Should the contractor get the entire payout?
Jim BroznyPro Member
Investor · Batavia, IL · Member since 2015 · 58 posts · 24 votesI filed a claim with my insurance company for wind damage to the siding on one of my properties. At the last minute, I called a contractor to meet the adjustor at the property so they could inspect it together. The contractor said he would do it as long as I gave him the job. I agreed.
Because I did not get any estimates prior to the adjuster visiting the property, I really don't have a good idea about what the job really costs. I only know what the insurance company is paying me. They are paying a healthy amount to replace the siding, gutters, and downspouts for the entire property.
My question to all of you, would you pay the contractor the entire amount the insurance company is paying me or would you negotiate?
Thanks!
@Jim Brozny Do not sign anything with the contractor yet. There are a ton of contractors who prey on insurance claims and make huge profits while you suffer with crappy work. I'm biased towards this since I live in the SW where contractors constantly rip off unsespecting folks when hail storms roll in. Due to seeing these guys rip people off all the time I have a deep down hatred for them that is rivaled by little else.
I'm a licensced contractor in the state of NM, so my experience is here. Although I'd assume its not much different there.
An insurance claim will normally cover damage minus depreciation, normally. Meaning 10k damage will get you an 8k check minus your deductable, assuming 20% depreciation. After all is fixed and you show a bill fo 10k you get the remaining 2k.
The adjustment should be a line item adjustment showing, material, labor, profit, and overhead. Make sure what the contractor is doing matches this. Do not settle for sub par material, this is where many will rip you off. If the adjustment state cement siding, put cement siding. If you have questions about a substitute contact your insurance company. If they pay for x and you put b up they may not cover it.
One thing the scammers in my AO will do is have you sign a contract before the adjustment is done. This contract states that the company will do the work if the adjustment is approved, and enough for them to make a ton of money. You sign this and then on the back in grey, gross example on my part, is a clause that you will give them 10-20% of your total insurance check if you back out.
One thing you may be able to do, depending on how big the claim is, is get them to do some other work around the property. For instance when replacing a roof, it wouldn't be uncommen to get a contractor to throw in some free stucco repair or other misc repairs that are wear and tear items. It never hurts to ask.
Be sure and get references, from people who have experience. The elderly neighbor who he called mam, but has no idea what a good contractor does is a crappy reference. Look at their social media, some of them are dumb enough to have their employees leave reviews, avoid them too.
I hope this was more informative and less of a rant. We've had a ton of contractors screwing people overe lately and it irks me to none other.
I'm guessing always negotiate if it is legal and ethical.
Yes, you would pay the contractor the full amount and your deductible, as long as they are completing all of the work. You are being indemnified for the damage, you should not be coming out ahead and making a profit on the claim.
You will receive the payment for actual cash value first, which is the repair cost minus the depreciation and your deductible. If you have replacement cost coverage, you (or your contractor) will notify your insurance company when the work is done and they will release the remaining amount it cost you to replace.
Now that's out of the way, some contractors are willing to negotiate your deductible. With replacement cost coverage, keep in mind that this is not correct in the eyes of the insurance company as you should be footing your portion of the repair cost as agreed upon in the contract, but some people look at it as "What momma dont know wont hurt her." This is completely up to you, as it can be considered fraud. If you have coverage for only actual cash value, the insurance company will pay you for the value of the items now and be done with it so you are free to negotiate as you please.
Hope this helps.
Jim,
The temptation is to just turn over the proceeds of the Insurance and trust the contractor to do all the necessary work. If it was my property, I would ask the contractor for a detailed estimate with all the work to be done and the final cost. Then draw up a contract that spells out what is to be done, what the cost is, what the requirements are, etc. If you are requiring the work to be done in a specified time frame you should spell out the penalties if not completed. If this is a big job, you should discuss with your agent and/or attorney whether or not a Bond would be appropriate. You should get proof of Liability, Business Auto, & Workers Comp. from the contractor before they start the job. You may also want to require that they add you as an additional insured to their policy with 30 day notice of cancellation. Further, a requirement in the contract that any subcontractors have to meet the same requirements may be a good idea. Lastly, discuss with your attorney any other things you should build in to the contract (that they hold you harmless and indemnify you, that their insurance is primary and non-contributory, that they waive subrogation against you, etc..). Some of these things I've mentioned may not be applicable or advisable but a good attorney should be able to advise you. The contractor may not like it that you are requiring things but you need to protect yourself.
** thought of one other thing. Compare the Contactors quote against the Adjusters report on what damage they are paying for to make sure everything is getting done. If the Adjuster did not give you a detailed report ask your agent for help in getting it.
@Jim Brozny Do not sign anything with the contractor yet. There are a ton of contractors who prey on insurance claims and make huge profits while you suffer with crappy work. I'm biased towards this since I live in the SW where contractors constantly rip off unsespecting folks when hail storms roll in. Due to seeing these guys rip people off all the time I have a deep down hatred for them that is rivaled by little else.
I'm a licensced contractor in the state of NM, so my experience is here. Although I'd assume its not much different there.
An insurance claim will normally cover damage minus depreciation, normally. Meaning 10k damage will get you an 8k check minus your deductable, assuming 20% depreciation. After all is fixed and you show a bill fo 10k you get the remaining 2k.
The adjustment should be a line item adjustment showing, material, labor, profit, and overhead. Make sure what the contractor is doing matches this. Do not settle for sub par material, this is where many will rip you off. If the adjustment state cement siding, put cement siding. If you have questions about a substitute contact your insurance company. If they pay for x and you put b up they may not cover it.
One thing the scammers in my AO will do is have you sign a contract before the adjustment is done. This contract states that the company will do the work if the adjustment is approved, and enough for them to make a ton of money. You sign this and then on the back in grey, gross example on my part, is a clause that you will give them 10-20% of your total insurance check if you back out.
One thing you may be able to do, depending on how big the claim is, is get them to do some other work around the property. For instance when replacing a roof, it wouldn't be uncommen to get a contractor to throw in some free stucco repair or other misc repairs that are wear and tear items. It never hurts to ask.
Be sure and get references, from people who have experience. The elderly neighbor who he called mam, but has no idea what a good contractor does is a crappy reference. Look at their social media, some of them are dumb enough to have their employees leave reviews, avoid them too.
I hope this was more informative and less of a rant. We've had a ton of contractors screwing people overe lately and it irks me to none other.
After a claim your insurance company will give you the actual cash value of the damaged property which is generally much less than the total cost to replace. If you have replacement cost coverage they will pay the remainder of the cost after the job is complete and you send them proof of the total cost in the form of an invoice from the contractor. So you will not have the opportunity to pocket any money. However, if somehow you do get the opportunity keep in mind that if you are caught committing insurance fraud in Illinois of between 300 and 10k you will get to enjoy a minimum two year sentence in prison.
You will not need to worry about doing any of the negotiating yourself either. Generally the insurance company will inspect the damage and come up with some $ figure they think is fair for the work. The contractor can sometimes negotiate with the insurance company if they believe it will cost more then the initial offer. It is often beneficial to have your contractor and the adjuster inspect the property at the same time so they can talk and agree on a price.
Remember, the insurance company is the one making the payment so they have incentive to negotiate a fair cost. A large portion of a roofing or siding contractors business comes from insurance claim related work so these contractors have an incentive to develop a good relationship with the insurance companies.
That being said, it is still very important that you properly vet your contractor like you would for any job. The one big difference in the vetting process after a claim when you have replacement cost insurance is that you do not need to worry about price since it is already determined by the insurance company.
@Jeff B.'s advice to get three bids is absolutely correct for normal work. However, after an insurance claim instead of getting three bids you could conduct three contractor interviews to determine who you think is best for the job. If you already know and trust one contractor you can also feel free to use him.
It is still very important to make sure you have a quality contract and have hired someone capable of finishing the job. My opinion is that you should hire a large well capitalized contractor with years of experience. These large contractors often have standing contracts with insurance companies that they will accept the price generated by so and so estimator program making the process totally seamless.
@Jeff B.'s advice to get three bids is absolutely correct for normal work. However, after an insurance claim instead of getting three bids you could conduct three contractor interviews to determine who you think is best for the job. If you already know and trust one contractor you can also feel free to use him.
I've had the experience that when a contractor knows it's a job from insurance proceeds - - they want it all and you don't get a fair bid. Therefore, don't give out more info than required AND follow good procedures :)
@Jeff B. The insurance company adjuster puts together a detailed report listing what is damaged and the price they will pay to fix it. Some property owners hire a third party to evaluate the damage and negotiate with the insurance company to set the appropriate price.
Your contract for work includes the set price you determined and getting the job requires accepting that price regardless of actual cost to complete. You then send the scope of work and price to contractors and determine the most capable one for the job.
You may be able to get a lower bid through the traditional process. However, if you do that bid amount becomes the max the insurance company will pay so you better be certain the contractor with the low bid will actually be able to do the work at that price and wont just walk off the job if it has major cost overruns. Remember the work is being funded by the insurance company and the increase in premium you will have after a $25,000 roof claim is nominal compared with a $35,000 roof claim.
This Youtube video was put together by my area Community Association Institute chapter which is an industry group designed for condominium associations that provides best practices for property managers. It explains the bidding process after an insurance claim.
@Account Closed I've actually gone thru this process with a tenant induced fire in an upper unit and water damage to the lower.
The insurance co made a settlement with ME. The settlement checks were made payable to myself and the Loss Payee to protect their equity (and they were a pain to work with, but it got done)
I contracted to get the work done and progress payments made to the contractor and his subs.
The two need not be connected and
Is not a factual requirement, at least not in Calif.
@Jeff B. You are right I should have specified that is not a requirement it is something we recommend to our clients. There are so many large contractors out that there that do insurance work that it should not be a problem to find a contracting willing to accept.
I should have also been clear that my comments only apply if you have replacement cost coverage.
If you have an actual cash value policy the insurance company pays you the money and walks away so that is a different story and you are 100% correct.
If they are paying replacement cost they pay the actual cash value up front and the rest when the project is finished and proof of completion and payment has been submitted. In this situation the only benefit from getting a lower bid is that the insurance company pays a bit less. In that case they will adjust their replacement cost valuation down and you will be liable for overruns unless you follow my suggestions above.
I would get a recommendation from the insurance company.
I think that some insurance companies will guarantee the work and payment if the work is done by one of their preferred contractors. Usually there is unseen damages that will need to be negotiated and it's easier to have the contractor deal with the adjuster and keep you out of the loop.
If thats not the case then I would get several bids and pay as you go.
If you want to make sure the job is not finished, pay the contractor up front.
I would get a recommendation from the insurance company.
I think that some insurance companies will guarantee the work and payment if the work is done by one of their preferred contractors. Usually there is unseen damages that will need to be negotiated and it's easier to have the contractor deal with the adjuster and keep you out of the loop.
If thats not the case then I would get several bids and pay as you go.
If you want to make sure the job is not finished, pay the contractor up front.
In reference to in bold
Absolutely do not do this. It's fine to have your contractor deal with the adjuster, if he tells you that you can't RUN. But know what the insurance is paying to fix. Far too often I have seen contractors install sub par materials or not do all what of the insurance is paying to be done. And it can lead to your insurance not covering it when it's damaged again. They are paying for it to be fixed to what it was or better before the claim.
Ensure you get what your insurance is paying for.
As a contractor , i find the insurance companies adjusters are a bit low and the contractor has to call them back to show them things they missed . If you get a good contractor ,he deals with all those headaches .
@Keith Harris, @John Mocker, @Curtis J. Thank you all for your feedback. I haven't had a claim like this before and I wasn't sure if there is a common practice. The contractor is a referral from my management company and they have a strong reputation. I asked him to meet the adjuster to make sure all of the damage and work gets addressed.
I have replacement cost coverage. The adjuster sent a detailed report of the work, materials, and labor costs. I can only assume the contractor and the adjuster agreed about the work. Would the adjuster share the payment amount with the contractor? The check will be made out to me.
You're welcome!
On the adjustments I've recieved it shows everyhting. That is what you would show your contractor so that he knows what all is exactly being done, atleast paid for by the insurance. You could certainly block out the pricing, but he will likely have the same program the insurance company uses to price his bid. So that would be a wash.
He will likely bill you for your first insurance check upfront or on a draw, and start and complete work from it. He will then submit to you a full bill to you, the entire amount of insurance claim. Which you will send, with whatever documentation required, to your insurance. He will likely expect the next check you recieve from them covering depreciation as well.
@Jim Brozny Just reading through your post to learn. I'd like to make sure I understood your situation in case I ever encounter it. Were you asking, for example if the insurance company says the repair costs 100 bucks, and you negotiate with the contractor to do it for 90, do you get to keep the remaining 10 bucks?
If I misunderstood I'd like to know what you meant :-)
IF I understood correctly, is everyone saying don't keep the extra or it's fraud?
@Jeff B. You are right I should have specified that is not a requirement it is something we recommend to our clients.
I should have also been clear that my comments only apply if you have replacement cost coverage.
I had full replacement coverage and was able to get good upgrades. Add the lost rents coverage and the total settlement came to 95k while the actual expenses only came to 89k so - - so I ended up mading 5k on the disaster -- not a recommended path as the stress was BIGTIME.
I have replacement cost coverage. The adjuster sent a detailed report of the work, materials, and labor costs. I can only assume the contractor and the adjuster agreed about the work. Would the adjuster share the payment amount with the contractor? The check will be made out to me.
Well IMO, that's a conflict of interest - - the contractor is NOT party to your insurance and the settlement is to YOU.
As I said in my case, the check was two-party, ME the insured and the Loss Payee for the mortgage holder. This means the LP will be send out payments to you (not the contractor) and you will then pay him. All this complication is to be sure that the property is in fact being restored and that you don't just pocket the change.
get a quote from the contractor, and verify their work
@Jeff B. Are you saying total construction cost + loss of rents was $89k and you were paid $95k and pocketed the rest?
If so that is in clear violation of your insurance policy and could be considered insurance fraud. It is also the exception that this would slip past the insurance company.
There is always going to be that oitlier case but in the 100s of claims we have been involved in over the past 3 years the process has worked as I explained every time (there is a lot of hail in Missouri)
The 5k came from lost rents - - HOW THE HECK can that be fraud? I was paid for 12 months of rents UP FRONT and the project can in by the 11th month.
Have you ACTUALLY done any of this personally or do you carp from the cheap seats?
I have made some decent money on a couple claims.
My insurance company sends their adjuster out, writes up an estimate based on average costs in the area, writes a check to my LLC, and we're done. They said contact them if I think it will cost more or if we run into something unseen and need to adjust it.
If I get can get it done cheaper than the average and there's something left over it stays with me. And I definitely get work done significantly cheaper given my # of properties and relationships.
I have made some decent money on a couple claims.
My insurance company sends their adjuster out, writes up an estimate based on average costs in the area, writes a check to my LLC, and we're done. They said contact them if I think it will cost more or if we run into something unseen and need to adjust it.
If I get can get it done cheaper than the average and there's something left over it stays with me. And I definitely get work done significantly cheaper given my # of properties and relationships.
@Mike Flavian VERY similar in my case - - "just ask" I was told.
@Jim Brozny you should have gotten a quote because the damage could be more or less expensive than your insurance payout. If the payout is higher you keep the difference, if it is lower then you ask for more money from the insurance company. If there is money left over it is likely because the work being done doesn't match the level the insurance company expected. There is nothing illegal about keeping the difference. In fact you don't need to have any work done if you don't want to and you can pocket it all. I am not sure why @Keith Harris thinks it would be fraud. It is not fraud because if you don't fix it, you are stuck with lower property value in exchange for that money - in other words you have not profited. It is your choice how to spend the money. The bigger concern is that often the payout is less than the cost of the work. Insurance companies try to get by with the bare minimum payout.