Disciplined in Sophisticated Defense and Insurance Litigation

November 23, 2016 | Publication| Awash in AOBs

Timothy R. Engelbrecht

This article originally appeared in Claims Management, a publication of the Claims & Litigation Management Alliance (CLM). Legal opinions may vary when based on subtle factual differences. All rights reserved.

Hurricane Matthew lashed Florida’s eastern coast in early October causing significant damage to both residential and commercial property.  While Hurricane Matthew is gone, Florida insurers are now bracing for another type of storm, namely a flood of assigned insurance claims in the wake of Hurricane Matthew’s destruction.  Over the past few years, assigned insurance claims – often referred to assignments of benefits or AOBs – have been particularly challenging for first-party property insurers in Florida.  AOBs raise unique issues, including fraud concerns. 

Let’s take a look at the history of AOBs, discuss how AOBs impact the resolution process including fraud concerns, and highlight some of the legal issues that are present with AOBs. 

A Brief History of AOBs and Fraud Concerns

The typical AOB situation arises when an insured has a property loss.  The loss is oftentimes a water loss due to a leaky roof, a broken pipe, or a plumbing malfunction.  The insured hires a contractor to either prevent further damage or to make emergency repairs.  The contractor requests the insured execute an AOB, which assigns the insured’s insurance rights to the contractor in return for the contractor’s services.  Then, after providing the services, the contractor makes a claim directly to the insurer for payment using those assigned rights.

For nearly 100 years, Florida law has recognized that an insured may freely assign post-loss insurance benefits to another even without the insurer’s consent.  The seminal case on the issue is W. Fla. Grocery Co. v. Teutonia Fire Ins. Co., 77 So. 209, 210-11 (Fla. 1917).  Citing Sec. First Ins. Co. v. State, Office of Ins. Regulation, 177 So. 3d 627, 628 (Fla. 1st DCA 2015). Florida’s First District Court of Appeal (“1DCA”) recently cited Teutonia in an opinion regarding the free assignability of post-loss insurance claims.  The 1DCA stated “[o]n this point, we find an unbroken string of Florida cases over the past century holding that policyholders have the right to assign such claims without insurer consent.” 

However, with the increased use of AOBs in first-party property claims over the last few years, there have been concerns that some of these AOB claims are fraudulent.  In fact, in the Security First case cited above, the 1DCA acknowledged in its opinion that “[the Court is] not unmindful of the concerns that Security First expressed in support of its policy change, providing evidence that inflated or fraudulent post-loss claims filed by remediation companies exceeded by thirty percent comparable services; that policyholders may sign away their rights without understanding the implications; and that a cottage industry of vendors, contractors, and attorneys exists that use the assignments of benefits and the threat of litigation to extract higher payments from insurers.” 

Despite that observation, the 1DCA stated that those “policy arguments and evidentiary basis for them put forth by Security First are more properly addressed to the Legislature.”  In fact, over the past few legislative sessions, Florida lawmakers have considered bills that would affect or limit the way AOBs are used in first-party property claims.  However, to date, none of those bills have become law.

Citizens Property Insurance Corporation (Citizens) is the largest insurer in the State of Florida.  In September of this year, Citizens’ Consumer Services Committee published a comprehensive report showing the impact of AOBs on claims and litigation.  The data for the report came from claims closed between 2011 and 2016.  In a nutshell, the report shows that assigned claims took significantly longer to settle than non-assigned claims.  Moreover, the report shows that an assigned claim is more than four times more likely to end up going into litigation than a non-assigned claim.

In late October of this year, ABC Action News Tampa Bay published a report stating that a roofing contractor was arrested and accused of defrauding approximately 90 homeowners out of insurance proceeds.  According to the report, the contractor went door-to-door in Florida’s Citrus County after a hail storm struck the area in 2014.  In most instances, the contractor offered to replace the homeowner’s roof in exchange for the homeowner executing an AOB to the contractor.  It is alleged that the contractor received over $950,000 of insurance proceeds, but never replaced the roofs. 

Guarding Against Fraud

One of the best ways for insurers to guard against suspected fraud is to gather as much information about the claim as possible.  Most insurance policies contain post-loss conditions that obligate the insured to provide a sworn statement in proof of loss, or submit to an examination under oath, or provide documents to the insurer.  These conditions provide the insurer with an opportunity to fully investigate the claim, which greatly reduces the chance of a fraudulent claim being paid.

In addition to those options, many insurers take recorded statements from their insureds following the first notice of the loss. A recorded statement is a convenient way for the insurer to confirm the facts of the loss and also determine if a contractor is involved. If a contractor is involved, the recorded statement allows the insurer to learn what work was actually performed and what equipment was used. Having that information early allows the insurer to be on guard for overbilling when the assignee contractor submits its claim. Having a cooperative insured assisting the insured is one of the best ways for the insurer to guard against potential fraud.

Having a cooperative insured, especially in the AOB context, is helpful because an insurer usually does not have the ability to require an assignee contractor to comply with the post-loss conditions with which the insured has to comply with the post-loss conditions with which the insured has to comply. That is because, when an insured assigns insurance rights to a contractor, the contractor does not assume the duties and obligations of the insurance policy.  Shaw v. State Farm Fire & Cas. Co., 37 So. 3d 329, 333 (Fla. 5th DCA 2010) disapproved of on other grounds by Nunez v. Geico Gen. Ins. Co., 117 So. 3d 388 (Fla. 2013). 

That said, an insurer can still request that its insured fulfill those post-loss obligations even if the insured has assigned her claim to a contractor.  If the insured fails or refuses to fulfill those post-loss obligations, that failure on the part of the insured may bar the assignee contractor’s claim, as further noted in Shaw: “If the assignor is entitled to be paid, the assignee is entitled to be paid, but if the assignor is not entitled to be paid because of some failure of performance on the part of the assignor, then the assignee is not entitled to be paid either.” 

Another way insurers can guard against fraud and the inflated value of claims is by using the insurance policy’s appraisal provision.  Most insurance policy appraisal provisions state that, if the parties disagree on the amount of money owed under the insurance policy, either party can request appraisal.  Once appraisal is requested, each party names an appraiser, and each appraiser then estimates the value of the claim.  If the appraisers agree, that sets the amount of money owed.  If the appraisers disagree, then the appraisers select an umpire, and the agreement of any two of those people sets the amount of money owed.

However, some assignee contractors have tried to resist participating in the appraisal process.  Some contractors argue that they only provide an emergency service (rather than actual repair to the damaged property), and the costs of such services are not subject to the insurance policy’s appraisal provision.  Other contractors argue that the appraisal process is a duty or obligation of the insurance policy and, along the same lines as the Shaw case discussed above, the assignee contractor cannot be compelled to perform such duties and obligations.

That issue was addressed in the recent case of Certified Priority Restoration v. State Farm Fla. Ins. Co., 191 So. 3d 961, 962 (Fla. 4th DCA 2016).  In that case, Florida’s Fourth District Court of Appeal (“4DCA”) affirmed the trial court’s ruling that compelled an appraisal that was requested by the insurer despite the fact the insured assigned her claim to a contractor.  The 4DCA cited to the Shaw case discussed above and held that participation the insurance policy’s appraisal process is not one of the non-delegable duties that must be performed solely by the insured.  Thus, the 4DCA held that the trial court did not err in compelling the appraisal.

Some contractors try to avoid appraisal because they would rather litigate the dispute.  Part of the reason some contractors prefer litigation over appraisal is because the contractor has a close relationship with an attorney, and because Florida has an attorney fee shifting statute that applies to first-party insurance disputes.  In a nutshell, Florida Statute § 627.428 provides that, if an insured is required to resort to litigation and is successful against her insurer, the insured will be entitled to recover her attorney fees from her insurer.  In the case of Continental Cas. Co. v. Ryan Inc. E., 974 So. 2d 368, 377 (Fla. 2008), the Florida Supreme Court held that the statute also applies to assignees of insurance benefits.  That means, if an assignee contractor is required to resort to litigation against an insurer and is successful, the assignee contractor will be entitled to recover its attorney fees from the insurer as well.

Because of Florida’s attorney fee shifting statute, many lawyers are eager to represent assignee contractors in litigation, especially when the loss is covered and the only dispute is over the amount of money owed.  In fact, AOB work has become so coveted by lawyers in Florida that one law firm in Orlando periodically hosts what it calls an “insider secrets workshop” for contractors.  The workshop promises to show contractors “the insider secrets the insurance companies don’t want [them] to know.”  The workshop teaches contractors how to use AOBs, work authorizations, and demand letters in order to collect money from insurance companies.  Contractors who attend the workshop are given a flashdrive with documents as well as a PowerPoint presentation that explains the AOB process from the perspective of the contractor and the law firm.

Moving forward

There is no doubt Florida insurers will be dealing with insurance claims spawned by the destruction left in the wake of Hurricane Matthew and other storms for many months, if not years, to come.  It is equally certain that some, if not many, of those claims will come in the form of AOB claims.  By using some of the approaches discussed above, insurers can guard against fraud concerns while, at the same time, fulfilling their obligations under the insurance policy.


Timothy R. Engelbrecht

A Partner at Butler Weihmuller Katz Craig LLP. in Tampa, FL. Timothy practices in our Extra-Contractual, and First-Party Coverage departments.

November 28, 2016 PublicationThe Pitfalls Affecting Admission of Expert Bad Faith Testimony Under Daubert

Two recent federal cases highlight the challenges practitioners face in presenting expert claims handling testimony in bad faith litigation under the Daubert standard.  In the first case, a court excluded such expert testimony on behalf of the insurer. In the second, the same court excluded and restricted such testimony on behalf of the insured.

Read More »
October 11, 2016 PublicationHold on to Your Recoveries so They Don't Spoil

The phrase "spoliation of evidence" invokes thoughts of discarded pipes and compromised fire scenes. Even the greenest of first party adjusters and subrogation professionals are quick to ask an insured if the physical artifacts related to a loss are still available. Given that most documents are now transmitted and stored electronically, the potential for spoliation of evidence exists not only with physical artifacts, but also with the preservation of documents and electronically stored information ("ESI"). In order to prevent a claim of defense alleging the spoliation of evidence, adjusters and subrogation professionals should be implementing litigation holds for all claims where subrogation is pursued. 

Read More »
March 04, 2016 PublicationShelter from the Storm: Potential Disputes in Handling Additional Living Expense Claims

If the insurer and the homeowners cannot come to an agreement on these issues early in the resolution process, disputes are likely to develop that may quickly lead to a contentious claims resolution and, ultimately, to litigation with the potential for extra-contractual damages.

Read More »
June 01, 2014 PublicationFraud Squad. The Role of Mediation in Settling Fraud Disputes

Alternative dispute resolution in a fraud dispute is a unique beast. The parties begin diametrically opposed horns locked in a fight to the death. Emotionally charged with righteous indignation, anger, and fear, tensions permeate the discussion. Perhaps too focused on dominance, even experienced fraud litigators continue to beat their chests. The parties seem intractable (perhaps emboldened by their legal counsel). Both sides appear incapable of compromise. Is the prospect of successful settlement talks a futile daydream? Of course not. The parties may simply need the assistance of a highly qualified mediator.

Read More »
September 01, 2013 PublicationMind the Gap: Weathering the Statutory Notification Process When a Data Breach Occurs

Even before Edward Snowden and the NSA entered into the public conversation, data breach concerns abounded. For instance, a recent study conducted by the Ponemon Institute surveyed 4,774 IT and IT security professionals from nine countries- U.S., UK, France, Germany, Japan, China, India, Australia, and Brazil - and revealed that 60 percent of companies had a network security breach in the last year and 34 percent of those companies experienced more than one breach.

Read More »
August 01, 2013 PublicationInvestigation: Fraud Squad. Keys to Good Faith Fraud Referrals

Unlike robbery, grand theft auto, and other street crimes, insurance fraud is rarely committed in a manner easily detected by law enforcement. 

Read More »
September 01, 2012 PublicationThe 2012 Women's Leadership Forum: Paying it Forward and Paying it Back

"Inspiration to initiate improvement." That's what attendees can expect to take away from the CLM's  2012 Women's Leadership Forum.

Read More »
April 12, 2012 PublicationLearning from the 2011 Tornado Season: A Historic Year of Coverage Lessons for Insurers in 2012

A publication of CLM
As natural disasters go, the tornado season of 2011 was one of the worst on the books. The National Weather Service reported that a record number of tornadoes touched down during the April-May 2011 tornado season, with the state of Alabama having more tornadoes reach the ground than in any other state.

Read More »
October 01, 2002 PublicationOvercoming Limitation of Liability Clauses in Commercial Warehouse Storage Contracts

Contained within the boilerplate language of most, if not all, commercial warehouse storage agreements is a clause limiting liability for damage to the consumer's goods ability of a warehouseman to limit his liability has its basis in public policy: absent the limitation, storage costs would be excessively high, as the warehouses would be required to carry perhaps hundreds of millions of dollars of liability insurance, depending on the nature of goods stored.

Read More »
September 06, 2019 PublicationAs Florida Goes

One of the most challenging topics in first-party property insurance over the last decade has been the increase in assigned claims. They are often called “assignments of benefits” or just AOBs...

Read More »
September 04, 2019 PublicationThe Challenges of Adjusting Pipe Breaks and Sewer Back-ups

In January of this year, we published an article entitled "The Challenges of Adjusting Long-Term Water Losses." That article focused on the "constant or repeated leakage or seepage" exclusion that appears in many insurance policies. The article chronicled three court decisions named Hoey, Price, and Hicks and how they affect coverage determinations.

Read More »
February 04, 2019 PublicationThe Challenges of Adjusting Long-Term Water Losses

Partner Timothy Engelbrecht, Esq. was featured in the latest edition of the Southern Loss Association newsletter! His article "The Challenges of Adjusting Long-Term Water Losses" discusses important exclusions in residential and commercial property insurance policies.

Read More »
August 21, 2018 PublicationJohn Garaffa "Business Interruption and Damage Claims"

Partner John Garaffa wrote a chapter titled "Business Interruption and Damage Claims" for the 5th Edition of The Complete Guide to Economic Damages.

Read More »
June 20, 2018 PublicationPerspectives on the ALI Restatement: The Plain Meaning Rule or Presumption?

The American Law Institute (ALI) voted to approve the Restatement of the Law of Liability Insurance (Restatement) at its annual meeting on Tuesday, May 22, 2018, with sections of the Restatement being debated until the final vote. The debate had resulted in many different drafts of the Restatement, with the Council of Advisors to the Restatement Reporters approving Proposed Final Draft No. 2 on April 13, 2018. This was the version ultimately approved by the ALI Members during the annual meeting.

Read More »
June 13, 2018 PublicationGood-Faith Claim Handling in Florida - Part II

This article is a continuation of the "Good-Faith Claim Handling in Florida" article that appeared in the Southern Loss Association Newsletter in February 2018. That article discussed the history and background of Florida Statute § 624.155, which is commonly referred to as Florida's bad-faith statute. The statute provides the exclusive remedy for people who believe they have been damaged by bad-faith claim handling practices in the first-party insurance context in Florida.

Read More »
April 30, 2018 PublicationAllocating Responsibility for Defense and Indemnity Costs Among Multiple Insurers

It is not necessary that the policies provide identical coverage in all respects in order for … each insurer [to be] entitled to contribution from the other; as long as the particular risk actually involved in the case is covered by both policies, the coverage is duplicate, and contribution will be allowed.

Read More »
March 20, 2018 PublicationIdentity Restoration Insurance: Why Would I Need That?

When retired nurse Helen Anderson flew to visit her sick daughter, she let her niece, Samantha, housesit. Though she had instructed her niece that no friends were allowed over, Helen found Samantha in the house with her friend, Alice Lipski, when she returned. After asking Alice to leave, Helen didn’t think more about her friend being in her house.

Read More »
February 01, 2018 PublicationA Theoretical Safety on the Trigger of the Duty to Defend

The Eleventh Circuit of the United States Court of Appeals recently decided Selective Insurance Company of the Southeast v. William P. White Racing Stables, Inc., et al., 2017 WL 6368843 (December 13, 2017), a case addressing limits upon what facts and legal theories may give rise to a duty to defend. In an unpublished opinion,[1] the court held the district court erred in finding a duty to defend based upon a theory of liability which was not pled, even though it agreed the facts alleged in the complaint could support a claim apparently within the scope of coverage provided by the liability policy.

Read More »
July 14, 2017 PublicationFlorida Water Loss Claims: What's Owed, And When?

Water loss lawsuits have spiked dramatically in Florida during the past few years. Insurers simply cannot resolve the unusually large differences in water damage estimates. Scope of estimated matching work usually explains the disparity. And litigation ensues over this hypothetical question: Can the water-damaged or tear out items be replaced and then matched to undamaged adjoining items; and if not, what is the proper scope of the matching work?

Read More »
October 18, 2016 PublicationFollow Up on Assignment of Benefits Litigation in Florida

In the summer of 2016, SLA published an article titled "Assignment of Benefit Litigation in Florida." The article was an introduction to the topic of assignments of benefits ("AOB") in Florida and how they are being used in insurance claims and litigation. Many readers asked for a follow up article that would provide some additional information and analysis on certain AOB topics. This article will spotlight four of those topics and give the reader some additional information and analysis on each of them.

Read More »
June 24, 2016 PublicationAssignment of Benefits Litigation in Florida

Over the past five years, first-party property insurers in Florida have been experiencing a wave of claims and lawsuits by contractors who obtain insurance rights from insureds through document called an assignment of benefits ("AOB"). This article is intended to introduce the reader to this topic and explain some of the challenges facing insurers in dealing with AOBs in Florida. The reader is welcome to contact the author to learn more.

Read More »
May 01, 2015 PublicationDefining Structual Damage: The Eleventh Circuit Rules

Section 627.706, Florida Statutes, has not always required "structural damage" as part of a "sinkhole loss." Until 2005, the statute required "actual physical damage to the property." The 2005 amendment to section 627.706 narrowed the damage requirement to "structural damage to the building" but left "structural damage" undefined. In 2011, the legislature codified five criteria that individually define "structural damage." See § 627.706(2)(k), Fla. Stat.

Read More »
November 24, 2014 PublicationThe Coverage Action 'Fixed' Bad Faith Damages: Are The Total Damages Binding?

Florida state and federal courts struggle with excess damage verdicts in first-party bad-faith actions arising out of uninsured motorist/underinsured motorist (UM) coverage. Recent case decisions produce mixed results for insurers. But mention UM coverage, bad faith, and total damages, and Florida Statute Section 627.727(10) immediately comes to mind. Comments by two judges framed the Section 10 debate.

Read More »
June 26, 2014 PublicationUninsured Motorist Bad-Faith Claims: Separate Action, Separate Trial, Separate Damages

First-party bad-faith claims arising from uninsured motorist (UM) coverage are separate and independent actions, too. If the uninsured motorist coverage action is truly separate and distinct from bad faith, one naturally expects a separate trial on bad-faith liability and extracontractual damages. However, there is a unique problem confronting first-party bad-faith claims arising from uninsured motorist coverage under Florida Statute Section 627.727(10). One decision characterizes the problem as a ‘‘conundrum'' created by Florida law.

Read More »
Key Points