Pitfalls of Preferred Vendor Programs

September 27, 2019
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Insurers over the years have utilized various strategies to reduce their claim payouts.  As policyholder advocates, we have found clients reaching out for help sharing experiences ranging from improper delays, valuation challenges, application of constrained policy interpretation, or flat out denials of covered claims.  The delay, diminish and/or deny mentality of insurers are becoming more and more prevalent in the new environment of bigger and more often disasters.  One old strategy that is resurging on the first-party property arena entails insurers recommending and enticing their policyholders to utilize contractors from their “preferred vendor” programs so they control and reduce scope and costs.  It is a slippery slope for insureds and insurers.

The Benefit to Insurers from Preferred Vendor Programs

The insurers benefit because they typically will have “preferred” rates and standardized methodologies for water, fire, smoke, or other covered loss repairs.  The insurance company’s “preferred vendor” often does not include the complete scope of work and, therefore, under-bids the fair market value of that improper scope.  These “preferred vendors” are incentivized to keep the insurer satisfied, have to follow the insurer’s preferred vendor rules and procedures as they receive large volumes of business from the insurer.  That “preferred vendor’s” cost estimate is what adjusters tend to rely on for determining what they will agree to pay an insured.  The insurers get to control what is paid, when it is paid, and how it is paid all while enjoying the financial benefit of reduced or discounted labor and materials.  The vendor benefits as they receive large volumes of workflow from the insurers resulting in increased revenue streams. 

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On the other hand, sometimes a “preferred vendor” may be advised in advance that they likely will not be retained for the project by an insured.  Their motivation to accurately measure and properly scope the loss is diminished.  This places an insured in a quandary because now the adjuster has to rely or stand behind a flawed estimate to resolve a claim.  This in turn forces an insured to make the tough choice of either (1) retaining the preferred vendor, who likely will submit change orders and increase the original claim measurement once their foot is in the door or (2) retain somebody of their own choice at a higher cost but at the risk of facing out-of-pocket expenses that rightfully should be covered by their policy.  Thus, an insurer can restrict an insured’s ability to truly have a choice in who should or should not complete their repairs or properly measure the loss. 

California Protections for Insureds

Fortunately, California has adopted some protections for insureds, who should be wary of such programs. 

Under California’s Fair Claims Settlement Practices Act (“CFCSPA”), there are specific circumstances that an insurer must comply with on such “preferred vendor” programs.  The language of CFCSPA’s section 2695.9 applies to residential and commercial insurance policies and states, in part, as follows:

(a) When a residential or commercial property insurance policy provides for the adjustment and settlement of first-party losses based on replacement cost, the following standards apply:

(b) No insurer shall require that the insured have the property repaired by a specific individual or entity.

(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.

The “Preferred Vendor” Transaction Does Not Benefit Insureds 

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Unfortunately, in our experience, there is no substantive benefit to the insured for opting into the “preferred vendor” program.  A qualified public adjuster or contractor will confirm that an insured is at a disadvantage when they are forced into such a situation with fewer options.  The lop-sided “preferred vendor” transaction results in a transfer of funds from insurer to its vendor and often sub-standard, improper or incomplete work for insureds as vendors generally attempt to cut corners to keep costs low.  We have experienced this practice more and more since the recent fires in California from the resulting smoke, soot, ash, or combustion-by-product related claims as well as in and other hurricane disasters throughout the United States. 

These tactics reduce an insured’s options to either hire their own contractor or be properly indemnified for their losses.  The insurers essentially direct an insured to utilize the insurer’s vendor.  If the insured chooses not to use the “preferred vendor” they face the daunting task of getting the work completed at a fair market price for more by a qualified contractor of their choice but exposing themselves to out of pocket expenditures as most reputable, licensed, insured and bonded contractors that are not on the “preferred vendor” list will simply reflect the proper market conditions and pricing.

Under such programs, an insurer must become the guarantor of the claim project and, as a result, must accept any liabilities associated with the work performed by its “preferred vendor”.  Once the insured is herded into the “preferred vendor” program, an insurer must, at no additional cost to the insured, ensure that the damaged property is returned to its pre-loss condition with acceptable trade standards for good and workmanlike construction.  It takes a professional loss consultant to ensure that someone is watching out for your interests.

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SunPoint Public Adjuster Inc. Advocates for the Insured’s Benefit

SunPoint Public Adjusters, Inc. (“SunPoint”) is the “Gold Standard” of the Public Adjusting industry.  We comprehensively review and evaluate your policy, immediately deploy a team of experts to assess and quantify your damages.  We customize a strategy around your personal recovery to promptly and properly maximize the resolution of your claim.  Our in-house and other veteran experts are experienced in quantifying and negotiating building, personal property, inventory, or other additional coverages.  We work solely on your behalf to favorably resolve your claim.  Our experts ensure your insurance company does not delay, diminish, or deny benefits that are rightfully owed to you.  Industry experts agree that having a public adjuster like SunPoint on your side early in the process expedites and maximizes your recovery.  

Our team of experts have been advocating on behalf of policyholders for decades. We have handled, managed and successfully navigated claims ranging from homeowner losses; corporate losses in the hundreds of millions of dollars; disaster losses involving government entities and entire municipalities; agricultural and recall losses, and virtually any type of disaster claim that could be imagined.  Our team of Public Adjusters, building cost consultants, inventory specialists, forensic accountants, equipment consultants, and many other experts make up a group unmatched in our industry.  It is easy to be big.  But it takes dedication every day to be the best – we have that dedication.  Our goal is aligned with yours.  To obtain a free assessment of your specific circumstances and recovery please contact us to strategize your best means of recovery according to your policy.

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Authored By

Masood Khan, Esq

SunPoint Public Adjusters, Inc
Masood is one of the principals of SunPoint Public Adjusters Inc., which is one of the premier public insurance adjusting, valuation, and loss consulting organizations in the United States.  His experience as an insurance adjuster, attorney, and Vice President for various companies provides him the tremendous insight to advocate on behalf of commercial professionals and homeowners who have suffered catastrophic losses and need a professional and dedicated expert on their side to level the playing field. Since 1992, Masood has helped numerous individuals and businesses recover from disasters such as firestorms, hurricanes, tsunamis, tornadoes, earthquakes and other catastrophes throughout the United States, Asia, and the Caribbean. For a consult, please call him at 415.271.2612 or by email at masood@sunpoint.us.

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