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- On October 28, 2015
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Property damage claims are on the rise in Colorado, especially for HOA’s. 2014 saw significant storm damage from Colorado Springs to Ft. Collins and as of this writing, storms are already bringing property damage claims in 2015.
There’s growing concerns in Colorado about restoration and repair contractors acting as policyholder representatives in the negotiation and settlement of insurance property damage claims. A cottage industry has sprung up in recent years as contractors, roofing consultants and “insurance claim specialists” offer to represent policyholders in regards to property damage claim settlements. It’s a growing trend, one which generally is not good for the insurance companies or the policyholders because of inherent conflicts of interest.
The National Association of Public Insurance Adjusters (NAPIA) has a longstanding ethical rule that its members not act as repairmen and contractors. The State of Colorado enforces this through their regulation of public adjusters. The reasons are obvious: not only is it a conflict of interest, but also third party representation.
In general, public adjusters determine a theoretical amount of value of damage. The policy wording, benefits, timing of the benefits, laws and regulations affecting the policy all go to determine the amount the policyholder may take as money, repair as it was, repair differently or replace at another location. There are an infinite number of calculations which can be considered regarding the value of a loss. Adjusters determine the measures and make estimates to arrive quickly at a fair amount of value.
Contractors have another mission, to profit from the construction. If a contractor is attempting to negotiate claim settlement, they are negotiating for their own benefit, not the policyholders. Colorado regulates what contractors can and cannot do in regards to settling claims. Senate Bill 38 makes it clear contractors can discuss “scope” of the loss but are not allowed to “adjust” the loss.
I’ve jokingly coined this process as “A Race to the Bottom.” The contractor wants his profits as high as possible. To achieve this, he pays his subcontractors as little as possible. In turn, the subcontractors cut corners and costs as much as they can so they can profit as well. I’ve seen this scenario play out countless times here in Colorado. Roofing consultants, insurance claim specialists and contractors all extract as much money as possible out of the claim for themselves.
In the field, I’m finding many insurance recovery contractors get construction jobs with one-page contracts that ambiguously indicate they will fix the repair for the amount paid by the insurance company. To get the business, many promise they will do the job and “absorb” the policyholder’s deductible. Once the contractor is established the “Race to the Bottom” begins. Claims are settled for less than what is rightfully owed under the policy, then sub-contractors are squeezed so GC’s can take as much money from the claim as possible.
More recently, contractors working to settle claims are running into insurance carriers and their adjusters who are not cooperating and not adjusting the loss correctly. Inevitably, this creates a contentious claim that jeopardized the association’s ability to receive full recovery for their damages.
Even worse, we see situations where contractors attempt to do the work on an improperly settled claim, often having the association submit incorrect proof-of-loss documents. This scenario can be devastating for an association and nearly impossible to recover from. Longer term, the association now has a real issue with old damage should another hail or weather event hit the community.
Overall, it’s critical for HOA’s to manage their insurance claims honestly, legally and ethically. Property managers have a fiduciary responsibility to the association, as does a public adjuster working on behalf of the association.
Once the claim is settled the scope of loss will be complete and a full contractor agreement can be written, not one that is ambiguous and assigns the contractor all of the claim proceeds, but one that outlines all the work, quality of materials, etc.
This issue deserves more discussion by everyone in the industry. It is clear that attorneys should practice law, public adjusters adjust for policyholders, and contractors build and construct. Contractors have the education and licenses required to build; they do not have the education or licenses required to give legal opinions and interpret insurance policies.
When a claim transitions to construction, much of the time a general contractor is managing the entire project. When this happens the proverbial “Fox is guarding the henhouse…”
The general contractor is usually performing some of the work and sub-contracting some out. In this scenario, who’s the fiduciary for the association? The general contractor again has their best interests in mind, primarily profits.
A solution Claim Solutions has been advocating its clients to adopt is to use a non-biased, third party project manager. The project manager should be a fully licensed general contractor with extensive experience in insurance claim reconstruction. By hiring a project manager, the association empowers a third party “watchdog” to manage the sub-contractors, with their only interest protecting the association. The project manager’s interests are aligned with the association and with the public adjuster, working strictly on behalf of the association as its fiduciary.
This past fall and winter we were involved in a problematic claim where the general contractor was hired for “all insurance proceeds.” The contractor acted as a GC and proceeded to destroy the HOA, gutters were removed and not replaced, causing flooding of some units. Furnace vent caps were left off for extended periods of time creating safety issues for tenants. The problems were endless and persist today. The right project manager would have hired the right sub-contractors AND managed them, avoiding all of those problems.
Within the proper framework and supervision, a property damage claim can be an unfortunate but beneficial event for an HOA. Most HOA insurance policies have provisions that require the insurance carrier to pay “Replacement Cost Value” for the damaged property, this simply means the HOA gets new property to replace damaged.
New roofing, siding, paint, HVAC’s can all have a major impact on the aesthetics and financials of an association. By making sure the claim and the construction are managed correctly by independent, third-party professionals, the HOA will be the major benefactor of the claim and will have a successful outcome with lasting benefits.
Scott Benglen is Founder, President and Managing Partner at Denver based Claim Solutions, LLC. Claim Solutions is currently managing over $50 million in property damage claims for Colorado HOA’s.
Scott can be reached at (303) 596-6043 or firstname.lastname@example.org.