Whenever a casualty to property occurs – a fire, water leak, windstorm damage – community associations are often faced with the need to make emergency repairs. Water may need to be removed to minimize mold growth, a site may need to be cleared of debris and fenced off following a fire, windows may need to be boarded up, roofs tarped. Many construction companies offer emergency services to assist in stabilizing the premises and preventing further damage to an already damaged structure. Most property insurance policies offer coverage for these services. Problem arise when the services are performed and contracts with the vendors are signed before the insurance company’s adjuster has authorized repairs. More importantly, agreements for these services are often made before the policyholder has had the benefit of advice from a legal or adjusting professional that works directly for the policyholder.
When emergency services are necessary after a casualty loss, contractors routinely require a contract with the policyholder that obligates the policyholder to pay, and assigns the rights to insurance policy benefits for such services. That assignment of benefits carries with it the rights to deal directly with the insurance company and, if necessary, to sue the insurance company to assert those rights to the extent of the services provided. The policyholder will likely have had little or no say in the emergency services deemed necessary by the contractor. In many cases, the insurance adjuster has not met with the restoration contractor either and has not approved the extent of the services proposed to be performed for payment. If the claim has been assigned in order to assure payment for the services, though, the policyholder may not even be authorized to discuss the services rendered by the contractor with the insurance company – only the contractor will have that right.
Experienced public adjusters can explain some of the problems that arise when emergency contractors take over important rights to benefits under your policy and provide valuable insight. Other problems affecting the policyholder’s insurance occur during reconstruction, as well.
When a community association is the policyholder, the board undertakes a fiduciary obligation to understand the insurance policy and obtain, for the benefit of the community, the value of the coverage embodied in the policy. Essentially, the insurance policy is an asset of the association that the board has a duty to maximize.
Once emergency services have been performed, an often complex repair process begins. Restoration requires thorough knowledge of the insurance policy and ongoing construction management. Policyholders should not assume the contractor knows the terms of the policy; in fact, the opposite is probably true. More importantly, contractors cannot represent an insured with the insurance company; they are not permitted to adjust claims and are neither licensed as public adjusters nor bound to the regulatory requirements of adjusting. Similarly, contractors are not qualified to interpret and argue policy provisions. In fact, the Florida legislature has explicitly prohibited licensed contractors from acting in the capacity of a public adjuster. At most, contractors can present their building plan to an insurance company to try to get approval, whether that plan maximizes policy benefits or not.
This means that contractors cannot represent a policyholder in disputes with the insurance company since that would constitute either public adjusting or the unauthorized practice of law. Even after an assignment of benefits has been made, contractors are not permitted to advocate on behalf of a policyholder to obtain the full insurance benefits available. In fact, the contractor’s only goal in obtaining the assignment of benefits is to assure it can get paid for the work. While there’s nothing wrong with that goal, in theory, and nothing wrong with the desire of the policyholder to avoid reaching into its own pocket to pay for reconstruction repairs, reaping the benefits of the insurance presents serious challenges. Not only must contractors be managed, the insured must be aware of the work proposed to be done, whether it is all necessary, how much of the scope of work proposed will be covered, and whether the scope of work is going to replace the damaged property to the full extent available under the policy.
Once a policyholder assigns insurance benefits to the contractor, the contractor succeeds to the position of the policyholder under the insurance policy to the extent of the covered work. The policyholder needs assurance that the work being performed will be covered, and that assurance cannot come from the contractor. That assurance either needs to come from the insurance company’s adjuster or the policyholder’s own adjuster or attorney who can advocate to recover policy benefits for the policyholder. For example, after a fire occurs there is frequently extensive water damage from the water applied to extinguish the blaze. Many times, especially in a high rise property where a fire starts on an upper floor and sprinklers are triggered, the water damage to the building as the water proceeds down through the building may exceed the direct damage from the fire. The restoration contractor will take steps to dry out the building and begin a remediation process to deal with the interior damage to the finishes, including any mold that appears. If unsupervised by the policyholder or the insurance company’s adjuster, the restoration contractor will determine a scope of work and move forward. The policyholder not only requires assurance from the insurance company that the work will all be covered, but that the work proposed will use the full extent of covered benefits under the policy.
Understanding and using the policy’s benefits usually exceeds the capabilities of a volunteer board of directors of a community association, even with the assistance of an experienced property manager. The board doesn’t have the expertise to understand the operation of the policy and know when the insurance adjuster is honoring the contract’s terms covering the proposed reconstruction activities, and managing the reconstruction will overburden even the most diligent property manager. For example, most property insurance policies severely limit coverage for compliance with building codes that took effect after the property was originally built. But, since reconstruction will generally have to meet the standards of current building codes, understanding the boundaries of the coverage for code compliance is critical. Insurance company adjusters frequently parse the reconstruction activities in an attempt to characterize many as “code upgrades” that are excluded from cover. Frequently, the distinctions made by insurance company adjusters unfairly favor the insurance company and do not honor the policy’s actual terms. If the contractor moves forward with the repairs, which may well be necessary and required under applicable building codes, the policyholder may not be able to recover all of the reconstruction costs when the insurance company starts to carve up the repairs based on “code compliance” versus covered replacement to code.
The result may be only partial coverage for the work undertaken for reconstruction. And, rest assured, the larger the scope of restoration involved, the more likely the insurance company will scrutinize the work and balk at paying. Depending on the contract with the contractor, any underpayment by the insurance company may revert to be the obligation of the policyholder. If that occurs, it is because there is no insurance to cover. In that event, the community association board is left with incomplete payments from the insurance company, very uncertain rights to further insurance benefits, and substantial gaps between coverage and reconstruction costs. The policyholder clearly needs an advocate at that point.
Predictably, insurance companies are quite willing to deal with contractors rather than lawyers or public adjusters representing policyholders. The reason is simple – contractors frequently leave some of the insured’s money on the table during the reconstruction process. Contractors are interested in getting the job, and are not qualified to maximize the benefits for the policyholder under the insurance policy. For example, when a property is repaired after a fire, the policyholder may not be aware that if the property had interior stucco before the fire, the policy allows restoration to that same quality interior finish. However, without awareness of the policy terms, the contractor likely prepares an estimate with more common gypsum drywall as the interior wallboard, and the insurance company readily approves that material because it is cheaper to construct than stucco would have been.
Unless the policyholder is aware of its rights and is able to advocate to the insurance adjuster to receive the coverage for the better quality repair that should be available, inferior gypsum board will be substituted. Eventually, as the property is rebuilt, the end product is a cheaper, less valuable building than the one the policyholder had insured. An unrepresented board will experience unhappy surprises regarding coverage and, later, second-guessing from their association constituency when the outcome of an insurance claim is poor.
The answer to this complex drama, as usual, is planning for disaster before it actually occurs – the insurance experts that will assist the community association when an insurance claim is necessary should be identified and introduced to the property and its management to guide preparations. Well-qualified public adjusters are experienced in assessing coverage and advocating on behalf of the policyholder for a truly like kind and quality replacement. Lawyers who emphasize property insurance coverage in their practice are able to advise policyholders on preloss preparations – documenting the condition of the insured building before a loss occurs, assembling important maintenance records for reference to prove what is preexisting or new damage; reviewing the association’s insurance policies to be sure appropriate benefit levels and types have been purchased; examining policy applications to confirm claims history and other requested information has been accurately disclosed and replacement values match policy limits to avoid coinsurance penalties.
Florida policyholders have experienced multiple disastrous losses during and after the hurricane seasons of 2004 and 2005, and community association boards are obligated to manage their insurance policy as a valuable asset. To do so, the association should have a relationship with a lawyer and other professionals before the loss occurs, who can be prepared to advocate to assure proper insurance benefits are available after a loss and to argue policy terms to force the insurance company to pay what it owes. The policy usually holds sufficient benefits to restore the policyholder’s property – but policyholders have be prepared to advocate for them.