Florida Department of Insurance Says Anybody Hired By a Licensed Public Adjuster Can Participate in Preparing an Insurance Claim By Writing the Insurance Estimates of Damage

Chip Merlin | Property Insurance Coverage Law Blog | October 18, 2018

The Florida Department of Financial Services (DFS) has issued an email authorizing Florida licensed public adjusters to hire anybody to make estimates of damage. This email corrects my latest two blogs which indicated that the OIR wanted to prevent those not licensed from working on insurance claims by determining valuations of loss and estimates of damage.

How one can write an estimate of a building, equipment or personal property loss without investigating the loss is beyond my understanding—but not beyond those running the Florida Department of Financial Services. The Florida DFS will allow any third party, including a person who has lost his or her license to work as a public adjuster, convicted felons, unlicensed contractors, contractors who may have lost their licenses, and unqualified people, to write estimates of damage. The only requirement is getting a public adjuster to hire them.

Here is the text of an email from the DFS in response to a public adjuster’s inquiry prompted by my prior two posts on this matter. He lists no qualifications for the third-party a public adjuster can hire to write an estimate for a first party insurance claim:

Hiring a third-party to prepare an estimate on your behalf would not be a violation, so long as that individual provides the estimate to you and does not does not otherwise solicit, adjust, investigate, or negotiate for or attempt to effect the settlement of a claim.

Thank you,

Jeffrey L. Young, MPA
Regional Administrator
Bureau of Investigation
Division of Insurance Agent & Agency Services

The impact of the Regional Administrator’s ruling cannot come at a better time for those who do not have public adjuster licenses and have no intention of obtaining one but are eager to start working on Florida insurance claims. They can make a deal with a public adjuster for a percentage of the settlement or of the estimate amount and provide those estimates to the public adjuster.

So, let’s look at the practical impact. Public adjusters who do not have enough in-house manpower or finances to hire or oversee licensed public adjuster estimators can simply hire third parties to make as many estimates as possible. Those public adjusters essentially turn their businesses into solicitation and negotiation businesses. They will give up a part of their fee but make a lot more money because they handle matters in volume.

For policyholders who are supposed to be protected by this regulatory scheme, this may not be so good. They will hire a licensed professional to assist in the claim, but the loss evaluation estimates can be done by a person who is not subject to the professional competence and integrity requirements that are required for the job. In sum, the DFS does not care who determines the amount of estimated loss so long as it is sent to the insurance company by the licensed public adjuster.

For all of you who were upset with me for explaining who could not write estimates for insurance claims in Florida, including those with criminal backgrounds, I apologize because I must have been mistaken. The law that I helped to draft is apparently not the law—at least according to those who are supposed to enforce it.

Obviously, I do not think this is best for policyholders. I have always suggested that the public adjustment trade should look at rules and regulations from the viewpoint of the policyholder—What is best for the policyholder even if it is not economically best for the public adjuster in the short term? The profession of public adjusting certainly took a step backwards with the Department’s view of the matter.

Is a Repair Cost Estimate Relevant When Repairs Are Based on Actual, Incurred Costs?

Edward Eshoo | Property Insurance Coverage Law Blog | April 7, 2017

I recently was involved in a lawsuit in which the insurer paid for some of the costs incurred by the insured in repairing his building following a loss. The insurer’s payment was based on a repair cost estimate prepared by its independent insurance adjuster. The insurance policy provided for payment of a loss on a “replacement cost” basis. The only limitations or conditions on the payment of replacement cost benefits were (1) the repairs must be made within a reasonable time after the loss and (2) the payment will not exceed the amount spent on the repairs. Both requirements were satisfied in my case. The repairs were completed within a few months of the loss and the insured was not seeking to recover more than the amount spent on the repairs.

Anticipating that the insurer would use its independent adjuster’s repair estimate to demonstrate that the amount spent on repairs was excessive and unreasonable, I filed a motion in limine to bar its use at trial.1 Although the matter settled before the court ruled on it, the motion set forth the following arguments why a repair cost estimate, which is nothing more than a hypothetical or theoretical guess of the probable cost of repairs,2 is simply not relevant when repairs are based on actual, incurred costs.3

First, the policy did not limit or condition a replacement cost payment to the necessary amounts spent to repair or to replace the property, like many property insurance policies do.4 Nor did the policy limit or condition its replacement cost payment to those reasonable amounts spent to repair or to replace the property, as some property insurers have.5 Because the policy did not limit or condition the insurer’s replacement cost payment to only those reasonable and necessary amounts spent to repair or replace the property, the estimate prepared on the insurer’s behalf was irrelevant to the extent it was offered to demonstrate the amount spent on repairs was unreasonable and unnecessary.

Second, under Illinois law, it is impermissible for a court to “redraft insurance policy language to fit the preferred interpretation of the drafter, particularly after the insurable event has occurred and a claim is pending.”6 If the insurer, as the drafter of its policy, wanted to limit or condition its replacement cost payment to only those reasonable and necessary amounts spent to repair or to replace the property, then it could have and should have drafted it accordingly. It did not.

Finally, none of the cases cited by the insurer supported the use of an estimate as a basis of measuring replacement cost when property is repaired or replaced after a loss.7 Rather, the cases established that: a necessary condition to recovering replacement cost benefits is the actual repair or replacement of property; when property is not repaired or replaced after a loss, the insured’s recovery is limited to actual cash value; and, in calculating actual cash value, defined in Illinois as repair or replacement cost less a deduction for physical depreciation, it is permissible to use an estimated repair or replacement cost as the starting point to ascertain actual cash value.

If the insured did not repair the loss, then he would be limited under the policy to actual cash value, in which case the estimate would be relevant. But, the insured repaired his property, triggering replacement cost benefits. Therefore, an estimate is simply not probative of, and is irrelevant to, determining replacement cost when property is repaired or replaced after a loss and the incurred costs to do so are certain and verifiable.8
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1 Motions in limine enable the court in advance of trial to rule on the admissibility of evidence, which promotes a trial free of prejudicial material and avoids highlighting the evidence to the jury through objection. Konieczny v. Kamin Builders, Inc., 304 Ill. App. 3d 131, 709 N.E.2d 695 (1999).
2 Dictionary.com defines an “estimate” as “an approximate judgment or calculation, as of the value, amount, time, size, or weight of something.”
3 Under Illinois Rule of Evidence 401, relevant evidence means evidence having any tendency to make the existence of any fact that is of consequence to the determination of the action more probable or less probably than it would be without the evidence. Under Illinois Rule of Evidence 402, evidence which is not relevant is not admissible.
4 See, e.g., Area Erectors, Inc. v. Travelers Prop. Cas. Co. of Am., 2012 IL App (1st) 111764, 981 N.E.2d 1120 (Ill. App. 2012).
5 See, e.g., C & S Mfg. Corp. v. U.S. Fire Is. Co., 993 F.2d 1304 (7th Cir. 1993).
6 Lyon v. Lumbermens Mut. Cas. Co., 207 Ill. App. 3d 730, 735, 566 N.E.2d 388, 392 (1st Dist. 1990).
7 Higginbotham v Am. Fam. Ins. Co., 143 Ill. App. 3d 398, 493 N.E.2d 373 (1991) and Carey v. Am. Fam. Brokerage, Inc., 391 Ill.App.3d 273, 909 N.E.2d 255 (2009).
8 See, Edgewood Manor Apt. Homes, LLC v. RSUI Indem. Co., 733 F.3d 761, 775 (7th Cir. 2013) (“The repair requirement has a more concrete function: It ensures that replacement cost is valued accurately. In the absence of actual repair, the claim would be based on estimates; when actual repairs are completed, the replacement-cost valuation becomes certain and verifiable.”).

Depreciation of Labor Class Action — Minnesota Supreme Court Oral Argument

Wystan Ackerman | Robinson & Cole | November 8, 2015

I’ve been following closely a series of class actions around the country alleging that, in calculating the “actual cash value” of property damage under a homeowners or commercial property insurance policy, insurance companies should not be applying depreciation to the labor component of the replacement cost of a damaged structure. When insurers estimate “actual cash value,” they typically estimate the replacement cost of the damage based on the materials, labor and other costs necessary to make the repairs, and then apply depreciation to that amount, to arrive at the actual cash value.

Plaintiffs’ lawyers have filed numerous class actions arguing that labor costs are not depreciable, and that the actual cash value thus should be calculated based on the full cost of labor and depreciated value of materials. If you haven’t been following this issue and would like more background, I suggest you read my August 10, 2015 and March 29, 2015 blog posts. This is, in my view, the hottest area in insurance class actions right now.

One of the benefits of modern technology for those who like to follow important cases closely nationwide is that many state supreme courts are now recording oral arguments and posting them online, or in some instances streaming the argument live (as the Massachusetts Supreme Judicial Court did in a case I recently argued).

The Minnesota Supreme Court recently heard oral argument on the issue of depreciation of labor costs (on a certified question from the Minnesota federal district court) in Wilcox v. State Farm Fire & Casualty Company. (In the interests of full disclosure, I wrote an amicus brief for the American Insurance Association in this case.) The oral argument video was recently posted online. The court dug deeply into both sides of the issue. Here are a few observations I had:

Minnesota Supreme Court photo

  • The court focused some of its initial questioning on how an appraiser of real estate, using the “cost approach” to valuation, will depreciate the full value of the building, including the labor component, as economically appropriate. Plaintiffs’ counsel appeared to concede that this approach is correct for a total loss, but argued that it is not appropriate for a partial loss. Those justices who commented on that issue did not seem persuaded by his argument that partial losses should be treated differently in this respect.
  • There was some discussion about a hypothetical where a roof was nearing the end of its useful life, with some justices appearing to take the view that it would not be an accurate method of calculating the actual cash value of the roof to apply depreciation only to the materials and not to the labor component.
  • Some of the court’s questions focused on how the State Farm policy at issue (like most homeowners’ policies) provides replacement cost coverage if the insured makes the repairs. One justice appeared to suggest that this demonstrates that State Farm is correct about what is intended by actual cash value.
  • There was a fair amount of discussion about how Minnesota’s adoption of the “broad evidence rule” for determining actual cash value impacts the question presented. One justice pointed out that the “broad evidence rule” allows for methods of calculation other than replacement cost less depreciation, which is the method that State Farm used here. He suggested that there may be circumstances where there are issues of fact.
  • One justice asked about a hypothetical scenario in which the repairs involved $200 of materials, but $10,000 of labor, and how that loss would be treated…

To finish reading this article

Insurance Appraisal as an Insurance Claim Dispute Resolution Tool

Eugene Peterson | Advise & Consult, Inc.

Over the past few months, I have been amazed, even surprised to learn that many legal professionals are totally unaware of an alternative method of dispute resolution for insurance property claims, when the adjuster and the insured cannot come to agreement. We all know of arbitrations, mediations and civil law suits, yet few are aware that there is yet another option available.  It is referred to as an “Insurance Appraisal.”

It is used when agreement cannot be reached in the settlement of a property claim dispute.  It has the potential of resolving the dispute outside of the standard court system, thus saving time and expense associated with a standard judge/jury law suit.

The process in many ways is similar to arbitration as it has most of the same advantages and disadvantages, but differs from arbitration in the number of people that set the value of the loss.  In arbitration, a single individual, the Arbitrator, rule on, or judges the dispute.  In this insurance dispute resolution process, three individuals, referred to as the panel, are charged with the responsibility to set the value of loss.

Of note, not all property insurance policies have the Insurance Appraisal provision written in them. So it is important to check the policy first before thinking about using this tool.

In the Insurance Appraisal process, the insurance company and the insured each are responsible for the selection and payment of fees and expenses of their representative.  This person is referred to as an “Appraiser.”  Do not confuse this type of appraiser with that of a real estate appraiser who creates an appraisal document that establishes value of real property for purpose of buying or selling.

The two “Appraisers” then mutually agree upon and select an independent third person referred to as an “Umpire.”  The fee for the services of the Umpire is split equally amongst the two parties.  If the two “Appraisers” cannot agree upon an “Umpire,” then either of the parties petitions the court that then makes the appointment.

This three member panel is charged with the responsibility to set the value of the loss. It is expected that the two “Appraisers” will come to agreement on as many issues as possible, before presenting the contested and disputed items to the “Umpire.”  When there is disagreement or an impasse, the “Umpire” then becomes involved and theoretically, like in baseball, sides with one or the other of the parties.  However, from practical experience, the “Umpire” often works to negotiate a compromise if both positions seem unreasonable.

In this process, any two of the three panel members can set the final value of the loss.  The panel is expected to set an “ACV” value (actual cash value – the value of the property based upon wear and tear, age, etc.) and an “RCV” value (replacement cost value – cost to replace the property today.)

The panel is not empowered to adjust the property; they simply set the value of the loss.  The property in this process is usually a damaged building or real property, or it can also be personal property (clothing, furniture, etc.).   Occasionally the panel might be asked to set a reasonable period of time for repair or determine the period of time needed for Additional Living Expenses.

The upside of the Insurance Appraisal process is that it is flexible, informal, and removes emotional decision making from insured and adjuster.  It sets the value of the loss quickly and saves time and money normally expended for the process of discovery and litigation.

The insurance policy, along with individual state law will determine if the Insurance Appraisal is binding or non-binding.

The downside is going into battle with someone who is biased and truly not independent, and is seasoned and experienced with the process to the point that they manipulate an unseasoned “Umpire,” as well as the other unschooled “Appraiser.”

If a construction insurance claim dispute needs resolution and the insurance company and the insured cannot come to agreement, then a quick way to resolve the problem and set the value of the loss is via an Insurance Appraisal.  It is simply another tool, deemed useful in insurance dispute resolution.

Insurers AIG, USAA Receive OK to Test Use of Drones

Andrew G. Simpson | Insurance Journal | April 8, 2015

drone over city

Two more insurers have received approval to test the use of unmanned aerial vehicles (UAVs), or drones, for their business.

The Federal Aviation Administration (FAA) has approved requests from USAA and American International Group (AIG).

State Farm said last month that it became the first insurer in the U.S. to receive FAA permission to test drones for commercial use. State Farm plans to explore their use in assessing potential roof damage during the claims process and in responding to natural disasters.

USAA also wants to test how drones  might help speed review of insurance claims following natural disasters. USAA can now fly drones, made by U.S.-based PrecisionHawk, during the day within line-of-sight of a trained pilot and air crew. Prior to the approval, USAA test flights could only take place at FAA-approved sites. No aircraft will exceed an altitude of 400 feet, and all flights will continue to be reported to the FAA prior to takeoff.

With FAA approval, USAA said it will work with PrecisionHawk to research best practices and safety procedures as it further develops plans for operational use.

USAA said it has also filed for an additional FAA exemption to further expand its ability to use drones in catastrophes. A decision on that request from FAA is expected soon, according to the insurer.

AIG said it will now be able to experiment with small UAVs to conduct inspections for risk assessment, risk management, loss control, and surety performance for customers in the U.S. The FAA exemption also permits AIG to implement a research and development program to explore new ways to employ UAVs.

State Farm said it will first conduct flights at private test sites in the Bloomington, Ill., area where it is headquartered but eventually the drones will be tested in real-world scenarios.

Erie Insurance has also requested permission for drone testing.

AIG said it already has an international UAV research and development program and has conducted flights in New Zealand.

The FAA recently issued long-awaited draft regulations on commercial use drones and is also attempting to streamline approval of drone testing.

Commercial drone flights are generally banned in the U.S. However, the FAA has awarded 99 waivers for commercial drone use under a program created by Congress to allow flights while the agency completes more formal regulations.

While the use of drones is restricted, that has not stopped businesses including real estate agents and film studios across the country from using them. It also has not stopped some insurance carriers and brokers from insuring them.  A recent report by Bloomberg found some insurers imposing their own safety rules rather than waiting on the FAA.

But the insurance industry as a whole would prefer to see the government set the rules.

“Companies across the country have already begun using drones for many different purposes, and insurance companies are eager to provide coverage for their loss or liability. But we need the government to set the ‘rules of the road’ for legal drone use so that insurers can begin to evaluate different risks and underwrite coverage,” Jimi Grande, senior vice president of federal and political affairs for the National Association of Mutual Insurance Companies (NAMIC), said in testimony before a recent Senate panel on drone regulations.

via Insurers AIG, USAA Receive OK to Test Use of Drones.