What is assignment of benefits, and how does it impact insurers?

What is assignment of benefits, and how does it impact insurers?

Assignment of benefits, widely referred to as AOB, is a contractual agreement signed by a policyholder, which enables a third party to file an insurance claim, make repair decisions, and directly bill an insurer on the policyholder’s behalf.

The Insurance Information Institute (III) describes AOB as “an efficient and customer-friendly way to settle claims.” Having a problem like a water leak in your home is stressful enough without having to negotiate an insurance claim. By signing an AOB, policyholders can leave that claim to the contractor they’ve brought in to fix the issue – in this case, potentially a plumber or a water remediation firm – and assuming that contractor acts in good faith, the repairs and the claim should be sorted without the policyholder losing too much sleep.

AOB – a fraudster’s playground
In recent years, AOB has hit the headlines for all the wrong reasons. Loopholes in the way AOB is being used are enabling contractors and restoration companies to abuse the practice by inflating claims costs and charging insurance companies for work that was either unnecessary or simply wasn’t done at all. These fraudsters then keep any extra money for themselves.

Florida-based insurance brokerage, AssuredPartners, shared the following about AOB: “Once you sign an AOB, you lose control of the direction of your claim. The contractor takes control and can submit whatever they like to your insurance company, sometimes billing the company double, even triple the going market rate for their services, and sometimes including work that was never performed.

“You don’t see this, and you can’t verify what was done but you have now committed to this contractor. You now have little to no recourse, nor are you able to comparison shop if you’re not satisfied with their work. Even if their work is incomplete, or you are unsatisfied with the end result, they can still claim compensation from the insurance company, which gets deducted from your benefits.”

A number of things could go wrong with AOB. When a vendor assumes control of a claim, that company is still bound by the terms and conditions of the original insurance policy. If a contractor violates any of those terms, the claim could be deemed void, leaving the policyholder out of pocket for a potentially significant loss.

Also, if the contractor files a claim and the insurance company does not agree with the dollar amount requested, under the AOB the contractor can engage in legal action against the insurer without the policyholder’s consent. According to the III, this can lead to: “a state of affairs in which legal fees can dwarf actual damages paid to the policyholder – sometimes tens of thousands of dollars for a single low-damage claim.”

Protecting policyholders from AOB fraud
The National Insurance Crime Bureau, whose mission it is to combat insurance fraud, has published a checklist for policyholders – also something that brokers can share with any clients considering AOB – to consider before hiring a contractor:

  • Get multiple estimates for any work / repairs that need doing
  • Ask for references and check reviews
  • Never let a contractor pressure you into hiring them
  • Get everything in writing, including the cost of the work, payment schedules, exactly what work will be done, time schedules for that work, guarantees, and so on
  • Read the contract in full. If there are any blanks or concerns, do not sign the contract
  • Do not pay a contractor in full or sign a completion certificate until the required work is done
  • Check all documents that are sent to your insurance carrier, and make sure you understand them
  • Work with an insurance broker to ensure you understand insurance policy language and to get help with the claims process

Impact of AOB on the insurance industry
Insurers who choose to dispute inflated AOB bills are up against it in the era of plaintiff-friendly court verdicts. If the insurance companies fight in court and lose, they must pay compensation to the plaintiff’s attorneys, but the opposite is not true if the insurers win their case. So, the cost of the legal expense is prohibitive for the insurance company either way, which is why many insurers opt to settle.

Inflated claims and massive volumes of lawsuits have the predictable result of driving up insurance companies’ legal costs – and insurers are forced to pass those costs on to consumers in the form of higher insurance premiums and more restrictive policy terms and conditions.