Do’s and Don’ts to negotiating with insurance on construction projects
As a construction lawyer, I deal with payment issues for my clients on a day-to-day basis. There are many tools, tips, and best practices that I wish my clients would use before the problem hits my desk.
These negative situations would go a lot smoother or possibly not happen at all if these “Do’s and Don’ts” are implemented in the workflow of a company.
Why are insurance claims made on construction projects?
Making an insurance claim on a construction is not something that contractors like. There are two ways to make claims, you can make a claim against another contractor’s insurance policy or you can make one against your own policy. Sometimes there is a need for both!
Further, there are different situations when claims can or should be made on a construction project.
The number one reason why insurance claims are made on a construction project are for claims where damage has occurred due to the work of a contractor. Examples include:
- Plumber installs pipe, water heater, or other plumbing fixture and it leaks all over the building causing water or flooding damage;
- Electrician installs wire or electrical fixtures and it causes a fire on the project;
- Roofer improperly installs a roof system and there is a leak causing damage to the structure;
- Heavy equipment operator mishandles the excavator, bulldozer, lift or crane and causes property or bodily damage to the project or people working on the project;
- A storm comes along and causes damage to the building, structure, or materials;
The list goes on and on.
The key here is that the damage is a result of the work of a contractor or subcontractor.
Insurance does not cover bad work. So in the instance of the roofer improperly installing the roof, the insurance policy will not pay to replace the roof, but it will pay to fix all the damage caused by the leak. This is an important distinction that I see a lot in practice. Clients want the roof replaced.
Organized clients have the most success with insurance claims
Construction companies who have the most success with insurance claims are the ones who are the most organized and efficient.
These are companies who use construction management software. These are companies who have written contracts, written change orders, chronological photographs of the project, follow written policies and procedures, and use technology in the day-to-day workflow.
The reason these companies have more success is because there is a wealth of data to present to the insurance company about the claim. Like lawyers, insurance companies love big data.
The only way to fight an insurance company and get all the money your company deserves is to have a well documented claim file. This comes from a solid paper trial. In today’s construction market, using management software, smart phones, tablets, and computers is the only way to store all of this information properly. Using cloud based software is an even better method because your data will never be erased.
Do’s and Don’ts regarding negotiating with the insurance company for your construction project
Now to the tips of how to make your claims with the insurance company when an occurrence arises…
Haggling with an insurance company can be an unwelcome but necessary part of your job—your employees (and your family) depend on you to bring in revenue from work you’ve done.
How you and your company handle yourself with insurers may mean the difference between a speedy payout and delayed or unfair compensation. Negotiate smarter by reviewing these rules of thumb:
- DO write a compelling demand letter
To make a claim, you may need to present the insurance company with what’s technically called a demand letter (or letter of demand), including proper supporting documentation.
You can send one on behalf of your company or you can hire a construction lawyer to do this for you. Obviously, I will always recommend a lawyer handle a demand due to the fact we can maximize any recovery due to experience and comparing quantum of other similar cases.
This notice requests compensation or restitution of some sort. Ideally, a qualified attorney should help you with this process—subtleties of language are important. Aim to emphasize:
- The nature and extent of your losses, such as loss of revenue, broken equipment, and missed work opportunities.
- Why you believe another person or entity is legally responsible for those damages.
- How much you want from the insurance company to settle your claim
- Backup up data such as invoices, contracts, emails, photographs, videos, correspondence, and purchase receipts are all important to send as evidence of the claim.
Your attorney can help you compile records, letters, receipts, contracts, or anything else that will support the arguments you describe in your letter. Send photocopies to the insurer, and keep the originals for yourself. If you use software to store all of this information, then it makes your or your attorney’s job that much easier.
After submitting this demand letter, and depending sensitively on the details of the claim, the rest of the negotiation process could go quickly. In a best case, it might just involve a few phone calls with the insurance company.
However, if the claiiam is disputed, then the negotiation process could last a long time and may even require a law suit against the insurance company if an impasse occurs.
- DO know what to expect
The first call with the insurance adjuster can be scary, since so much is on the line. If you inaccurately represent what happened—or exaggerate damages or details—you could weaken your claim.
Understand that insurance companies aren’t “evil.” However, they are businesses. The more they pay out to claimants like you, the less profits remain for the company. To that end, insurance companies often engage in subtle (and sometimes not so subtle) tactics to minimize payouts on claims.
Remember that most if not all calls to the insurance company are recorded. If they are not recorded, then the insurance company may ask for a recorded statement.
For instance, the adjuster may dangle an immediate “lowball” settlement amount. If your company really needs the money for cash flow reasons, you may be tempted to take the offer.
Negotiating intelligently, however, sometimes means seeing the bigger picture. A cash infusion now can be useful. But is it as useful as a truly fair settlement that takes a few weeks (or even months) of back and forth?
Before the initial phone call with a claims adjuster, you might receive a “reservation of rights” letter. Don’t be alarmed. This simply tells you that the insurance company is investigating your claim, while reserving a right not pay it if it determines the claim does not fall under the policy.
Remember, insurance companies make a lot money by holding out on payment of a claim. They make money on the “float” and they make money by winning the battle of attrition. They know you will eventually take less because you need the capital to run your business.
Insurance companies use technology to maximize their exposure in a claim, therefore you should use it as well to maximize your potential claim.
- DO have a settlement amount in Mind
When compiling your demand letter with your attorney, to the best of your ability given (likely) incomplete information, clearly determine what your claim is worth. Before negotiations, decide on a minimum acceptable amount. This figure is only for your information, so you know how to strategize. Do not reveal this number to the insurance company!
Read also: Construction management – the ultimate guide
Remember to analyze your best day in court and your worst day in court. Then that will help you formulate a “home run” number, a “middle of the road” number and a “bottom line” number. This will be your negotiation range with the insurance. Also, note that many times your bottom line will need to drop in order to get a settlement.
- DON’T (necessarily) accept the first offer
If an insurance adjuster makes an offer that’s too low, don’t accept it just because you think must or because you’re paranoid about short-term cash flow. As discussed above, insurance companies have tremendous incentive to minimize claim payouts.
And there’s often a fair bit of wiggle room. If an offer seems too low, ask the adjuster to justify it. This will give you the opportunity to respond to any of the perceived weaknesses of your claim.
Insurance companies invented the game of back and forth offers. They love this practice because they know the claimant will eventually get tired and give up.
- DO point out the emotional aspects of your case (as appropriate)
Logic obviously matters during the negotiations process.
You need to construct a sound cause-and-effect argument that explains why the insurance company needs to compensate you some XYZ amount. However, the discussion doesn’t have to be bloodless. Insurance adjusters are people, too. The vast majority got into this line of work to assist others.
Without playing up your suffering for points, you might genuinely reveal your challenges. What will nonpayment mean for your family? For your company? For everyone who depends on your company? Showing vulnerability—strategically, of course—can help you reach a fair outcome.
- DON’T get angry
Remember that claims adjusters are representatives for a business. They’re doing their jobs. It won’t help to take out your frustrations with the company’s tactics on the messenger.
Cool heads prevail and that is why attorneys do such a good job at getting you the maximum for your insurance claim. Often claimants will get angry and this will stall or end negotiations. Time is on the side of the insurance company, don’t get angry and give them more time!
The need for insurance claims on a construction project are real and happen all the time. The big takeaways here are to make sure before the need for a claim to be made, you and your company are using technology to document the project and your work. This is always best practice.
Then remember to be comprehensive with your claim. Even if you choose not to use an attorney, make sure you include everything in your claim that will support why your company is entitled to the full demand amount.
Construction insurance claims are complicated. Just as I would not try to install a roof myself, a construction company should not try to handle an insurance claim. Let the professionals do this.
About the author: Article by Seth J. Smiley, construction and injury attorney licensed in Louisiana, Texas and California. Contact Smiley Law Firm if you have any questions or comments on this article or construction insurance claims.