Credit guru Thea Dudley has spent more than 30 years in LBM credit management. Now she's here to answer your credit and collection questions. Got a question for her mailbag? Contact Thea at [email protected]

Dear Thea,
I am constantly hearing from my customers that they need 60-90 day terms on the jobs they do for insurance work. They tell me the insurance companies take so long to pay them, so they need the extended terms. I have zero knowledge of how insurance works for their jobs and zero knowledge if they are telling the truth. I haven't found a place to get good information. Can you help?
Signed, Feeling Bamboozled in Boulder

Dear Bamboozled,

Drunk people, children, and leggings always tell the truth. If only it were that easy to get a straight answer on the subject of insurance money from either side of the table. You are not alone in your quandary, it is quite the quagmire. (Managed to get two word-of-the-day calendar words in one sentence. Go me!)

Since this dilemma seems to resemble a never-ending story, I reached out to my some friends who actually work for insurance companies to get some clarity. Yes, I did say friends; my world is small.

Contractors have their view of the process. Some have limited issues and can pay me as agreed, others ask for the 90 days, claiming the process is grueling.

Insurance companies have their view of the process, too. According to two of the leading insurers this is the insurance company’s tale of the process:

First, the homeowner calls their insurance company, which starts the claim process. The agent comes out to inspect the damage (sometimes they do it by phone or by homeowner-submitted pics instead) and gives the assessment. This inspection and assessment will determine what kind of damage the homeowner has and the extent of the damage. Depending on the situation (let’s say it is a roof), there will be a deductible and then there is the coverage issue. Many agencies do not cover the cost of bringing the roof up to code if it was not up to code to begin with. They don’t usually pay for an upgrade; insurance is there to make you close to whole, not upgraded.

Depending on what the agency or state requires, the agent may bring a roofer with him to get up on the roof to comply with company policy or regulations. The homeowner may have already had a contractor out to get a feel for what the replacement cost is and what the options are.

Once the insurance agent gathers the information, they give the dollar amount. This is where it gets sticky. The number of ways the money comes out is wild:

  1. Insurance company cuts check to the homeowner prior to the work being done, less a small retention to be held until the project is complete (usually about $1,500 to $2,500). The homeowner is then responsible to pay the contractor. The insurance company will cut the final balance either directly to the contractor or homeowner upon completion. The insurance company may require a final inspection, pictures, a homeowner sign-off, or invoice from the contractor.
  2. Insurance company cuts a joint check to the mortgage company and the homeowner. The mortgage company requires a lien waiver prior to signing off on the check. Alternatively, the mortgage company will deposit the check and cut a check directly to the contractor, once the contractor has submitted a bill and work has been signed off on by the homeowner. (This absolutely could stretch the payment timeframe out).
  3. Insurance company deals directly with the contractor, usually via the terms and conditions of the contract with the homeowner, who gives the contractor authority to deal directly with the insurance company for payment.
  4. Insurance agent may cut a check to the homeowner on the spot. What the homeowner does with the money is up to them. They may never fix the problem.

It's complicated, but at least it's a roadmap. So, where does the process really fall down? At any given point. There are a lot of steps, so there are plenty of opportunities for the wheels to come off the bus and stop the money:

  • If the homeowner drags heinie and does not sign off, uses the money to pay for a vacation, doesn't communicate with either the insurance company or the contractor, then the money slows or stops.
  • If the insurance company doesn’t follow up or the agent is overloaded/slow with the paperwork, that slows the money.
  • If the contractor doesn't follow up, prepare the final billing, pick up the check, jump through whatever hoop the insurance company requires, does a final inspection, or ticks off the homeowner, the money slows or stops.
  • If the contractor is “really busy” and doesn’t have the time to take care of the end of project paperwork process, the money stops.

What about natural disasters? Hurricanes, floods, locusts? Is the excuse that an insurance agency is overwhelmed and behind on cutting checks an issue? According the agencies I spoke with, not really (don't shoot the messenger). The issue there really revolves around getting an agent out there or getting paperwork submitted. Most agencies have offices all over the country that can cut checks once the damage has been assessed.

So, yes, Bamboozled, there is a 90-day need. Sometimes self-inflected, sometimes for circumstances beyond a contractor's control. From the research, it appears extended terms would be an every now and then/need some extra time thing or a lifestyle choice. Fifty shades of payment bondage grey continues.