Public Adjuster Not Entitled to Fee When it Fails to Prove What Amounts Were Owed

Chip Merlin | Property Insurance Coverage Law Blog | November 3, 2019

Public adjusters sometimes find themselves in disputes with their own clients. Public adjusters should be paid fees for services they perform as promised in their contracts. Failing to provide those services or performing services which harm rather than help the policyholder will invariably cause the policyholder client to rightfully challenge those fees.

A Texas case decision issued last week is a good study of how things can go wrong. There, the facts of the public adjuster contract indicated the following:

In September 2007, Bedford Hospitality contracted with CCPA to adjust the ‘loss and damages by hail/wind’ on its behalf. In the one-page contract form, which we reproduce at the end of this opinion, Bedford Hospitality ‘agree[d] to pay CCPA … ten percent (10%)* plus sales tax if applicable as agreed of the amount as adjusted of the replacement cost recovered on account of loss on structure, contents, business interruption, loss of use, [and] extra expense.’ . . . Above the underlined ‘ten percent’ was handwritten, ‘To be paid 10% over 130,000.00 al[ ]ready paid.’ Following the description of the payment, the contract identified Bedford Hospitality’s policy number and Colony as the insurer. Finally, next to an asterisk, the paragraph concluded, ‘The total commission payable to CCPA … may not exceed 10% of the amount of the insurance settlement.’

As a side note, the Texas public adjuster statutes provide in part:

Sec. 4102.104. COMMISSIONS. (a) Except as provided by Subsection (b), a license holder may receive a commission for service provided under this chapter consisting of an hourly fee, a flat rate, a percentage of the total amount paid by an insurer to resolve a claim, or another method of compensation. The total commission received may not exceed 10 percent of the amount of the insurance settlement on the claim.

Public adjusters should always make certain their contracts comply to the letter of the law in the state they practice.

In this case, appraisal was demanded, and the trial court noted that the public adjuster refused to go to an inspection and had “abandoned” their adjustment in November 2007. The insurer then refused to go to appraisal and the policyholder filed litigation in 2009. That suit settled for an unsegregated amount which the public claimed 10 percent of the entire settlement.

The trial and appellate court then ruled that the public adjuster was entitled to nothing because it did not prove how much of the settlement was for the “replacement costs” and other specifics of the claim rather than something else, such as attorney fees, interest, or actual cash value.

I am certain that some may read the case as a way out of paying public adjusters their fees because it seems pretty hard for the public adjuster to prove what portion of a settlement is for the contract amounts of a claim versus something else.

To me, I read the case for other practical lessons:

  1. Public adjusters should attend inspections and not abandoned their work. If they do abandon their work, they can expect not to get paid.
  2. When extra contractual damages get paid, it may be a lot wiser to accept an agreed amount of what the claim portion of the settlement is rather than trying to claim entitlement to the entire amount of the settlement which the law will not allow a public adjuster to collect upon.
  3. Public adjusters should try to work as part of the team to help in the litigation. I often win cases because of the public adjuster’s hard work before suit and then after the litigation is commenced. The policyholder client is usually happy and pleased to see the public adjuster just as interested and invested in a case in litigation, and the disputes as demonstrated above do not occur.

This is a rare case because most public adjusters I know are hard-working and not abandoning their responsibilities. When they do, this case is going to provide guidance as to what a public adjuster can expect for a fee.

Adjusting to Public Adjusters: Avoiding Claim Denials

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.

Trial Court’s Award of Contractual Fees to Public Adjuster Overturned

Tred R. Eyerly | Insurance Law Hawaii | April 29, 2019

    A judgment awarding the public adjuster his compensation for work performed under contract was remanded for further proceedings by the Hawaii Intermediate Court of Appeals. Joslin v Ota Camp-Makibaka Ass’n, 2019 Haw. App. LEXIS 155 (Haw. Ct. App. April 5, 2019). 

    A fire destroyed the homeowners’ residence on September 19, 2013. The property was subject to the bylaws of the Association of Apartment Owners of Ota Camp. The Association had a policy with Alterra Excess & Surplus Insurance Company and submitted a claim for all units damaged in the fire. The Association’s adjuster came the following day to inspect the site.

   Separately, Robert Joslin, public adjuster, entered a contract with the homeowners to adjust their claim in exchange for twelve-percent of any insurance proceeds obtained. Over the next several months Joslin pursued insurance proceeds from Alterra on behalf of the homeowners. On December 18, 2013, Joslin filed a complaint with the Insurance Division arguing that Alterra had failed to timely make payments on the claim. 

    On February 10, 2014, Alterra’s third party administrator, Engle Martin & Associates, sent a check to Joslin for $231,940 made out to the Association, the homeowners and Joslin. 

    On February 10, 2014, Joslin sent a letter to the homeowners with the check for their signature. The letter stated that the check would be deposited into a client trust account, the fees would be removed, and a new check issued from Joslin. The letter included an invoice for services totaling $28,992.31. 

    The Association’s legal counsel sent an email to the property manager on February 14, 2014, stating that under the bylaws, the Association was responsible for the repair of the unit. Thus, if the Association signed the check over to the homeowners and they did not repair the unit, the Association would breach its duty and be liable to the new owners of the unit. The lawyer also wrote to Engle Martin, asking that the check be cancelled and reissued as payable to the Association as the sole payee. 

    Joslin then sued the homeowners and the Association, seeking a declaratory judgment that as a public adjuster, he had an equitable lien against the insurance proceeds, a finding that the Association was unjustly enriched, and that the homeowners breached their contract with Joslin. The circuit court granted Joslin’s motion for summary judgment in so far as he was entitled to have his commission paid from the insurance proceeds as a public adjuster under Haw. Rev. Stat. 431:9-230. Further, the homeowners breached their contract with Joslin and he conferred a benefit on the Association, but there was a genuine issue of material fact as to the amount of value actually conferred. Joslin was also awarded fees.

    The Court of Appeals found that Haw. Rev. State. 431:9-230 did not provide authority for Joslin to be paid commissions out of the insurance proceeds paid under the Association’s policy. Instead, the statute addressed an adjuster’s responsibilities as trustee “for all premium and return premium funds received or collected under this article. The plain meaning of “premium” meant the amount paid at designated intervals for insurance. Therefore the appellate court disagreed with the circuit court that Joslin was entitled to commissions based on Haw. Rev. Stat. 431:9-230.  

    Instead, the applicable statute was Haw. Rev. Stat. 514B-143 (f), which provided that “any loss covered by the property Policy . . . shall be adjusted by and with the association. The insurance proceeds for that loss shall be payable to the association . . .” Accordingly, the circuit court erred in granting Joslin summary judgment on the declaratory judgment claim. 

    The appellate court also found that genuine issues of material fact existed as to whether the Association was unjustly enriched by the actions of Joslin, including whether he conferred a benefit upon the Association by causing Alterra to issued a payment for $231,940 and whether the Association’s retention of the money resulting from Joslin’s labor and expertise without compensating him was unjust. There also remained genuine issues of material fact as to whether the Association was unjustly enriched by the activities of Joslin. 

    The court determined Joslin was not entitled to an equitable lien against the proceeds paid by Alterra because the funds had been interpleaded. The funds would be distributed by the Clerk of Court in accordance with the final judgment in the case.

    Finally, the award of attorneys fees to Joslin was reversed. Because he did not have a statutory right to receive his commissions from the insurance proceeds under the Association’s policy and the circuit erred in granting Joslin summary judgment on the declaratory judgment claim, the court also erred in awarding him fees.

    The case was remanded to the circuit court for further proceedings. 

Where There Is Smoke, There Is… A Denial

Edward Eshoo | Property Insurance Coverage Law Blog | April 30, 2019

An Illinois Public Insurance Adjuster recently contacted me regarding an insurer’s denial of a smoke damage claim. The facts were as follows. While a condominium unit owner was using the fireplace in the unit (“unit 1”), smoke began to fill up in the condominium unit above (“unit 2”). The condominium association made a claim to its property insurer for the smoke damage to unit 2. Concluding that the fireplace flu in unit 1 was improperly installed, the insurer denied the association’s claim, asserting exclusions for damage caused by or resulting from (1) faulty workmanship (“the faulty workmanship exclusion”) and (2) the discharge or release of pollutants (“the pollution exclusion”).

In my opinion, the denial was erroneous, and the smoke damage should be covered for the following reasons.

First, the exclusions conflict with the coverage afforded by the Illinois statutorily-mandated standard fire insurance policy (“the Standard Fire Policy”),1 which insures against all “direct loss by fire.”2 The Merriam-Webster online dictionary defines the phrase “direct loss by fire”3 as “loss traceable to fire as the proximate cause: loss that is caused by smoke or by water used in extinguishing a fire.”4 Indeed, in the eyes of the Illinois Department of Insurance, a direct loss from fire also includes mold resulting from water used to suppress a fire. In that regard, in 2002, the DOI issued Bulletin 2002-7, which advised property insurers that mold and fungus-related limitations or exclusions violated the Standard Fire Policy to the extent they excluded or limited coverage for water and mold damage following a covered fire loss.5

Second, Illinois courts have concluded that a pollution exclusion applies only to damage caused by traditional environmental pollution i.e., industrial discharge or toxic waste into the environment.6 Thus, even if smoke is a pollutant, the discharge, dispersal, migration, release, or escape of smoke from a fire in a contained or indoor environment does not constitute the type of traditional environmental pollution contemplated by the pollution exclusion.

Finally, the faulty workmanship exclusion contains a “resulting loss” exception, in that if faulty workmanship results in a covered cause of loss, then coverage is afforded for the resulting loss or damage caused by the covered cause of loss, though coverage is not afforded for the cost of correcting the fault or defect itself.7 In my opinion, a resulting loss is covered even if faulty workmanship is a “but for” cause of the loss. In that regard, the intent of the exclusion and exception is to exclude only that portion of the loss attributable to the faulty workmanship. The exclusion and exception, read together, operate to eliminate the conduct or defect from consideration in analyzing the cause of resulting damage; unless, of course, there is no resulting damage and the loss consists solely of the conduct or defect itself, in which case coverage does not apply. Put another way, only the actual physical peril causing the resulting damage is subject to the coverage analysis.

Here, the improperly installed fireplace flue is eliminated from consideration in analyzing causation. Thus, to determine if coverage applies, the actual physical peril causing the resulting damage, smoke, must be analyzed. As explained above, smoke from a fire in a contained or indoor environment is not subject to the pollution exclusion. Because there is no other provision in the association’s policy excluding it, the smoke damage is covered.8

While I was surprised to see that this insurer denied the association’s claim, I guess I should not be. Many claim representatives I have deposed never heard of the Standard Fire Policy, though it has been in existence in the majority of states since 1943. Incredibly, an Allstate claim representative I recently deposed never read the Standard Fire Policy during his 12-plus years at Allstate, despite the fact that the Standard Fire Policy is included as an endorsement to all Allstate policies written in Illinois. That is ironic, given that insureds (albeit untrained and inexperienced) have an obligation to read and understand their policy according to some courts, but apparently trained and experienced claim representatives need not read and understand them.

What is more, while claim representatives I depose routinely agree that a fair and good claim handling practice requires looking for reasons to support coverage and not simply looking for reasons to deny coverage, most give lip service to this well-established claim handling practice. In this smoke damage claim, it would have been very easy for the claim representative to find coverage for the reasons explained above. Common sense dictates the same. After all, “where there is smoke, there is fire.”
1 Under the powers vested by sections 397 and 401 of the Illinois Insurance Code, the Director of Insurance has promulgated certain regulations which provide for a Standard Fire Policy. 215 ILCS 5/397 and 5/401(a); 50 Ill. Adm. Code § 2301 et. seq. Under the regulations, all fire insurance policies must “conform to such form of the Standard [Fire] Policy or, if another form is used, shall for the purpose of concurrence of contract be deemed to be the Standard [Fire] Policy.” 50 Ill. Adm. Code § 2301.30. In essence, the Standard Fire Policy guarantees a minimum level of coverage that supersedes any attempt to limit or to restrict coverage to less than the statutory minimum. Stated differently, fire insurance policies may not provide coverage less than that set forth in the Standard Fire Policy.
2 Illinois Standard Fire Policy.
3 loss by fire
4 A California Superior Court in Marrufo v. Automobile Club of Southern California, recently concluded that an endorsement limiting coverage to $5,000 for a wildfire smoke loss reported more than 90 days after the start of a wildfire violated the California statutorily-mandated standard fire insurance policy, which insures against all loss by fire. The court reasoned that “all loss by fire” includes smoke from a fire. Link to the decision.
5 CB #2002-07 Filing Procedures and Requirements for Exclusions and Limitations Related to Mold.
6 Seee.g.Am. States Ins. Co. v. Koloms, 687 N.E.2d 72 (Ill. 1997).
7 See Moda Furniture, LLC v. Chicago Title Land Trust Co., 2015 IL App (1st) 140501 (Ill. App. June 29, 2015)(the resulting loss exception affords coverage for damage separate from the cost of repairing the faulty workmanship itself).
8 Even under a narrow interpretation of the resulting loss or ensuing loss exception to the faulty workmanship exclusion, which requires that an unexcluded peril separate and distinct result or ensue from the excluded faulty workmanship, the smoke damage would be covered as a resulting loss. The oft-cited example for the narrow interpretation is if faulty workmanship in the installation of electrical wiring in a dwelling or building result in fire, then the resulting fire loss is covered. See Narob Dev. Corp. v. Ins. Co. of N. Am., 631 N.Y.S.2d 155 (N.Y. App. Div. 1995).

Interesting Public Adjuster Contract Required By Michigan Director of Insurance

Chip Merlin | Property Insurance Coverage Law Blog | April 29, 2019

The Michigan Director of Insurance recently issued the following bulletin:

Bulletin 2019-07-INS
April 17, 2019

FROM: Anita G. Fox
Director Of Insurance
DATE: April 17, 2019


This bulletin supersedes Bulletin 2018-22-INS, dated November 20, 2018.

The Director has approved a new residential public adjuster contract. The effective date of the new contract is May 15, 2019. All licensed public adjusters must begin using the new contract on that date; and must file the new contract with DIFS no later than June 30, 2019.

Here is a copy of the new Michigan Residential Public Adjuster Contract.

Anita Fox is a former accomplished insurance defense counsel and was recently appointed Michigan’s Director of Insurance. Despite her name and background, her appointment does not necessarily mean that an insurance company fox is guarding the insurance henhouse. Time will tell and many experienced insurance defense counsel certainly know how insurance companies can make policies and procedures which are not in the public interest.

The mandated insurance contract has two parts which I found interesting. It requires the parties to indicate which coverages the public adjuster is adjusting and charging a fee. This is important. Some public adjusters wrongly do no adjustment work on the contents or living expenses and instead make their own policyholder customers do all the work, and then charge for it. This contract makes it clear what the public adjuster is required to do, and I applaud this requirement.

The second item is the recognition that the public adjuster is still required to be paid for work even if litigation, arbitration or mediation is necessary. I applaud this as well because the issue comes up every now and then and after the public adjuster does work and disputes arise regarding the amount owed or coverage owed. This contract mandate expressly raises the issue so there is no misunderstanding.