What is an Insurance Assignment?

An insurance assignment is an agreement that transfers the rights or benefits of an insurance policy to another party. It gives that party the authority to file claims, make repair decisions, and collect insurance payments without the involvement of the policyholder.

Insurance assignments can be helpful in certain situations but also come with risks that policyholders should understand before signing one. This comprehensive guide will explain everything you need to know about insurance assignments.

What is an Assignment of Benefits?

An Assignment of Benefits (AOB) is the most common type of insurance assignment.

With an AOB, the policyholder signs a contract assigning post-loss insurance rights or benefits to a third party, such as a contractor, repair company, or service provider.

For example:

• You experience water damage in your home and hire a water remediation company to handle the repairs.

• You sign an AOB assigning your insurance claims benefits to the water remediation company.

• This gives the company the right to file an insurance claim on your behalf, make repair decisions, and collect insurance payments for their services.

Essentially, the third party steps into the shoes of the policyholder for anything related to that insurance claim.

Where are AOBs Most Commonly Used?

AOBs were originally used in health and life insurance policies. But today they are most prevalent in property insurance claims, especially in:

• Homeowners insurance
• Commercial property insurance
• Flood insurance
• Auto insurance

Some common examples include:

• A homeowner with hurricane damage signs an AOB with a roofer to repair their roof.

• A business owner with fire damage signs an AOB with a contractor to rebuild.

• An auto owner with a damaged vehicle signs an AOB with an auto body shop for repairs.

In these situations, the homeowner, business owner, and auto owner are the assignors. They assign their insurance benefits and claims rights to the roofer, contractor, and auto body shop, who become the assignees.

Why Do People Sign Insurance Assignments?

There are some potential benefits for policyholders who sign over their insurance claims through an AOB:

Convenience

The contractor handles everything related to the insurance claim, including:

• Communicating with the insurance company
• Filing paperwork
• Managing repairs
• Collecting insurance payments

This can be helpful for policyholders who don’t have the time or expertise to manage the claims process effectively.

Efficiency

Contractors are experienced in insurance claims and can potentially expedite the claims process so repairs are completed faster.

Cost savings

Some contractors may offer a discount on services if the customer signs an AOB allowing them to directly bill the insurance company.

Access to funds

The contractor can start repairs without the policyholder having to pay large deductibles or other out-of-pocket costs upfront.

What Are the Risks of Signing an AOB?

While AOBs can provide legitimacy benefits, there are also significant risks to be aware of:

Loss of control

By signing over your claims rights, you give up control over how the claim is handled. The contractor makes all decisions regarding repairs, billing, etc.

Inflated claims

Dishonest contractors may inflate the claim by billing for unnecessary work or work that was never performed. This drives up costs for insurance companies.

Legal action

Contractors may sue your insurance company over disputed claims or costs without your consent or involvement.

Void insurance policy

If the contractor violates terms of the insurance policy, it could void coverage entirely, leaving you unprotected.

Out-of-pocket expenses

You may end up owing out-of-pocket costs if the contractor’s charges exceed your coverage limits or if coverage is voided.

Credit damage

If you end up in a dispute with the contractor, they could file a lien against your property or report you to credit agencies.

Limited recourse

Once you sign an AOB, you have very little recourse if you are unsatisfied with the contractor’s services or the claim outcome.

Higher insurance premiums

Widespread AOB abuse drives up claim costs for insurers, which leads to higher premiums for consumers.

As you can see, improperly used AOBs can create big problems for policyholders. It’s critical to understand these risks before signing away your insurance benefits.

Does an AOB Override the Insurance Contract?

No, an AOB does not override the original insurance policy contract. The assignee steps into the shoes of the policyholder and is still bound by all the policy terms and conditions.

For example, the policy may require:

• Timely notification of a loss
• Full cooperation in the claims investigation
• Obeying all claim procedures and guidelines

If the assignee fails to adhere to these contractual obligations, the insurance company can deny claims payments.

Any violations by the assignee that void coverage will also void coverage for the policyholder.

Can an Insurance Company Reject an AOB?

In most cases, insurance companies cannot reject or ignore a valid AOB. The AOB gives legal rights to the assignee and the insurer is obligated to acknowledge those rights.

However, if the assignee clearly violates provisions laid out in the insurance policy, the insurer may be able to deny claims or void coverage entirely.

For example, if the contractor misses the deadline to notify the insurer of loss damages or refuses to cooperate with the claims investigation process.

What Information is Required in an AOB?

There are certain elements that must be included in an AOB form to be valid:

• Names of the assignor (policyholder) and assignee (contractor)
• The assignor’s signature
• Details about the insurance policy and claim
• Clear description of the benefits being assigned
• Effective date of the assignment

Some states have additional requirements for AOB forms to protect consumers:

• Written estimate – A detailed estimate of services and costs from the assignee. This protects against inflated claims.

• Cancellation terms – Language allowing the assignor to cancel the AOB if work hasn’t begun or is unsatisfactory.

• Notification statement – A notice clearly stating the assignor is giving up claims rights. This helps ensure informed consent.

• Indemnification clause – Hold harmless language preventing the assignee from seeking additional payment from the assignor over the policy’s cost.

How Does an AOB Impact Insurers?

The explosion in AOB claims has substantially impacted insurance companies in recent years:

• Increased claims severity – Dishonest contractors drive up restoration costs through inflated billing. This has dramatically increased the size of water and roofing claims.

• Litigation costs – More lawsuits over disputed AOB claims means more money insurers have to spend defending themselves in court.

• Premium hikes – Insurers have to raise rates and implement policy restrictions to account for the rising costs connected to AOB abuse.

• Strain on adjusters – More complex AOB claims require more adjuster time to investigate, negotiate, and settle appropriately.

According to the Insurance Information Institute, the frequency of AOB claims in Florida increased 46% from 2015 to 2016 alone. These costs ultimately trickle down to consumers.

How Can Policyholders Avoid AOB Problems?

If you’re considering signing an AOB, here are some tips to protect yourself:

• Thoroughly research companies and read reviews before hiring. Avoid contractors aggressively soliciting business door-to-door.

• Get quotes from multiple vendors and check references.

• Review AOB language carefully before signing. Look for cancellation rights and fee disclosures.

• Negotiate the AOB terms if anything seems unfair or unclear. Don’t let yourself be pressured.

• Keep communicating with your insurer during repairs and request to review any claims submissions.

• Never pay a contractor for an insurance deductible or any amount beyond your out-of-pocket policy limit.

• Avoid signing an AOB when possible by managing the claim yourself.

Are AOBs Prohibited in Some States?

Yes, some states have essentially prohibited or heavily restricted the use of AOBs to curb abuse:

Florida – As of January 2023, policyholders cannot assign post-loss benefits for residential or commercial property insurance policies.

Louisiana – Requires AOBs to allow cancellation within 5 business days. Also limits rights transferred.

Texas – Prevents contractors from acting as public insurance adjusters in AOB claims.

North Carolina – Policyholders must give written notice of executing an AOB to insurers.

South Carolina – Prevents third parties from suing insurers over AOB disputes. Limits transferred rights.

The best practices are for policyholders to educate themselves on AOB risks and make cautious decisions before signing away insurance benefits. Consulting with an insurance professional is also recommended for guidance.

Other Types of Insurance Assignments

While AOBs are the most common, there are some other scenarios where