When policyholders suffer a property loss and their insurance adjuster confirms coverage for some or all of the loss, many policyholders will hear the following from their adjuster: “We [the insurer] have a Preferred Service Providers list of recommended contractors you can choose from, all of which have been vetted for quality and reliability. You can also choose your own contractor to perform the repair work, however, if you choose a contractor from our Preferred Service Providers list, we [the insurer] will guarantee the work and arrange repairs if it’s not completed properly.”

Preferred Service Provider (“PSP”) lists are a money saving tool for insurers. Contractors on an insurer’s PSP list agree to complete the scope of repair work approved by the insurer at a price determined by the insurer. In exchange, the insurer sends continuous repair and replacement work to the contractor. Ideally, the insurer achieves its goal of paying less to repair or replace the property, and the contractor achieves its goal of continuous work and income.

Contractors, public insurance adjusters, and insureds in Colorado have approached me, voicing strong opinions, both for and against PSPs. This post is an invitation to open discussion regarding the pros and cons of insurance companies’ use of PSPs.

PROS:

1. Insurance companies save money, repair or replace the property for less, improve loss ratios, and may pass on the savings to their insureds in the form of lower premiums.
2. Insureds gain piece of mind, knowing the insurance company has already vetted the contractor, and knowing their insurer will guarantee the contractor’s work if the work is poor or incomplete.
3. Contractors on the PSP list receive a consistent stream of work and payments from the insurance companies (in the form of policyholders’ insurance benefits checks).

CONS:

1. The insurer (rather than a qualified contractor) determines the scope of replacement or repair work, and because the insurer’s incentive is cost savings the scope of work is likely to be inappropriately narrow.
2. PSP list contractors are more apt to accept the insurer’s scope of work, even if the contractor disagrees, because the contractor wants to continue to receive additional work from the insurer.
3. Contractors offer to “negotiate” the claim on behalf of the policyholder and thereby engage in unauthorized public adjusting.
4. Insurance companies pay only the “prevailing competitive rate” as determined by the insurance companies. This often reduces or eliminates the margins necessary for contractors to make a profit. Once contractors lose profits, contractors either go out of business or leave the PSP list, creating high turnover of contractors on the PSP list.
5. Insurers determine the price of the work and may apply a different Xactimate pricing list to the project which is lower than Xactimate pricing lists used by non-PSP list contractors. This also eliminates contractors’ profit margins and provides incentive for the contractor to complete less than quality work and use less than quality materials in order to avoid losing money on the project.
6. Non-PSP list contractors are unable to submit a “competitive” estimate given insurers’ control over the scope and price of the repair or replacement work.

The above are only a few of the potential benefits and problems. Additional problems, concerns and questionable practices may call for raising this issue with the Colorado Division of Insurance, and Departments of Insurance in other states, in order to determine how insurance companies’ use of Preferred Service Providers impact policyholders.