Contractors: What to Do When the Client Keeps the Insurance Money

As a contractor, you count on insurance jobs to keep your business going. It’s tough when claims get denied or underpaid, though. Even worse is when you do everything right, but the client spends their insurance money on something else. You worked hard and did a great job, but now you’re left empty-handed. It’s not fair, and it hurts your business.

Robinson and Henry P.C. values partnerships with contractors. We think you should get paid, and we are here to help. Learn what to do when the client keeps the insurance money.

You Have a Right to Get Paid 

This essential fact seems lost on some deadbeat clients. They understand that you didn’t do the job for free. Still, they assume they can do whatever they like with the insurance check, and will “work something out” when it comes to paying for your services.

As you know, “work something out” often leads to you — and your crew — not getting paid on time, or at all. Fortunately, Colorado law is on your side, and provides ways to collect what your clients owe.

Two Ways to Pursue Payment 

Mechanic’s Lien 

A mechanic’s lien is a tool that helps contractors, subcontractors, and suppliers get paid for their work and materials. It gives you a superseding legal claim on the property you worked on. This means the client must make you whole by a certain date. If they don’t, you can pursue foreclosure of their property to recover what you’re owed.

Often this lien can prompt payment because homeowners cannot refinance or sell their property without paying your lien. However, the homeowner could try to thwart foreclosure with a countersuit for construction defects under the Colorado Construction Defect Action Reform Act.

Details for filing a mechanic’s lien can be found at Colorado Revised Statute 38-22-101. Under this law, any of the following can file or join such a lien to collect payment:

• contractors,
• subcontractors,
• laborers,
• material suppliers,
• architects,
• engineers, and
• surveyors

Filing Deadlines 

Filing deadlines are very strict, so it’s important to follow them carefully:

1. Serve a Notice of Intent to Lien to the owner at least 10 days before filing the actual notice.
2. File the lien within two months — or four months if you completed the work or supplied the materials — of the last work date, and
3. File the foreclosure lawsuit to enforce the lien within six months of having recorded the lien.

Missing one of these deadlines can cause you to forfeit your rights to the lien.

Breach of Contract Litigation 

For all its power, a mechanic’s lien might not be your preferred collection tool. Maybe you don’t want to worry about the strict deadlines. Perhaps you missed the four-month window, or feel the client does not owe enough to justify threatening foreclosure on their house.

But you still want your money.

A breach of contract lawsuit in civil or small claims court is an effective alternative. But remember: if you’re a subcontractor, a breach of contract action won’t be an option unless you have your own contract with the client.

Elements of a Breach of Contract Case 

To prevail in a breach of contract suit, you must show the following in court:

1. The Existence of a Contract: Produce the work contract which establishes that a) an offer was made, b) the offer was accepted (signed), and c) both sides considered what they would gain and give in the contract.
2. Proof of Performance: You must show that you either upheld your end of the contract, or had a justifiable reason for not doing so. Before and after photos of the job can satisfy this element if you completed the work. If you stopped work for any reason, you must provide documented evidence of that reason.
3. The Other Party’s Failure to Perform: In this context, you show that the client has not paid for your services — despite receiving insurance money for it.
4. Damages: You or your company suffered a loss as a result of the client not paying for your services. This can include the cost of materials and labor, plus attorney’s fees and court costs. If your contract had an accruing interest provision, you can collect that too.

Important Documents 

You must preserve certain documents to be able to bring an effective breach of contract lawsuit. These are:

• A copy of the executed contract
• Before and after photos of completed work
• Subcontractor invoices or material expenses
• Proof that insurance paid out on the claim
• Unanswered payment demands sent to the homeowner

Evidence for Breach of Contract Suits 

Evidence improves your chances of success. Key evidence in a breach lawsuit can include:

• A copy of the executed contract,
• before and after pictures of completed work,
• subcontractor invoices or material expenses,
• proof that insurance paid out on the claim, and
• unanswered payment demands sent to the homeowner.

Even if you’ve preserved all this evidence, I recommend hiring an attorney to initiate your lawsuit. 

Deadline: You must file your claim within three years of the homeowner’s breach of the contract.

One More Option: Small Claims Court

What if you cannot afford an attorney, or the amount you’re owed isn’t worth the cost of legal representation? You still have some recourse: small claims court.

If you have a simple case, and you’re trying to collect less than $7500, small claims court is an option. You simply fill out and file forms with the court, pay a filing fee, and have a copy of the forms served on the other party. You don’t need an attorney, but if you retain counsel, he or she can do this for you.

Even if your client owes more than $7500, you can still take them to small claims court. However, you will not be able to collect more than the maximum $7500.

Need Help Collecting Money That’s Owed to You? 

Now that you’re considering next steps, let a member of our experienced litigation team discuss the specifics of your case. We’ll help you find the best way forward in your collection efforts. Are you done waiting? Call 303-688-0944 for your case assessment.