Assignment of Benefits

An assignment of benefits (AOB) is a legal agreement between an insurance policyholder and a third party—such as a contractor, mechanic, or doctor—that enables the third party to file an insurance claim, make decisions, and directly bill an insurer on behalf of the policyholder. As part of the agreement, the policyholder and third party include an AOB clause in the contract to specify the tasks and required information for the claim. The third party then forwards the finished AOB document to the insurance company. 

How Does Assignment of Benefits Work?

Assignment of benefits is a legal concept based on “freedom of contract,” which states that two parties can make a private agreement, including the forfeiture of certain rights. Due to freedom of contract, AOB allows an insurance company to directly pay a third party for services performed on a policyholder’s behalf. For instance, if property damage occurs from a water leak in their rental property, the policyholder can delegate the claim to the contractor they’ve brought in—likely a plumber in this instance—by signing an assignment of benefits. 

Once a policyholder signs an AOB, they are effectively giving up their right to involvement. So, if a policyholder signs an assignment of benefits with a roofing contractor after their rental property’s roof is destroyed by a hurricane, the roofing contractor can work with the insurance company directly to file the claim and receive their money without the policyholder’s involvement. 

While there is a general procedure for the assignment of benefits, it’s important to keep in mind that each state has its own rules, regulations, and permissions. Generally, AOBs are used as follows: 

1. The policyholder and contractor create an AOB clause as part of the contract. 
2. The contractor outlines the work that will be performed. 
3. The contractor sends the completed AOB to the insurance company.
4. The insurance adjuster reviews the claim and resolves any discrepancies.
5. The work is completed and the insurer issues the check to settle the claim. 

The Pros and Cons of AOB

Assignment of benefits should be assessed on a case-by-case basis since the pros and cons are dependent on the situation. Policyholders should consider what their insurer allows and what the service provider is specifically offering. 

Advantages of AOB

Assignment of benefits can offer policyholders advantages such as:

• Streamlined processes. Since the third party handles the billing, the policyholder doesn’t have to be involved with the insurer. Once the policyholder has met their deductible, they are free from paying for services and waiting for reimbursement.  
• No negotiations. The insurer and the third party work out an arrangement regarding payment amounts without the policyholder needing to be involved. 

Disadvantages of AOB

While the assignment of benefits can make the claims and payment processes simpler for the policyholder, there are some disadvantages, including:

• Potential for fraud. Fraudulent AOB activity includes inflated invoices or charges for work that wasn’t done. If a contractor knowingly commits fraud, it could cause the policyholder’s claim to get denied and ultimately result in higher premiums.‍
• Potential for lawsuits. Signing an AOB doesn’t exempt the policyholder from the ultimate responsibility of paying for services rendered, meaning the policyholder could be dragged into expensive litigation if there is a disagreement.