In insurance claims circles, an AOB is typically used in certain lines of business such as auto insurance and property insurance. In the auto insurance arena, an insured signs an AOB which gives the auto body repair shop the ability to “stand in the shoes” of the car owner during the repair process to expedite the ordering of car parts or other needs during the auto repair claim cycle. The same is true with property insurance claims where a contractor, plumber or other tradesmen use an AOB as a way to expedite home repairs involved in an insurance claim. In theory, the AOB is supposed to relieve the insured from making decisions on construction or plumbing supplies or services so that repairs can be done in a quicker fashion.

Trends in the Claims Arena

Unfortunately, AOBs have become, as one claims executive explained, “a license to steal.” What was designed to be an efficient way to expedite claims handling and help an insured reduce the burden of repair decisions has turned into a way for unscrupulous repairmen and contractors to inflate claims costs, often without the insured’s knowledge of the excess charges.

How It Works

A homeowner has a plumbing loss which floods the house. Not knowing who to call, the insured calls a plumber to come out and fix the leak. The plumber then refers the homeowner to a water mitigation company to extract the water from the house and start the dry out process. The mitigation company shows up and assures the homeowner that they are there to help, but before work can begin they require the insured to sign a contract including an assignment of benefits clause.

The mitigation company explains they will take care of everything and handle the billing directly with their insurance company. Anxious to get the water out of the house, the homeowner is unknowingly signing away their right to all insurance benefits and other rights under the policy, not just the benefits for the amount of the work or services done by the water mitigation company but also all repairs related to the water loss.

After the mitigation company performs the extraction services, they send an invoice to the insurance company for $10,000 (a typical water mitigation invoice for a 1500 – 2000 sf house is $3,500); a review of the invoice shows excessive charges. The insurance company attempts to negotiate a more reasonable charge with the mitigation company. The mitigation company refuses to negotiate and turns the matter over to their attorney who files suit for breach of contract. The mitigation company also threatens to file a Contractor’s Lien on the homeowner and start foreclosure proceedings. Contractor Lien laws in Florida allow a contractor to foreclose on property for mechanical lien/work performed.

The insurance company is then forced to either accept the excessive invoice or defend the lawsuit. Should the insurance company defend the lawsuit and the court awards even one additional dollar to the mitigation company, the insurance company is then liable for attorney fees and costs. To avoid costly litigation and to protect the insured from a Contractor’s Lien, the insurance company often pays the negotiated but excessive mitigation bill. The excessive costs are ultimately paid by homeowners in the form of higher premiums.

The Way It Should Work

A homeowner has a loss and calls a reputable mitigation company. The mitigation company asks the homeowner to sign a work authorization with a direction to pay. The work is done and the insurance company pays the mitigation company directly.

How Do Mitigation Companies Get the Referrals?

Mitigation companies are actively marketing to plumbers. Direct mailers to plumbers result in a referral fee as high as $1,500, oftentimes much higher than what the plumber charges the homeowner to fix the leak. Business-to-business referrals or payments for the same are not considered kickbacks.

Homeowners are also being directly solicited with promises of “up to $10,000” if the insured hires the mitigation company after a water loss.

How Big Is the Problem?

In the last two years there have been more than 95,000 lawsuits filed against insurers. Back in 2005 and 2006 there were only 9,000 AOB lawsuits – an explosion of nearly 1,000% when you compare the time periods! These lawsuits are either defended or settled – but either way, this abuse is negatively impacting your insurance rates.

The courts say it’s up to the legislature to change the law; the legislature says it’s up to the Office of Insurance Regulation (OIR) to change the policy wording, and the OIR says it is both a legislative and judicial issue.

Until there is a fix to the problem, it is important for homeowners to ensure they read any contract before signing and it is also important to contact the insurance company first and at the time of a claim. The insurance company may have emergency service contractors available, helping reduce the likelihood of fraud and improving the repair process for policyholders.