Contractors: Reduce Payment Delays

Jon Topolewski
By: Jon Topolewski
PublishedJun 13, 2024
3 minute read

Prompt payment is crucial for skilled tradesmen, like roofers. To expedite the process, consider adding a clause to your contracts that allows you to bill the homeowner’s insurance carrier directly. This bypasses the customer’s inexperience with submitting claims and ensures the insurance check goes straight to you, rather than being spent elsewhere by the homeowner. Implementing this simple change can significantly reduce payment delays.

It’s called an ‘Assignment of Benefits’ clause.

An assignment of benefits (AOB) legally transfers some or all of a client's insurance benefits to the contractor. This helps contractors get paid faster.

What is an Assignment of Benefits Clause? 

An assignment of benefits (AOB) legally transfers some or all of a client’s insurance benefits to the contractor. For example, if you repair a client’s storm-damaged roof, the insurer sends the benefit check(s) straight to you.

The AOB clause — agreed to by you and the homeowner — allows you to deal directly with the insurer. You become the assignee for the insurance benefits. The homeowner client has no more part to play, other than getting their roof repaired.

Benefits of an AOB Clause 

The biggest benefit to you, the contractor, is that this process cuts out the middleman, aka the homeowner. It prevents the customer from backing out or delaying payment after you’ve poured your time and resources into the project.

Another benefit? Many homeowners have enough stress to deal with after suffering a substantial loss. These clients will be happy to avoid the push-and-pull process of dealing with their insurance carrier.

Two Types of AOBs 

As the contractor, your potential benefits depend on which type of AOB you and the homeowner agree to use.

Assignment of Direct Payment 

In this narrow arrangement, the contractor only has the right to collect payment directly from the insurer. You bill the insurer, and instead of sending the client the check, they pay you.

You are entitled only to payment for your services in the repair or restoration of the client’s property.

Assignment of Full Rights 

This type of AOB gives you, the contractor, all the rights and responsibilities of the insured homeowner. Most crucially, it includes the right to sue for any claims the customer/insured might have against the carrier including for breach of contract and bad faith if the insurer unjustly denies or delays the claim. Successful bad faith lawsuits award double the amount of the original claim.

Both AOB types offer one clear benefit: Instead of waiting for cash up front, you can start on the project, then bill the insurer directly.

Requirements of a Colorado AOB 

In Colorado, an assignment of benefits (AOB) clause or document must include the following elements:

  1. Bolded Disclosure: A prominent, bolded statement informing the customer of the insurance rights they are relinquishing by signing the AOB.
  2. An Itemized Breakdown: A detailed list of work to be performed, including the scope of services and materials required, broken down per unit.
  3. A Written Estimate: A comprehensive written estimate of all services to be performed, providing transparency and clarity for the customer.
  4. Cancellation provisions: Three distinct cancellation options for the customer: (a) within 14 days of signing the AOB, with written notice to the contractor, (b) 30 or more days after signing, if the AOB has no start date and work has not commenced, and (c) if the contractor/roofer has not “substantially performed” at least 30 days after the agreed-upon start date.
  5. Communication Restrictions: Language preventing the policyholder from directly communicating with their insurer about the claim once the AOB is signed.
  6. Contractor Rights: A clause granting the contractor the right to negotiate, endorse payments, or take legal action against the insurer on the policyholder’s behalf.

These essential components ensure that contractor AOB agreements comply with Colorado’s legal requirements. This protects the interests of both the contractors and their customers.

Potential Risks of AOBs 

Assignment of Benefits clauses have clear benefits for contractors and homeowners alike. However, there are risks — especially when contractors forget to consult experienced contract attorneys beforehand. 

  • Less Sympathy in Litigation: Be cautious when securing an AOB with “full rights” of the insured. In a lawsuit, a jury may be less sympathetic to your business than they might be to a homeowner. Moreover, the insurance company is likely to try to argue that your “greed,” rather than their alleged “bad faith,” is the real problem.
  • Undisclosed Policy Breech: The insurer may withhold payment due to an undisclosed policy breach by the homeowner. If you’ve waived your right to collect from the homeowner, this can result in a total loss. Make sure the homeowner is in good standing with their insurance carrier before entering into an AOB arrangement.
  • Longer collection periods: Relying on insurance companies for payment instead of homeowners can increase the average time it takes to collect on open accounts, negatively impacting cash flow.
  • Slow Insurance Companies: Accepting AOBs means relying on insurers for payment. This can lengthen the time it takes to collect on some accounts. As you know, longer collection periods negatively impact cash flow.

Ultimately, if AOBs lead to longer payment cycles and increased operational expenses, contractors should carefully consider the potential drawbacks before accepting them.

Need Help Getting Paid What’s Owed to You?

There are many ways you can protect your business. The most important way is drafting the right contract for the job. Our experienced contract law attorneys can help. Let one of our lawyers discuss the specifics of your situation. We’ll help you find the best way forward for your business. Call 303-688-0944 for your case assessment.

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