Last week, in my post, What Role Does an Insurer’s "Preferred Contractor Program" Play in a Bad Faith Lawsuit?, I evaluated the analysis applied by the Nebraska Supreme Court in order to arrive at its decision that a contractor hired by tan insured through the carrier’s preferred contractor program served only as an independent contractor. The Nebraska Supreme Court determined that the contractor’s actions could not be used against the insurer to prove the carrier’s bad faith.
In Discovery in Insurance Bad Faith Cases, Part II, Charles M. Miller stated:
Prior to entering into the agreement the insurer may perform some due diligence to determine the qualifications of the contractor and then monitor or inspect the contractor’s work to assure its quality. In order to be part of the program, the contractors may have to agree to do some of their work at certain prices, or give other cost preferences to the insurance company. In return the insurer may promise to refer its insureds to the contractor, who will then do the covered insurance repairs…At the same time, because the insurer may get a price break when the approved contractor is used, the insurer may also save money.
In theory, it might sound like a great idea – find licenses and capable contractors who are willing to help insureds conduct necessary and covered repairs to their property at reduced prices. There are, however, potential problems with the actual manner in which preferred contractor programs are implemented and used by carriers.
In a bad faith lawsuit, a policyholder’s attorney might want to investigate whether the insurer had a preferred contractor program and the manner in which it was used in the attorney’s particular case. The circumstances surrounding the manner in which the preferred contractor program was disclosed and how the insured was advised by the insurer about the preferred contractor program could be very important in a bad faith lawsuit. Was the insured advised of the preferred contractor program? Was the insured advised that the preferred contractor program was an option? Was the insured told that he/she was required to select a contractor from the preferred contractor program? All of these are important considerations when evaluating the various factors that come into play in a bad faith case against a carrier.
Where the bad faith suit concerns the work of a preferred contractor, counsel should obtain all documents concerning the contractor’s work including the insurer’s file regarding the contractor, which may contain reports of inspections of the contractor’s work, names of other insured’s who had work done by the contractor, any agreements and price concessions between the contractor and the insurer, and documents related to the overall preferred contractor program.
I imagine that the intentions of the carrier when setting up a preferred contractor program would include something like the following: save the carrier money; make sure that the insurance proceeds are used to repair the insured property and make an effort to exert some control over the manner and cost of the repairs. However, like many other things in the insurance arena, programs do not always function in the manner in which they were intended.
Unfortunately, these programs do not always work the way they were designed to work. For example, the insurer may limit the work a contractor can do in making repairs or providing needed service. These limitations may cause further property damage or fail to allow for repair of all the damages. For example, an insurer may limit the time its water remediation contractor can keep fans in a house to dry up a water leak. As a result, the contractor may feel compelled to remove the fans before the house is dry.
Another example is that the insurer might require the contractor to repair damage to a particular flooring with materials that don’t match existing flooring in the home. These are only a few examples of what could go terribly wrong in property damage claim when a preferred contractor program is in place. These examples suggest that repairs might not have been conducted thoroughly or properly. Some of these examples reflect that the insured might find him/herself with even greater damage down the road when shoddy repairs to one area lead to additional damage to other later. In these examples, who benefits from the preferred contractor program? Is the insured properly repaired? Was the use of the insurance proceeds practical? At the end of the day, were the covered repairs actually conducted?
Please tune in next week for additional information about preferred contractor programs.