The assignment of benefits (AOB) is standard practice in the US insurance industry. AOB is a contract in which a policyholder grants a third party – such as a medical provider, an auto repair shop owner, or a contractor – permission to bill an insurance company directly for services rendered. While AOB is very convenient for policyholders, it has become quite the headache for insurance companies thanks to widespread, systematic AOB abuse.
In the state of Florida, abuse of AOBs has fuelled an insurance crisis, according to the Insurance Information Institute (III). The III states there were roughly 1,300 AOB lawsuits in Florida in the year 2000. Just three years later, the annual number shot up to 79,000, and by 2018 there were roughly 135,000 AOB lawsuits through November – a staggering 70% increase in just 15 years.
“Abuse of AOBs in Florida has evolved over the past decade,” said James Lynch, chief actuary and vice president of research and education at the III. “It started primarily with no-fault auto insurance claims, but over the past few years it has spread over to homeowners’ insurance and more recently into auto physical damage claims, particularly involving damaged glass.
“I think insurers are probably most concerned with regards to AOB abuse in homeowners’ insurance. Most typical homeowners’ insurance companies will cover water damage claims. If the piping in your home suddenly springs a leak, you, as an insured, have an obligation to get that leak fixed as quickly as possible. You call up a contractor who asks you to sign an AOB. Some contractors might then be abusing that AOB by doing a poor job or an overly expensive job and then billing the insurance company an excessive amount.”
Insurers who choose to dispute inflated AOB bills are up against it in Florida’s unique legal system because it tends to reward plaintiff attorneys. If the insurance companies fight in court and lose, they must pay compensation to the plaintiff’s attorneys, but the opposite is not true if the insurers win their case. So, the cost of the legal expense is prohibitive for the insurance company either way, which is why many insurers opt to settle.
Inflated claims and massive volumes of lawsuits have the predictable result of driving up insurance companies’ legal costs – and insurers are forced to pass those costs on to consumers. In its recently published ‘Assignment of Benefits Report for Florida,’ the III estimates that Florida’s auto and homeowners’ policyholders have paid about $2.5 billion more for insurance over the past dozen years to cover the increase in legal costs triggered by AOB lawsuits.
The broker and agent force is on the frontline when it comes to explaining why premiums might be creeping up, Lynch explained. While the problem primarily revolves around personal lines insurance, it’s equally important for commercial lines brokers to understand the problem.
“At the moment, abuse of AOBs is not such an issue in commercial insurance because commercial policies tend to be more complex and more complicated in terms of who might be eligible to sign an AOB contract,” Lynch told Insurance Business. “That being said, there’s a lot of creativity in the plaintiff’s bar, so that potential is always there. Business owners should be fully protecting themselves by making sure that when they do suffer damages, they’re fully in control of the process of securing contractors and making sure no AOB is undertaken lightly.
“Also, in their trusted advisor role, brokers are often seen by clients as experts in personal insurance as well as commercial insurance, so they might be getting questions about their clients’ personal lines accounts. Therefore, it’s important for all brokers to educate themselves about how the problem of AOB abuse has spread.”