and if that contractor receives a judgment that is far below their settlement offer, the contractor may have to pay the insurer’s legal fees.
- (2) If both the settlement demand and settlement offer are reasonably in line with the judgment, each party pays its own legal fees.
- (3) If the settlement offer from the insurer is too low, and the contractor receives a judgment far above the insurer’s settlement offer, then the insurer may have to pay the contractor’s legal fees.
The actual calculations, copy and pasted from the legislation:
(a) If the difference between the judgment obtained by the assignee and the pre-suit settlement offer is:
- 1. Less than 25 percent of the disputed amount, the insurer is entitled to an award of reasonable attorney fees.
- 2. At least 25 percent but less than 50 percent of the disputed amount, no party is entitled to an award of attorney fees.
- 3. At least 50 percent of the disputed amount, the assignee is entitled to an award of reasonable attorney fees.
When benefits are assigned, contractors can’t pursue payment from the owner
Here’s a caveat that will be tough on contractors who do execute an assignment of benefits, as well as their subs and suppliers: If a payment dispute arises with an insurer during a project where an assignment of benefits is present, the contractor or their subs can’t attempt to recover payment from the owner. An owner will be responsible for payment up to their deductible and work they’ve “approved”, but after that, contractors, subs, and suppliers on these jobs can only pursue payment recover between themselves and against the insurer.
This has vast practical implications for parties who regularly work under an assignment of benefits agreement.
For any amounts beyond the owner’s deductible – based on how this new legislation is laid out – contractors, subs, and suppliers couldn’t demand payment from the owner, they couldn’t file mechanics liens for recovery, couldn’t file suit against the owner, and they couldn’t send an owner’s debt to collections.
But the way this part of the statute is written isn’t exactly clear. It states that the owner will be responsible for “Any betterment ordered and performed that is approved 209 by the named insured.” However, this comes almost immediately after the statute purports to waive recovery rights for work done under the assignment agreement.
However, if an owner requests and approves work outside the scope of the assignment of benefits contract, it seems clear that contractor, subs, and suppliers will be able to look to the owner for payment. But, as long as the work performed is done under the assignment of benefits agreement, recovery options are extremely limited.
These are some of the most substantial changes coming with the new Florida assignment of benefits regulations, but we couldn’t cover everything here. Further, some of these new laws are in conflict with existing law – and some of the provisions of this statute seem to even be in contradiction with themselves. That means it’s impossible to know exactly how it will all shake out.
Regardless, for Florida restoration contractors and other construction businesses who do insurance work, it’s a good idea to take a deep dive on the new laws. While this legislation was borne to benefit Floridians and fend off AOB litigation, the Florida construction industry must wait and see what the practical effects will be.