Contingency contracts are widely used in the storm restoration industry, but also widely misunderstood and improperly utilized.
Contrary to popular belief, contingency contracts are enforceable if written correctly. While the general rule that contracts are unenforceable when missing key terms – such as price and scope – is true, when the manner in which these key terms are to be defined is included, the contract can be enforced. The trick is defining price and scope in a way that takes into account those times when the claim is escalated to a PA or attorney and settled without a defined price or scope. If not properly addressed ahead of time, your contract can be deemed unenforceable and all of your hard work is out the window as the property owner walks away from the contract without having paid you a dime.
To help avoid this painful and unfortunately all too common occurrence, we suggest you consider adding language in your contract along these lines:
Contractor agrees to perform all work approved by Owner’s insurance co., and Owner agrees to pay Contractor, immediately upon receipt, the RCV value of the claim, including all proceeds and supplements approved by Owner’s insurance co. for repairs to the Property, Owner’s deductible, recoverable and non-recoverable depreciation, Owner upgrades, needed code compliance items, and General Contractor Overhead and Profit.
In the event a defined scope and price are not identified at the time payment of the claim is made to Owner, the scope shall be the maximum scope of repairs developed by Contractor or others at the time of payment and the price to be paid to Contractor shall be the Xactimate or other industry standard pricing applicable at the time said work is performed.
Of course, there are many other key provisions we recommend for every storm restoration contract, but these are the ones that directly affect enforceability due to the lack of an otherwise defined price and scope.
Final important note: This “alternative” definition of price and scope only works if the Contractor, PA, or consultant has prepared a comprehensive damage estimate. Whether done in conjunction with a PA or other consultant, this key step should be performed well prior to settlement of the claim and provided to the property owner and any others involved in obtaining settlement.
© Karen Ensley and Brian Benitez, Ensley Benitez Law, PC, 2021. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. Ensley Benitez Law, PC, will represent you only after being retained and that agreement is made in writing.