It is becoming more and more common that insurance companies are recommending and suggesting that their “preferred vendors” perform loss repairs. California offers insureds protection if they opt to use a preferred vendor. Under the Fairs Claims Settlement Practices Regulations, if an insurer recommends a vendor, the insurer is essentially required to guaranty that vendor’s work.

There is a lot of incentive for an insurer to have a preferred vendor perform claim repairs. The vendors will typically perform the work for less than an independent vendor. This is because an insurer’s preferred vendor program will usually require that the carrier is given a discount on labor or materials. Vendors will offer such discounts to get the insurer’s business. Preferred vendors are often water and smoke remediators but can also include flooring contractors and contractors for other particular trades.

An insurer’s use of preferred vendors keeps claim costs down. The preferred vendor’s estimate usually will operate as the insurer’s claim valuation. Once a preferred vendor is suggested and prepares a repair estimate, the insured is often faced with the decision of either: (1) having the preferred vendor make the repairs or (2) taking a cash payment and then having to find a contractor who can do the repairs at the discounted amount offered by the preferred vendor. As you can probably guess, insureds often opt to let the preferred vendor perform the repairs.

California provides protection when a preferred vendor is chosen for loss repairs. The Fair Claims Settlement Practices Regulations require that when an insurer either recommends or suggests a vendor to make property repairs and the insured opts to have that vendor make the loss repairs, the insurer is required to ensure that the damaged property is returned to its pre-loss condition. The insurer is required to do this at no additional costs to the insured. The insurer is also required to ensure the property is repaired in a manner that meets accepted trade standards for good and workmanlike construction. Cal. Cod. Reg. § 2695.9(c)(2).

The Fair Claims Settlement Practices Regulations also imposes additional restrictions on insurers when it comes to suggesting vendors who can perform repairs. An insurer can only recommend a vendor if either: (1) the insured specifically requests a referral or (2) the insurer informs the insured in writing of the right to select any vendor to make the repairs.

For reference, Cal. Cod. Reg. § 2695.9(c) in its entirety provides as follows:

(c) No insurer shall suggest or recommend that the insured have the property repaired by a specific individual or entity unless:

(1) the referral is expressly requested by the claimant; or

(2) the claimant has been informed in writing of the right to select a repair individual or entity and, if the claimant accepts the suggestion or recommendation, the insurer shall cause the damaged property to be restored to no less than its condition prior to the loss and repaired in a manner which meets accepted trade standards for good and workmanlike construction at no additional cost to the claimant other than as stated in the policy or as otherwise allowed by these regulations.