Definition, How It Impacts Insurance

• An assignment of benefits is a contract that lets a service provider bill your insurance company directly.
• These agreements are often used in industries like healthcare and home repair.
• Assigning your benefits to someone else can streamline payments, but may increase fraud risk.

When you obtain insurance, whether for your health or your home, you’re probably thinking about what the coverage will pay for, not how the payments will be made. 

Policyholders who sign an assignment of benefits agreement allow their insurance benefits to go directly to the service provider. Usually, this eliminates the headache of dealing with an insurance company’s claims department. But it can also open you up to potential fraud.

What is an assignment of benefits agreement?

An assignment of benefits (AOB) agreement is a contract that a policyholder signs to allow a third party to receive their insurance benefits.

“An assignment of benefits is designating who’s going to receive the payment that the insurance company issues after a claim is received,” explains Lauren Winans, chief executive officer and principal HR consultant at Next Level Benefits, an HR consulting firm that helps companies navigate employee benefits including insurance.

Without an AOB agreement in place, the policyholder would pay the other party out of their own pocket, then file a claim with their insurance company to get reimbursed.

For example, if you go to a doctor, you might sign an AOB agreement so that their billing department can deal with the insurance provider directly. Ideally, that would prevent you from having to get involved with the claims department at your insurance company. 

That said, there can still be circumstances where you have to get involved, even with an assignment of benefits agreement — for example, if you owe the difference between what your doctor charges and what the insurer pays.

How does assignment of benefits work?

These AOB agreements can vary depending on factors like the type of insurance policy, the provider, and state laws.

In some cases, an AOB happens automatically. If you go to an in-network doctor, they’re under contract with that insurance company. That contract states that the provider will handle billing and receive payment directly from the insurance company, Winans says.

But with out-of-network providers you might sign an AOB agreement as part of standard check-in paperwork. That way the doctor can still receive at least some payment directly from the insurance company, and then bill you for the remainder. 

Similarly, with property insurance, a contractor or other type of service professional might ask you to sign an assignment of benefits for repair work. When that happens, the service provider would be able to file a claim on your behalf and receive reimbursement from the insurance company. 

The exact terms of an AOB agreement vary based on who’s asking you to sign. Some agreements might be specific to one type of repair or project, whereas others might cover several.

Some agreements go beyond an assignment of benefits and give the contractor full power of attorney rights, says Angel Conlin, chief insurance officer at Kin Insurance, a home insurance provider.

Insurers can also differ in how they handle these agreements. A 2019 Florida law, for example, enables insurers to offer policies that restrict the right to use an assignment of benefits agreement, as long as the policy is offered at a discount. Conlin says Kin Insurance policyholders who waive their assignment of benefits right save an average of 5% on their policy.

“The good news is they get a discount for giving up a right they probably never knew they had and never really want to use,” she says.

Assignment of benefits for homeowners

For homeowners’ insurance, an AOB agreement could be used if a contractor wants to get paid directly from the insurer. In many cases, says Conlin, that happens in a high-pressure situation. 

“You discover that there’s a water leak and your house is flooding. So you quickly call the fastest place you can find,” she says. “Then you’re standing there with some papers on a clipboard in front of you to sign so they can start sucking the water out. Oftentimes, there’s an assignment of benefits included in there.”

Assignment of benefits in healthcare

In healthcare, an AOB agreement might be used to pay a medical professional that you don’t necessarily choose, like an anesthesiologist, Winans says. You may have chosen a surgeon, but the anesthesiologist that gets assigned to you the day of the surgery might bill separately. So, you might be asked to sign an assignment of benefits when you check in.

“You’re essentially signing that anyone who sees me today can accept payment directly from the insurance company, it doesn’t have to go through me as the patient,” Winans adds.

Pros and cons of an AOB agreement

An AOB agreement can make the claims and payment processes easier at times, but there are also some downsides to note. Much depends on the situation, so consider factors like what your insurer allows and what the service provider is specifically asking for. 

Here are some general pros and cons to consider:

Even though an AOB agreement can streamline the claims and payment processes, there can be downsides that come with transferring benefits to another party, particularly with property insurance.

“Because they now stand in the shoes of the insured, they can do everything without asking the insured’s permission,” Conlin says.

For example, a vendor could inflate a claim and commit fraud, she says, causing the claim to get denied and leaving the homeowner unable to get their home repaired. Or, the vendor could sue the insurance company on your behalf for payment on an inflated claim. “So then the insured doesn’t have any idea that all of a sudden they have a lawsuit on their record,” Conlin adds.

In Florida, these types of lawsuits became an issue due to a state law that helped contractors get attorney’s fees paid for by the insurance company. That incentivized some attorneys to work with contractors to obtain AOB agreements and then sue insurers.

“That way, the vendor gets to inflate the amount they’re demanding, and the attorney gets attorney’s fees. So it was this sort of symbiotic partnership between them,” Conlin says. A 2022 Florida law removed this allowance, but contractors are trying to fight it in court.

Canceling an AOB agreement

Depending on the circumstances, including laws where you live, policyholders might have some flexibility to cancel an assignment of benefits agreement. For example, in Florida, homeowners have at least 14 days to back out of an agreement without any penalties. 

Once the grace period passes, there isn’t much recourse. For example, a vendor might file a lawsuit long after the period passes where you can rescind the agreement. In that case, the assignment of benefits agreement stands.

The bottom line

An AOB agreement can make it easy for you to receive insurance benefits without dealing with the claims department at your insurance company. But not all agreements look the same, so read carefully before signing. In some cases, like healthcare, the agreement could work well for all parties. But in other cases, such as home repairs, it might be benefitting the vendor more than the policyholder.

If you’re unsure about what an assignment of benefits agreement means for you, consider talking to a professional. Your insurer should be able to explain what’s allowed in your situation, and external experts, like an attorney, might help you make a more informed decision.