Construction Financing and Factoring of Insurance Receivables—MMA Related Case Sheds Light on Factors in the Property Insurance Claim Industry

Property damage insurance claims funding by factoring companies is a relatively recent phenomenon in the property insurance claims industry. The lawsuit between Insured Advocacy Group, LLC (IAG) and PCG Claims, LLC1 serves as an example of the challenges that insurance restoration firms and other associated companies in the property claims business may face. This case highlights that these financial arrangements are rooted in complex financial agreements and required operational practices. The case reveals the potential pitfalls when contractual obligations are unmet and that the use of factors (or factoring companies) is complicated and not a panacea.

The case centers around a factoring arrangement between IAG and PCG Claims. A factoring company, such as IAG, provides immediate cash to a business by purchasing its accounts receivable at a discount. In this case, PCG Claims, a property insurance estimating company, entered into an agreement with PMC Funding 2021 LLC, which subsequently assigned its rights to IAG, the factoring company. The purpose of the agreement was for IAG to purchase certain accounts receivable from PCG, primarily related to estimates prepared by PCG at the request of the law firm McClenny, Mosely & Associates PLLC (MMA).

However, this transaction became problematic when MMA was accused of engaging in fraudulent activities that severely undermined the value and collectability of the accounts receivable purchased by IAG. This development led to a series of legal battles, culminating in this lawsuit filed by IAG against PCG Claims. The problems of MMA have been well documented in McClenny, Moseley & Associates, aka MMA, Files Bankruptcy: Texas Lawyers Involved With Mass Hurricane Advertising Scheme Seek Reorganization, and The FBI Is Publicly Seeking the Identification of Victims of MMA.

Factoring is a common financial tool used in many industries. It is relatively new in the insurance restoration industry. By selling their accounts receivable to a factor, these firms can obtain immediate liquidity, allowing them to continue operations and manage cash flow more effectively. However, as illustrated by this case, factoring arrangements can also introduce significant risks, especially when the underlying receivables become uncollectible due to factors beyond the firm’s control.

In the case of PCG Claims, the estimates prepared for MMA were rendered essentially worthless following the legal actions taken against MMA, including a stay on hundreds of lawsuits and the suspension of MMA’s lawyers. These legal developments not only disrupted MMA’s ability to collect on these claims but also left PCG and its factoring partner, IAG, in a precarious position.

Several critical legal issues are at play in this lawsuit, each with significant implications for the broader insurance restoration industry:

Breach of Contract: IAG alleges that PCG Claims breached their contract by failing to ensure that the accounts receivable sold to IAG were collectible. This breach is central to the lawsuit, as IAG contends that they are owed over $774,000 due to PCG’s failure to deliver on their contractual obligations.

Breach of Warranty: Alongside the breach of contract claim, IAG also asserts that PCG breached several express warranties in the Purchase Agreement. These warranties included assurances that PCG had good and marketable title to the accounts and that the accounts were originated in compliance with all applicable laws. The failure of these warranties, according to IAG, directly resulted in their financial losses.

Failure of Consideration and Rescission: IAG argues that due to the fraud uncovered in MMA’s operations, the accounts receivable purchased under the factoring agreement lost all value, constituting a failure of consideration. As a result, IAG is seeking rescission of the contract, which would effectively unwind the agreement and require PCG to return the funds paid by IAG.

The lawsuit between IAG and PCG Claims underscores several important considerations for restoration firms, particularly those that rely on factoring and engage in complex contractual relationships with law firms and other third parties. One of the primary lessons from this case is the critical importance of due diligence. Before entering into factoring agreements or other financial arrangements, restoration firms must thoroughly vet their partners and assess the risks associated with the receivables they plan to sell. This includes understanding the legal landscape in which their partners operate and being aware of any potential red flags that could impact the collectability of their receivables. In this case, the allegations of fraud against MMA were a significant risk that, had they been identified earlier, might have led PCG to reconsider its relationship with MMA or, at the very least, implement safeguards to protect its financial interests.

The dispute also highlights the need for clear and enforceable contracts. Restoration firms must ensure that their agreements with factoring companies and other third parties, including AOBs with policyholders, are detailed and robust, with explicit terms governing the rights and obligations of each party. This includes warranties and representations that protect against the possibility of fraud or other issues that could render receivables uncollectible. In this case, the estimating company never had a right to an AOB from the policyholder, and neither did MMA.

There are other risks as well. I am certain that the policyholder attorneys who took over the cases are not happy to be extorted by estimators refusing to turn over evidence of damage. Exhibits to the complaint describe decisions by PCG to withhold estimates from insurance companies and property owners unless payment was secured, reflecting a strategic response to the legal challenges posed by MMA’s actions.

The lawsuit between IAG and PCG Claims serves as a cautionary tale for the insurance restoration industry. While factoring can provide valuable liquidity to firms, it also introduces risks that must be carefully managed. Restoration firms must exercise due diligence, ensure contractual clarity, and remain vigilant in navigating legal and regulatory challenges. The nearly 20% factor fee charged in this case also reduces the margins of restoration contractors and will certainly be raised by insurance companies to prove that the repair costs are unduly high because the contractor is not financially sound or just trying to pass those finance costs onto the insurer.

The retail name for the factoring company is ClaimPay. On its website, it notes the following:

One of the primary focuses of ClaimPay is to assist Property Damage Providers who face cash flow constraints due to unpaid account receivables from insurance companies. In such cases, ClaimPay offers advanced funding to these providers while they await the collection of their receivables, regardless of the duration it may take.

ClaimPay specializes in providing cash flow solutions to property damage providers such as mitigation and remediation companies, mold and engineering assessors, roofers, and other professionals involved in services related to AOBs, LOPs, or Service Agreements.

By acting as a funding partner, ClaimPay ensures the stability of businesses and helps them overcome cash flow limitations, thus supporting their long-term success.

I was surprised by the number of transactions ClaimPay has entered into:

ClaimPay empowers restoration businesses with financial freedom and stability, offering unlimited growth potential without traditional bank loans. Convert insurance claims into cash in 3 easy steps: 1) apply on claimpay.net, 2) get pre approved for funding, 3) submit claims for funding .

For over seven years, ClaimPay has funded over 200 property damage providers, exceeding $4,000,000 of total funding weekly. We’ve successfully supported over 120,000 claims, actively contributing to the restoration industry’s growth in various states.

Allianz is a large insurance company that offers a competing product to factoring known as Trade Credit Insurance. It notes that when a factor takes 5% of a receivable, that can have a significant impact on long-term profits. I am certain long-term financing of 19-20% of a receivable is not good for business.

One final note: The estimating company was providing its services to MMA on an hourly basis, not to exceed a certain percentage of the recovered amount. I am certain that insurance defense attorneys will note that this type of arrangement will generally disqualify the estimator from being able to provide an expert opinion because there is a contingent element to it. Thus, the estimates provided in this case were essentially worthless to everybody.

1 Insured Advocacy Group v. PCG Claims, No. 1:24-cv-05532 (SD NY 2024).