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Considerations for home construction contractors handling insurance work

The Departments of Commerce and Labor and Industry published Bulletin 2010-4 (the Bulletin) in 2010 to address complaints of consumers and the insurance industry regarding perceived abusive practices being done by building contractors. In particular, consumers were concerned about contract language that required payment even if the homeowner did not pick that contractor to do the repairs. Insurers complained about some contractors asserting the right to negotiate coverage terms on behalf of the insured/homeowner, including the right of appraisal. Simply put, insurers did not want contractors assuming the role of claims adjusters.

Almost a year has passed since its publication, yet contractors remain confused as to how to comport with the Bulletin. To clarify the scope, the departments followed up by providing answers to frequently asked questions (FAQs). The FAQs stress that the bulletin relies on existing Minnesota law and that aside from limited situations described in the bulletin was not intended to "regulate, amend or otherwise interfere with any contractual relationship between a contractor and a consumer."

Price Agreeable Contracts

A price agreeable contract states that the homeowner agrees to allow the contractor to perform whatever repair work the homeowner's insurance company agrees to cover, for the price that the insurer agrees to pay. Most of these contracts also contain a provision that cancels the contract if the contractor and insurer cannot reach an agreement.

The Bulletin does not prohibit price agreeable contracts. However, it qualifies the acceptable language that can be used. Accordingly, it should be clear to the homeowner that that the contract authorizes the contractor to do the work. In turn, it should also be clear that the contract does not merely permit the contractor to examine the homeowner's property or discuss the matter with the insurance company.

The Main Takeaway from Bulletin 2010-4: a Contractor Shall not Assume the Role of a Claims Adjuster

While price agreeable contracts can still be used, contractors must remove language from contracts and advertising materials which can be construed as the contractor offering services of a licensed public adjustor-someone who negotiates a claim settlement on a homeowner's behalf and may require licensing as a public adjustor. Therefore, contractors should remove the following and any similar statements from their contracts that involve negotiating terms of insurance coverage on behalf of the homeowner:

  • Contractor will act as the homeowner's representative or agent in negotiating an insurer
  • Contractor will negotiate the insurance claim with the insurance company on the homeowner's behalf
  • Contractor represents the homeowner or is adjusting the claim
  • Contractor will represent your best interests when meeting the insurance adjuster
  • Homeowner gives full authority to contractor to negotiate with homeowner's insurance company to pay for any damages

Despite these restrictions, contractors can still negotiate the scope of work with their customer and the price for the work. In addition, the contractor can identify for the insurer and make the insurer aware of damage that may have not been included in the initial scope and settlement offer. Nothing in the Bulletin provides a new basis to limit direct discussions between the parties on the scope and cost of repairs.