By: Brian Burkett*

INTRODUCTION

           It is well established that most homeowners purchase property insurance for peace of mind or because it is required, and not necessarily because the homeowner believes a catastrophe will happen to them.[1] Given this, many homeowners are unfamiliar with their policy provisions.[2] When a disaster occurs, the homeowners’ policy plays an integral role in helping the homeowner rebuild.[3] The policyholder will have several options while navigating through the claims process. While some policyholders will choose to work with the insurance company directly or rely on a contractor to negotiate the claim, others will turn to a public insurance adjuster. Although there is not a right or wrong way to move through the claims process, problems can arise when an unlicensed or untrained person negotiates a claim settlement with the insurance company.[4]

WHO IS RESPONSIBLE FOR CLAIM NEGOTIATION?

            Public adjusters are professionals that are employed by a policy holder for the purpose of analyzing a loss, and preparing and filing a claim.[5] These public adjusters work exclusively for the policy holder—not the insurance company—while managing the claim.[6] Essentially, in addition to possessing a significant amount of insurance knowledge,[7] a public adjuster is a building and construction expert for the purpose of assessing damage for insurance claims.[8] Compensation for public adjusters is usually a contingent fee based on the outcome of the settlement.[9]

            By contrast, policy holders working directly with the insurance company will work with a claims adjuster. Claims adjusters are employed by the insurance company and adjust claims on behalf of the insurance company.[10] This arrangement, on occasion, can have the effect of putting the interest of the insurance company ahead of the interest of the policy holder.[11]

            A final situation many policy holders find themselves in is when a contractor is working on the policy holder’s behalf to adjust the claim. Home improvement contractors, roofers, repair workers, or any other tradesmen often agree to negotiate a claim while completing the repair work for the homeowner.[12] While contractors are most likely licensed to complete construction work, fee arrangements can result in the contractor receiving a commission on the claim in addition to a fee for the work.[13] Occasionally, contractors will have policyholders assign the benefits of the policy (using an assignment benefits form) to the contractor for the work performed.[14]

WHAT IS UPPA?

            In recent years, a growing area of discussion in the property insurance industry is the unlicensed practice of public adjusting (UPPA).[15] UPPA occurs when a tradesmen holds themselves out as competent to represent a policy holder before the insurance company for the purpose of negotiation a claim.[16] While public adjusters must pass a test to obtain a license in order to negotiation claims,[17] the practice of unauthorized adjusting, as the name suggests, does not require any training or certification.[18] UPPA can have adverse effects on policy holders, agents, brokers, and insurance companies.[19]

            UPPA frequently occurs after natural disasters in which tradesmen flock to affected areas that are in need of rebuilding.[20] These tradesmen often promise policy holders that they will fight the insurance company for the largest settlement.[21] While many tradesmen are honest in their dealings, others are motivated strictly by profit and are not necessarily looking out for the best interest of their client.[22] The profit for the tradesmen can come from both a fee (or commission) for the claim settlement, as well as the fee for the completed work.[23] This is effectively allowing the tradesmen to “double-dip” in the insurance proceeds.[24]

            UPPA can have trickle-down economic effects across the insurance industry. Take, for example, a contractor who convinces a policy holder to sign an assignment of benefits form- the contractor will now have control of the policy and any benefits received.[25] At this point the policy holder is now at the mercy of the contractor as the contractor controls the policy.[26] The contractor is now free to do whatever they can get away with.[27] If there is a dispute between the insurance company and the contractor, the contractor can use whatever dispute resolution method available to challenge the insurance company.[28] The policy holder is out of the picture because of the assignment of benefits.[29] Additionally, insurance companies may find themselves pursing action against the contractor for fraud. Even though the policy holder may not be involved, the policy holder will likely feel the economic effects of the resolution process.[30] With litigation, or another form of dispute resolution, occurring between the contractor and the insurance company, some of the costs incurred by the insurance company may be passed off to the policy holder through increased premiums.[31] Eventually the entire cost of doing business for both private and corporate policy holders is driven up.[32]

            Fraud is another concern when dealing with post-disaster insurance claims.[33] With the problem of untrained, unlicensed, and unregulated individuals engaging in insurance adjusting, post-disaster fraud can easily occur.[34] In post-disaster situations, contractor fraud tends to be the most prevalent complaint.[35] Contractors who are working on a damaged home in addition to submitting estimates to an insurance company are in a unique position in which fraud can occur.[36] Among other situations, contractor fraud can occur when a contractor submits a general estimate to the insurance company, over-estimates the work to be done, or abandons a job altogether.[37] Once the contractor has the assignment of benefits from the policy holder, the contractor now has the control of the policy proceeds. Submitting a general claim could violate the policy holder’s obligation under the policy to prepare a more detailed inventory of loss.[38] A fraudulent over-estimation allows the contractor to complete whatever work they can get away with.[39] Abandoning a job after money has been collected by the contractor can leave the policy holder pursuing a civil claim, and, in some cases, seeking criminal charges.[40] These incidents of fraud from UPPA drive up insurance premiums and the cost of doing business.[41]

WHAT IS BEING DONE?

            Given the complexities of an insurance claim, the public must be protected so that the unauthorized practice of public adjusting does not take advantage of vulnerable policy holders.[42] Many states have taken action to protect these policy holders. For example, the Florida legislature has held that only licensed public adjusters may assist policy holders with their claims.[43] Florida has specific laws that regulate public adjusters and protect the public.[44] When a person, without a proper license, attempts to assist a policy holder with their claim, the unlicensed person is subject to stiff penalties.[45] Texas has also take action to prevent a conflict of interest between policy holders and contractors.[46] Texas law prevents a contractor (even if a licensed claim adjuster) from serving the policy holder as both the contractor and claims adjuster.[47] A recently enacted Illinois law holds that an unlicensed person engaging in public adjusting constitutes a nuisance.[48] These laws are cracking down on contractors who hold themselves out as claims adjusters.[49]

CONCLUSION

            UPPA occurs when an unlicensed individual engages in claim adjusting with an insurance company on behalf of a policy holder.[50] This activity can cause significant economic consequences to individual policy holders, commercial insureds, insurance companies, and agents.[51] Most notably is the effect of increased premiums to the individual and commercial policy holders as a result of increased litigation and/or fraud.[52] As the problem has become more prevalent—especially during post-disaster loss—states have addressed the issue by cracking down on UPPA.[53]

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NOTES:

* J.D. Candidate, University of Maryland Francis King Carey School of Law, Class of 2017.

[1] William Merlin, Jr. & Mary Kestenbaum, The Unlicensed Practice Of Law And Unlicensed Public Adjusting, 4 (Feb. 2005), http://docplayer.net/3045260-The-unlicensed-practice-of-law-and-unlicensed-puclic-adjusting.html.

[2] Bobby Marzine Harges, Disaster Mediation Programs—Ensuring Fairness and Quality for Minority Participants, 39 Cap. U.L. Rev. 893, 905 (2011).

[3] Id. at 893.

[4] See generally Jason Wolf, Erasing the Abuse of Unlicensed Public Adjusters, Claims Journal (Feb. 17, 2014), http://www.claimsjournal.com/magazines/ides-exchange/2014/02/17/244531.htm (explaining the commencement of claims using non-licensed adjusters and the problems associated with non-licensed adjusters).

[5] National Association of Public Insurance Adjusters, http://www.napia.com/aboutnapia1 (last visited Mar. 18, 2016).

[6] Id.

[7] Ronald J. Papa, Good, Bad, Ugly Looking Back at Sandy and Industry’s Readiness, 3 (2013), http://www.nfa.com/2013_insurance_advocate_good_bad_ugly_looking_back_at_sandy.pdf.

[8] Bobby Marzine Harges, Disaster Mediations in Mississippi: The Influx of Public Adjusters Into Mississippi After Hurricane Katrina Compels the Mississippi Legislature to Enact the Mississippi Public Adjusters Act, 77 Miss. L.J. 761, 762 (2008).

[9] Id. at 763.

[10] Id. at 762.

[11] Ten Benefits to Using a Public Insurance Adjuster, Advocate Claim Service Inc., http://www.advocateclaims.com/wp-content/uploads/Ten-Benefits-to-Using-a-Public-Adjuster.pdf.

[12] Harold Levy, Industry Takes Aggressive Stance against Unlicensed Practice of Public Adjusting, 3 J. Public Adjusting 1, 3 (2014).

[13] Wolf, supra note 4.

[14] Charles Tutwiler, The Unlicensed Practice of Public Adjusting – The Insurance Claims Keep Rolling In, Property Insurance Coverage Law Blog (Aug. 9, 2014), http://www.propertyinsurancecoveragelaw.com/2014/08/articles/insurance/the-unlicensed-practice-of-public-adjusting-the-insurance-claims-keep-rolling-in/.

[15] See Levy, supra note 12, at 3 (discussing the growth in UPPA and industry concerns).

[16] Id.

[17] Id.

[18] Wolf, supra note 4.

[19] Levy, supra note 12, at 3

[20] Id.

[21] Adjusting Claims by Unlicensed Individuals and Entities, TDI Commissioner’s Bulletin # B-0017-12 (June 26, 2012).

[22] Wolf, supra note 4.

[23] Id.

[24] Id.

[25] Tutwiler, supra note 14.

[26] Id.

[27] Id.

[28] Id.

[29] Id.

[30] Id.

[31] Wolf, supra note 4.

[32] Id.

[33] See Fredric A. Kerstein, An Overview of “Post-Disaster Fraud”, 18 St. Thomas L. Rev. 791 (2006) (discussing all aspects of fraud, specifically contractor fraud, after a natural disaster).

[34] Id. at 795-96.

[35] Id. at 796.

[36] See id. at 796 (providing examples in which a contractor is able to commit fraud in post-disaster situations).

[37] Id.

[38] Levy, supra note 12, at 3-4.

[39] Tutwiler, supra note 14.

[40] Kerstein, supra note 33, at 800.

[41] Wolf, supra note 4.

[42] Merlin, supra note 1, at 2.

[43] Id. at 18.

[44] See id. (explaining the various Florida laws that govern licensed individuals).

[45] Id. at 18.

[46] Tex. Ins. Code § 4101.251; Tex. Ins. Code § 4102.163.

[47] See House Bill 1183, TDI Commissioner’s Bulletin # B-0014-14 (May 23, 2014) (explaining how contractors performing work for a policy holder may not represent that same policy holder in the insurance claim).

[48] Denise Johnson, Contractors Acting As Public Insurance Adjusters Irk States, Insurance Journal (Sept. 5, 2011), http://www.insurancejournal.com/magazines/features/2011/09/05/213620.htm.

[49] Id.

[50] Levy, supra note 12, at 1.

[51] Id. at 3.

[52] Wolf, supra note 4.

[53] See Johnson, supra note 48 (discussing how states have responded to post-disaster claim adjusting by contractors).