Assignment Of Benefits

Insurance lawyers get calls from companies that have an assignment of benefits (AOB). This AOB is discussed in an article published by Claims Journal. It does a good job of discussing it and even though it talks about events in Florida, Texas has essentially the same laws and these AOB’s are being seen in Texas.
The problem for property insurers? No one is willing to take a firm position against the surge of AOB lawsuits, which are proliferating to the point where they are in danger of strangling insurers. The Courts are deferring to the Legislature but the Legislature is seemingly uninterested in making change.
The problems are endemic to Florida’s private market. The “carrier of last resort,” Citizens Property Insurance Corporation, is in the midst of a legislatively mandated, large-scale depopulation program, in which it has slashed its number of policies by about a third in the last several years. Citizens’ loss is a gain for several upstart carriers, but the AOB crisis is showing no signs of abetting and costs to defend these frivolous claims are becoming exorbitant.
AOB lawsuits are easy to understand, both from the carrier’s perspective and the insured’s point of view. The typical scenario progresses as follows:
-A homeowner has a water loss – such as a leaky pipe, an overflow from a sink or toilet that causes water to seep into the baseboards, flooring and furniture – and calls a water mitigation company for emergency dry out services;
-The water mitigation company sends a technician with a truck full of air blowers, dehumidifiers and other equipment, removes the baseboards and dries the inside of the house;
-Either before, during or after the multiple day dryout process, the water mitigation company presents the homeowner with documents including an AOB, in which the insured assigns all of his or her rights under the policy to recover insurance proceeds to the contractor;
-Days or weeks later, the insured files a claim with the insurance company.

Take a step back and consider what just happened. A company performed services for a consumer and then billed an unrelated, uninvolved third party for the services performed. The customer said it was OK to bill the third party, but the third party is now obligated to pay for services which it didn’t want and which it may or may not have agreed to pay for in the first place.
The lawsuits arise when the claim is denied because the losses are frequently not covered by the policy. This results in the water mitigation company left with an unpaid bill so — this is the key to the entire AOB lawsuit scheme – the company chooses to collect from the deep pocketed insurance company instead of the individual policyholder.
The business practice has proliferated for insurance companies and those of us who represent property insurers in litigation. For instance, one water mitigation company has brought 79 total lawsuits since the beginning of 2014. Another filed 257 total AOB lawsuits statewide in 2013 and 2014. Insurance companies have no reliable means to prevent these lawsuits because the Courts have refused to address the underlying public policy behind companies doing work for a property owner and expecting to be compensated by the insurer, despite the absence of any relationship between the insurance company and water mitigation company and the lack of coverage.
At first, insurers tried to defend the lawsuits by arguing that they had no obligation to pay if a claim was later found to not be covered. That argument was unsuccessful. Carriers then tried to attack the language of the AOB documents and assert that the AOB company usually lacked standing to sue, because the AOB was often too broad and exceeded the scope of the water extraction services. This argument was also unsuccessful.
The next argument had initial success at the Circuit Court level, when insurers argued that consumers could not assign rights which did not yet exist. In other words, carriers argued that policyholders couldn’t assign post-loss benefits to the water mitigation company until the policyholder and carrier knew that there were tangible benefits to be assigned. After all, assigning a nullity did not seem to make rational sense.
More recently, however, the argument was destroyed by the Courts. May 20, 2015 was referred to as Black Tuesday throughout the property insurance community in Florida, when the Fourth District Court of Appeals released three major decisions on the issue. In One Call Property Services, Inc., a/a/o William Hughes v. Security First Insurance Company, No. 4D14-424, the Court rejected all of the insurer’s defenses, namely that a right which had not yet accrued cannot be assigned. Insurers had high hopes for this defense because it essentially argued that an insured who had not yet contacted their carrier and who had no decision on coverage, could not assign any non-existing rights.
The Court outlined the competing policy arguments:
Turning to the practical implications of this case, we note that this issue boils down to two competing public policy considerations. On the one side, the insurance industry argues that assignments of benefits allow contractors to unilaterally set the value of a claim and demand payment for fraudulent or inflated invoices. On the other side, contractors argue that assignments of benefits allow homeowners to hire contractors for emergency repairs immediately after a loss, particularly in situations where the homeowners cannot afford to pay the contractors up front.
Unfortunately, the Court also decided that it is not in position to evaluate these practical arguments and that the Legislature would need to address these concerns. But the Legislature failed to act in the most recently completed session.