Gene A. Weisberg | Gladstone Weisberg | September 25, 2019
Innocent policyholders can find their claims denied if their public adjuster commits fraud on a claim.
Courts routinely hold that a public adjuster’s fraud is the policyholder’s fraud, even when done without the policyholder’s knowledge. When a public adjuster or lawyer takes over the claim presentation for the policyholder, and supplies false or inflated claim information, there may be sufficient grounds to void the policy or enforce a misrepresentation or concealment policy exclusion.
The focus on fraud investigations typically is whether the policyholder has misrepresented or concealed a material fact in connection with the claim presentation.
However, when a public adjuster is retained, communications typically go through him or her. General agency law binds the policyholder to what the public adjuster or attorney represented on the policyholder’s behalf, even if the policyholder does not know or understand what is occurring. This is because under agency law, an agent’s actions are considered to be the principal’s actions. Thus, if the public adjuster or lawyer is committing fraud, as a matter of law so is the policyholder client.
Most public adjusters are honest. Yet a persistently large number fraudulently inflates repair claims to increase their own fees, which are a percentage of the insurance payout. This problem is magnified when adjusters try to exploit anxious policyholders after major storms sweep through regions.
If the claim submission includes claims for amounts for which there is no proper basis, such that it meets the standard of intentional misrepresenting or concealing of material facts, this could impact the policyholder’s right to recover any amount. Thus, policyholders are well-advised to pay attention to what the public adjuster does on their behalf, ask questions and otherwise make sure they know what is being represented on their behalf.
Public-adjuster fraud a large concern
Such scams are expensive lessons for policyholders. The fraud provides an important reason for policyholders to stay alert, aware and involved throughout the life of a claim. Innocent policyholders can find themselves forced to pay for significant damage repairs out of pocket when their insurer denies a claim.
Insurers also must stay alert, and work to detect repair scams by public adjusters and lawyers before the claims spiral into costly lawsuits that consume time and money, while also breeding ill will.
Public-adjuster fraud thus remains a significant concern for insurers and their policyholders around the U.S. The home damage can be acute. Policyholders are distraught and often vulnerable to come-ons by public adjusters they hire to help handle their damage claims.
National statistics on public-adjuster fraud are in short supply. The arrests/convictions database of the Coalition Against Insurance Fraud, however, lists 133 records about public-adjuster fraud cases specifically, and 705 fraud articles about adjusters generally.
“The court ordered all payments that the company had made were to be repaid, with interest, because of the public adjuster’s fraud.”
Because an agent’s actions are considered to be the principal’s action, when a public adjuster, who acts as the insured’s agent, fraudulently inflates a claim, even if the policyholder did not know it was inflated, it still is fraud when the public adjuster knew. Several states apply this rule in different contexts to public adjusters and lawyers, and recent civil cases reinforce the general rule.
In New York, a policyholder had to repay money the insurer paid for an inflated claim.1 The public adjuster and a company adjuster worked together to make and pay inflated claims, an arrangement for which both later were criminally convicted. The insurance company sued to recover from the insured all amounts paid on the claims, not only the inflated portions but the entire claim. The court ordered all payments that the company had made were to be repaid, with interest, because of the public adjuster’s fraud.
The court relied on the “well-settled rule that a principal, even if innocent, is liable for acts of fraud that are within the scope of an agent’s actual or apparent authority.” The court explained that this general principle applies in the insurance context:
[A] principal who has expressly or impliedly appointed another person to make proof of loss under an insurance policy is barred from recovery, under a policy which provides that it shall be void for fraud or false swearing of the insured after the loss, where the agent is guilty of fraud or false swearing in or in connection with the proof of loss; and this is so even though the insured is ignorant of the misrepresentation and innocent of any intent to deceive or defraud, and [even when] the act of the agent is to the detriment rather than the benefit of the insured.2
The insureds in Chubb v. Consoli argued that public adjusters should be exempt from general agency principles. The court held that there is no reason to justify such an exemption.
More recently, the Federal Court of Appeals in Colorado rejected an argument that a public adjuster’s submitting an inflated claim without the policyholder’s knowledge is outside the scope of the public adjuster’s agency and adverse to the policyholder’s interest, as the insured sought a ruling that he was not bound by the public adjuster’s fraud.3 The court ruled that it was proper to instruct the jury that the policyholders hired the public adjuster and lawyer “to act as their agents in connection with their insurance claim”, and that “the general agency rule that ‘[t] acts or omissions of the public adjuster and attorney are the acts or omissions of the plaintiffs.’”4
The insureds sought to modify that jury instruction to say that only “legal and authorized” acts or omissions of the public adjuster and attorney were the insured’s acts, based on a theory that a principal is not responsible for the agent’s intentional crimes. The court rejected this argument.
Unlike the New York case, where the claim was paid before the fraud was discovered, in the Colorado case, the insurer was suspicious of the claim.
“The insureds fired the public adjuster and attorney after growing suspicious of their integrity.”
The amount claimed greatly exceeded its experts’ evaluation, and the insurer’s engineer determined that the fire that was the subject of the claim did not cause any of the claimed losses. The insureds fired the public adjuster and attorney after growing suspicious of their integrity. Despite all of these factors, the court held that it was proper to give a jury instruction stating that the policyholders were bound by the public adjuster’s acts or omissions.
In both of these cases, the policyholders signed sworn statements in proof of loss, that the public adjuster prepared, claiming inflated amounts. This was a factor in the courts’ determining that fraud was established.
N.Y. court upholds claim denial
In another New York case, the court affirmed a summary judgment for the insurance company when the claim was denied based on misrepresentation and concealment of material facts when a proof of loss, including duplicative items, was submitted.5 The court found that the proof of loss included duplicative items, items in which it demonstrably had no insurable interest, and claimed loss for debris removal expense it later admitted were never incurred. Moreover, even if these items were put aside, of the nearly $675,000 remaining claimed losses, only $275,000 were supported.
The court stated “[o]vervaluation of insured property raises a presumption of fraud in proportion as to the excess, and such presumption becomes conclusive where, as here, the insurer demonstrates that the difference between the amounts claimed in the proof of loss and the losses actually shown to have been sustained are grossly disparate and without reasonable explanation …”6
The insured sought to attribute the overvaluation solely to its public adjuster. The court said that even if that were true, the public adjuster was acting within the scope of his authority when he submitted the claims. The fact that the insured signed the proof of loss, and was the primary beneficiary of the representations in the proof, also were factors. After all, although public adjusters are paid more when the claim payment is higher because they receive a percentage of the policy benefits paid, the majority of the claim payment goes to the insured.
Court: Public adjuster fraud is insured’s fraud
In Washington State, a Federal District Court similarly found that fraud by the policyholder’s public adjuster was fraud by the insured. This warranted claim denial and the right to a refund of money paid on the claim before the fraud was known.