An assignment of benefits is a form that, when signed by a homeowner, allows contractors to directly contact the insurance company and get paid by them directly. This form becomes very popular in the aftermath of natural disasters. When this process works well, assuming all parties are doing what they are supposed to, the owner signs the assignment of benefits, the contractor completes the work, the insurance company pays the contractor, and the owner’s property gets fixed. When this process does not work well…it is a bit more complicated, which is why contractors and homeowners need to be careful.
The best way to protect yourself as a homeowner is to only engage with licensed contractors, a company with an actual license number, or a license holder behind the scenes that could potentially go after you if you are wronged or shortchanged.
As a homeowner, there are two very negative scenarios:
The homeowner signs the assignment of benefits, the contractor gets started on repair work, and then the insurance denies the claim (they won’t pay). In this case, you still owe the contractor money for the repairs. Many, if not most, of these agreements include clauses stating that if the insurance does not pay, the homeowner is responsible.
The homeowner signs the assignment of benefits, the contractor does low-quality work, asks for money up-front, and/or bails on the work in the middle of the project. The homeowner is chasing the contractor to complete the work and follow up with the insurance company. This happens often; some contractors get excited about the prospect of lots of work and go around taking deposits and signing contracts in excess of the amount of work they have the resources to complete promptly.
As a contractor, you must ensure you will get paid. Securing payment is key to a successful construction business; otherwise, you are stuck chasing payment on jobs on which you have already sunk labor and material. Securing an assignment of benefits from an insured homeowner is a good practice, so long as you know, there is a viable claim. In cases where the homeowner has staged or intentionally inflicted damage on his/her property, the insurance could deny payment. If possible, it is always a good idea, to secure at least a partial payment and agree to reimburse the owner once the claim is paid.