In recent years, the legal landscape surrounding Assignment of Benefits (AOB) agreements has shifted dramatically, especially in states like Florida and Louisiana. Colorado contractors are also starting to see more specific cases related to AOBs and so must also tread carefully. A recent federal court decision, Douglas Smith Builders LLC v. State Farm Fire & Casualty Co., No. 22-CV-01722-RM-SBP (D. Colo. July 24, 2024), offers a cautionary tale about when a contractor has standing to sue an insurer under an AOB.
In Douglas Smith Builders, the court found that the contractor had not performed any work for which it had not been paid, and therefore had not suffered a “concrete injury”:
“Plaintiff is not asserting that it made any repairs to the Vazquezes’ property for which it has not been paid... 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 also scrutinized the validity of the contract between the contractor and the homeowners. Under Colorado law:
“A contract is formed when one party makes an offer and the other party accepts it, and the agreement is supported by consideration.” Grosvenor v. Qwest Corp., 854 F. Supp. 2d 1021, 1024 (D. Colo. 2012)
But in this case, the contract was deemed illusory:
“The agreement states that ‘in no event is [Plaintiff] required to commence the Service Repairs until the Insurance Company has approved payment...’ and Plaintiff has identified no provision in the contract that obligates it to do anything specific at all.”
This means there was no mutual obligation—a key requirement for a valid contract. If the contractor’s obligation to perform is contingent on the insurer’s approval, and the insurer approves $0.00, then the contractor is left with no enforceable rights.
Because the AOB was based on the same flawed contract, it too was unenforceable:
“The assignment of benefits agreement... is also insufficient to confer standing because the consideration for that agreement is the same underlying contract for repairs... the Court further finds that the assignment of benefits also lacks consideration and is not enforceable.”
To ensure contractors have a valid agreement, they should consider the following:
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AOBs Must Be Backed by a Valid Contract
Contractors must ensure that their agreements with homeowners include specific obligations and clear consideration. A promise to perform work only if the insurer pays is not enough.
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Work Must Be Performed (or Damages Incurred)
Without having performed work or incurred costs, a contractor likely lacks standing to sue the insurer.
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Avoid Illusory Agreements
Contracts that leave performance entirely at the discretion of one party are not enforceable. Courts will view them as “agreements to agree,” not binding contracts.
For additional questions regarding property damaged disputes in Colorado contact our office at (970)297-7999 or visit our state specific website HERE.
