Preferred Contractor Endorsement in Property Insurance Policies

Certain property insurance policies have what is known as a preferred contractor endorsement. It can be written in numerous ways, but the objective is to allow the insurer to perform covered repairs through its preferred contractor.

In a recent case, the property insurance policy contained this endorsement:

That policy includes a preferred contractor endorsement which states that when a covered loss occurs to the insured’s property “and repairs are necessary to protect property from further damage,” the insured must notify People’s Trust [insurer] “before authorizing or commencing repairs so [People’s Trust], at [its] option, may select Rapid Response Team, LLC, to make the covered reasonable repairs.” The endorsement also provides that if the insured fails to comply with this requirement, People’s Trust’s obligation for “repairs made to protect the covered property from further damage” is the lesser of the reasonable costs incurred for the repairs or the amount People’s Trust would have paid Rapid Response Team.

Synergy Contracting Group, Inc. v. People’s Trust Ins. Co., 49 Fla.L.Weekly D1236a (Fla. 2d DCA 2024).

There was a separate service agreement between the insurer (People’s Trust)  and Rapid Response Team that paid Rapid Response Team $2,000 for service calls. The insured was not a party to this separate service agreement.

The homeowners suffered water damage and hired their own remediation contractor to perform repairs.  The homeowners also assigned rights under their policy to the remediation contractor. The contractor submitted an invoice to the insurer for $5,000. The insurer paid $2,000 because this is the amount it would have paid Rapid Response Team under the service agreement. The contractor then filed an insurance coverage lawsuit making all sorts of arguments against the preferred contractor endorsement. The trial court granted summary judgment in favor of the insurer, which was affirmed on appeal.  This is why:

Here, the language of the policy is clear that the [homeowners] must provide notice of a claim prior to authorizing work on that claim, and the fact that the endorsement does not lay out the separate contract between [the insurer] and Rapid Response Team — a contract to which the insureds are not a party — does not change that fact.

The service agreement does not amend the policy. It does not create a different policy limit for coverage. Nor did the service agreement need to be incorporated into the policy, where it was simply offered to prove how much insurer would have paid [Rapid Response Team] for the work. No policy provision prevents [Rapid Response Team] from providing what may be a volume discount to [People’s Trust] through its service agreement.

[The contractor] also argues on appeal that the endorsement should not be enforced in this case because it is procedurally and substantively unconscionable. First, [the contractor] argues that the endorsement is procedurally unfair because, without knowledge of [the insurer’s] separate agreement with Rapid Response Team, the insureds could not make a meaningful choice on whether to enter into the insurance contract. We do not agree.

In exchange for accepting the endorsement, the [homeowners] received a reduction in their premium. They “could have rejected the preferred contractor endorsement, but instead opted for a very modest discount on price in return for being bound to use [Rapid Response Team] to mitigate . . . any property loss.” Id. The amount that [the insurer] would pay Rapid Response Team is immaterial to the relevant purposes of the insurance contract, which were (1) that repair work necessary to prevent further damage would be completed and (2) that [insurer] would pay for it. Furthermore, in the same way that the [homeowners] could have rejected the preferred contractor endorsement, [contractor] did not have to contract with the [homeowners]. Before entering into the assignment — and thereby placing itself in the [homeowner’s] shoes—[contractor] should have made itself aware of the policy provisions to which it was subjecting itself, including the preferred contractor endorsement. If it was not satisfied that the endorsement was clear as to the amount of payment, [contractor] should have obtained that information before freely entering into the assignment contract.

We likewise reject [contractor’]s argument that the endorsement is substantively unconscionable. “Substantive unconscionability . . . requires an assessment of whether the contract terms are ‘so “outrageously unfair” as to “shock the judicial conscience.” ‘ ” “A substantively unconscionable contract is one that ‘no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.’ ”  The insurance contract at issue here does not meet this definition. In exchange for a premium reduction, the [homeowner] accepted that the insurer had the option to employ its own contractor to complete necessary mitigation repairs at a price to be paid by the insurer, and as protection for the insurer, the insured agreed that the insurer would pay no more than what it would have paid its preferred contractor. This is a mutual bargain entered into freely.

Synergy Contracting Group, supra (internal citations omitted).

If dealing with a preferred contractor endorsement, consider this holding and that rationale associated with the premium reduction and endorsement being a mutual bargain between the insured and insurer.

 

Please contact David Adelstein at [email protected] or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.