I would like to continue addressing the “preferred contractor program” or “quality vendor program” that is implemented by many insurance companies. As discussed in What Role Does an Insurer’s "Preferred Contractor Program" Play in a Bad Faith Lawsuit? Part II, some of the reasons insurers might choose to set up such a program is to save money when the approved contractor is used or to exert some sort of control over the type and quality of repairs conducted and materials used. In What Role Does an Insurer’s "Preferred Contractor Program" Play in a Bad Faith Lawsuit?, I evaluated a case where the insurer was found not to have any liability in connection with a contractor’s work – a contractor that had been selected from the carrier’s preferred contractor program. A decision from the Arizona Court of Appeals has an interesting opinion on what happens when the Quality Vendor Program does not work as planned.

In Tritschler v. Allstate Insurance Company and Better Way Services, Inc., 144 P.3d 519 (2006), Tritschler’s home was insured by Allstate. Rain entered the insured’s home and caused damage to various portions of the residence. Allstate had implemented a Quality Vendor Program and Better Way was a participating vendor. When Allstate received notice of Tritschler’s claim, Allstate turned to its Quality Vendor Program:

Allstate contacted Better Way to conduct emergency repairs on the home and told Tritschler that Better Way was in its “Quality Vendor Program” for repair services. Better Way prepared an estimate of needed repairs that totaled $44,471. Included in this estimate were standard ten percent profit and ten percent overhead charges by Better Way. Tritschler signed a work authorization form allowing Better Way to receive payment of his insurance proceeds from Allstate, and Better Way commenced work on Tritschler’s home.

After Better Way began conducting the repairs, Better Way left the job because Tritschler became dissatisfied with the quality of the work. Tritschler complained to Allstate about Better Way’s workmanship and said he intended to complete the rest of the repairs himself. Allstate offered to allow Tritschler to “cash out” his repair claim and Tritschler accepted. Allstate paid Better Way $26,210.39 without investigating Tritschler’s claims that Better Way’s work was substandard. Allstate paid Tritschler the difference between the amount of Better Way’s estimated cost of repairs and the amount that Allstate paid Better Way. Allstate did not, however, pay Tritschler the amount of Better Way’s estimate designated as overhead and profit charges.

Allstate…included with its check a note stating: “If you decide to use a general contractor, please submit signed contract or paid bill and [Allstate] will reimburse the contractor overhead and profit.”

Tritschler later retained an independent adjuster who submitted an actual cash value proof of loss and made a demand to Allstate for an additional $36,377 for the “warranty claim” that included $7,967 for a general contractor’s overhead and profit. Allstate reimbursed the insured in the amount of $3,757.90 based on a mathematical error in the original calculation and paid an additional $5,320.35 based on Allstate’s estimate of the remaining repairs. Allstate, however, but refused to pay the contractor’s overhead and profit.

Tritschler sued Allstate for breach of the insurance contract and bad faith based on its failure to pay a general contractor’s overhead and profit. Tritschler, the insured, also sued Better Way Services, Inc., the general contractor, for breach of implied contract.

Although there were several others issues evaluated by the Arizona Court of Appeals, the Court’s analysis regarding the Quality Vendor Program included the following:

Under that program [Quality Vendor Program], Tritschler did not receive an actual cash value payment, but he did not need that payment because Better Way agreed to repair the damaged property and to be paid directly by Allstate. On the other hand, when Better Way left the job, the Quality Vendor Program was no longer applicable, and any further payment was to be determined by the terms of the policy. As we have construed the policy, Allstate was obliged to pay the actual cash value of the damaged property.

The Arizona Court of Appeals’ decision in Tritschler sheds light on how a Court might interpret the manner in which an insured in Arizona might still collect insurance proceeds from an insurer when the vendor selected from the Quality Vendor Program doesn’t come through on the job. This is another facet of bad faith litigation that policyholder’s attorneys should consider when litigating bad faith against an insurance company whose preferred contractor program was involved with the repairs to the insured property.

Please tune in next week for more bad faith information.