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Contracts for Insurance-Covered Repairs

Contracts for Insurance-Covered Repairs

 

When natural disasters or fires cause massive destruction to association property, it is not only important to find the right contractor to conduct the repair work, but it is also critical to negotiate a well-worded contract with that contractor.  Specifically, an association needs to protect itself from unexpected bills that are not covered by insurance.

 In order to protect an association from the nasty surprise of a bill for uncovered repair work, the following provisions for any insurance-covered repair or remediation project should be included in the contract:

The Contractor Should Agree to Accept the Price Approved by the Insurance Carrier.

Many times, the costs associated with cleanup and repairs from a natural disaster, fire or other major loss are not fully-known when the cleanup or repair work is ready to start.  Rather than waiting for the insurance carrier’s coverage decision or – worse yet – signing an agreement at the price quoted by the contractor, an association should require the contractor to accept, as payment in full, the insurance proceeds for the work performed – and nothing more.  In this scenario, a specific dollar figure is not included in the contract, unless as coverage decision has already been made.

The Association Should Not Have to Pay Until Insurance Proceeds are Received.

In addition to requiring contractors to accept payment in the amount approved by the insurance carrier, contractors should not be permitted to demand payment for work until insurance proceeds are received from the carrier.  Otherwise, an association may find itself fronting the money for the insurance carrier – money the association may not have.  Late payments could then result in otherwise unnecessary interest charges that will not be covered by insurance.  In some instances the insurance proceeds may not be received for several weeks or even months after the remediation and repair work is completed – especially when the damage was caused by a widespread natural disaster, like Superstorm Sandy, and the insurance carriers are handling numerous claims at once.

Additional Work Must Be Approved by a Change Order.

Contractors are experts at finding additional work that needs to be performed once they are onsite for insurance-covered damages, but they should never be given open-ended authority to make “necessary” repairs.  If the issue requiring repair was not related to the covered loss, the association will usually end up being responsible for the cost of the repair.  In order to avoid this problem, contracts should specify that all repairs not covered by insurance proceeds must be pre-authorized by a signed written change order.

Most contractors will not perform additional work without at least speaking to the association first; however, when repairs are related to insurance-covered losses new potential problems arise.  As already discussed the scope of work and approved repair costs may not be known before remediation and repair work start.  This creates a risk for contractors to guess wrong about what work will be covered.  The contractor may believe that an item needs to be completely replaced, but the insurance carrier’s final determination may be that the item was repairable – or not covered at all.  Recently, this problem was exacerbated in flood zone areas after Superstorm Sandy when many contractors performed work on damaged property that was below the “base flood elevation” (BFE), and that work was not covered by insurance.  Had the work been performed above the BFE, it would have been covered by insurance.  By structuring the contract to protect the association, the risk of these types of repair costs being shifted to the association is minimized.