Restoration Contractors and Roofers Beware: Your Assignment of Benefits Agreements May Not Hold Up in Colorado

A recent legal ruling in Colorado could impact the manner of restoration contractors’ and roofers’ business. A United States District Court judge ruled that a restoration contractor had no standing to file a lawsuit and that the assignment of benefits contract (AOB) was invalid. The case, Douglas Smith Builders v. State Farm Fire and Casualty Company, 1 provides a cautionary tale for contractors and roofers who rely on AOBs to secure payment for their services.

In this case, Douglas Smith Builders LLC, a roofing contractor, entered into an AOB agreement with Rosa and Jess Vazquez after a hailstorm damaged their property. The Vazquezes assigned their right to insurance benefits to the contractor, who then sought to claim payment from State Farm. A disagreement ensued, and a suit was filed. However, the court ruled against the contractor on several grounds, effectively invalidating the AOB agreement.

The court first determined that the contractor did not have standing to bring the lawsuit because it had not performed any work for which it had not been paid. The standing requirement necessitates that the plaintiff suffer a concrete injury, which was not the case since the contractor did not complete the repairs. The court noted that the circumstances could be different if the contractor actually did the repair and suffered economic harm:

Plaintiff relies on Kyle W. Larson Enterprises., Inc. v. Allstate Insurance Co., 305 P.3d 409, 413 (Colo. App. 2012), for the proposition that under Colorado law, repair vendors such as Plaintiff are ‘first-party claimants’ under Colo. Rev. Stat. 10-3-1115 ‘when they assert an entitlement owed on behalf of an insured under an insurance policy.’ But the Court finds the circumstances of that case are distinguishable. There, the plaintiff roofer received the defendant insurers’ approval to make certain repairs, and the insurer paid those claim amounts. Id. at 410. The dispute centered on whether the insurer unreasonably denied payment for additional repairs the roofer made to comply with applicable building codes and to maintain certain manufacturers’ warranties. Id. The court concluded that the roofer could bring a claim against the insurer on behalf of the insured. Id. at 410. By contrast, Plaintiff is not asserting that it made any repairs to the Vazquezes’ property for which it has not been paid. Moreover, under the terms of the Vazquezes’ policy, replacement cost benefits are not due or owed until repairs are completed, and repairs or replacement must be completed within two years of the date of loss. Therefore, Plaintiff has not shown an entitlement owed on behalf of the Vazquezes. In the absence of any evidence that Plaintiff performed work for which it was never paid, the Court discerns no concrete injury that would confer it with standing.

The court then made a very significant finding that the underlying contract between the contractor and the Vazquezes was an illusory contract and not enforceable. The agreement lacked consideration, meaning it did not obligate the contractor to perform any specific work, and its terms were insufficiently definite. As a result, the contract was not enforceable:

Here, the purported contract between Plaintiff and the Vazquezes lacks consideration, and its terms are insufficiently definite. The agreement states that ‘[s]pecifications of material brands, styles, colors, and choices of that nature will be agreed to in writing prior to commencement of repairs.’ Further, the agreement states that ‘in no event is [Plaintiff] required to commence the Service Repairs until the Insurance Company has approved payment of Insurance Proceeds for the Claim in an amount that is not less than the Estimated amounts’ (id.), and Plaintiff has identified no provision in the contract that obligates it to do anything specific at all. Thus, the contract could be characterized as a nonbinding ‘agreement to agree or a contract subject to conditions precedent which were never fulfilled.’… Plaintiff’s contentions that it ‘is ready and willing to do the repair work’ and is ‘fighting for Defendant to pay a fair price to repair the roof’ are inadequate to demonstrate the existence of an enforceable contract. On the current record, the Court finds there is no contractual basis for Plaintiff to assert it has standing.

Since the contract was unenforceable, the AOB agreement, which was based on the same underlying contract, was also deemed invalid. The court highlighted that the assignment lacked consideration, rendering it unenforceable.

Even if the contractor had standing, the court noted that the claim was barred due to the Vazquezes’ failure to provide timely notice of the hail damage. The notice was given fourteen months after the incident, which the court found to be an unreasonable delay. The court also pointed out that this delay prejudiced the insurer, as it hindered their ability to accurately assess the damage and investigate the claim. The contractor did not rebut this prejudice.

This case sets a precedent that could have far-reaching implications for contractors and roofers in Colorado. This ruling means that to have standing in court, the contractor must demonstrate a concrete injury. This typically means showing that work was performed for which you have not been paid. Simply having an AOB agreement is not sufficient. Further, the underlying construction contract must be clear, definite, and supported by consideration. Ensure that the agreement specifies the obligations of both parties in detail. An illusory or vague underlying construction contract will not hold up in court.

As a result of this decision, Colorado contractors and roofers working under an AOB may find insurers and their adjusters may no longer agree to adjust claims with them unless the work has been completed.

Will these same issues be raised in other states? From my review, the trend is that the same issues raised in this case are being raised with greater frequency throughout the United States. Indeed, the trend, as exemplified in Florida, is that AOBs are under attack in a legislative and regulatory manner and not just in litigation.

Thought For The Day

Whenever you’re in conflict with someone, there is one factor that can make the difference between damaging your relationship and deepening it. That factor is attitude.
—William James

1 Douglas Smith Builders LLC v. State Farm Fire & Cas. Co., No. 22-cv-10722 (D. Colo. July 24, 2024).