Unauthorized practice of public adjusting issues are going to the Texas Supreme Court. Lon Smith Roofing is not giving up and filed a petition which should be read by those with interests in the property insurance claims industry. I have previously discussed this case in:

Public adjusters and insurance regulators should closely read what Lon Smith is arguing. The lawyers for Lon Smith Roofing noted in their second issue:

In a case of first impression for this Court, the Court of Appeals erred in holding that LSRC held itself out as a public insurance adjuster, and violated section 4102.051 of the Texas Insurance Code, merely due to this language in the Agreement: ‘[b]y signing this agreement homeowner authorizes [LSRC] to pursue homeowners’ best interest for all repairs, at a price agreeable to the insurance company and LSRC.’

The Texas Department of Insurance stated in a Commissioner’s Bulletin that “Texas Insurance Code Chapter 4102 does not prohibit contractors from providing estimates or discussing those estimates and other technical information with an insurer or its adjuster.” TDI also allows a roofer or contractor to discuss the amount of damage to the consumer’s home, the appropriate replacement, and reasonable cost of replacement with the insurance company.

LSRC pursued homeowners’ best interest for “all repairs,” but did not negotiate for or effect the settlement of a claim, or advocate on behalf of the Keys or discuss insurance policy coverages and exclusions. LSRC did not violate section 4102.051 or chapter 541 of the Texas Insurance Code (unfair or deceptive act or practice in the business of insurance). Thus, the Agreement is not illegal, void, or unenforceable as a matter of law.

In addition, section 4102.207 provides under “Insured Option to Void Contract” that an agreement that violates section 4102.051 is voidable at the option of the insured. The Court of Appeals erred in holding the Agreement was “void per se” (but only as to LSRC). This issue is important to the jurisprudence of the State of Texas, given the number of roofing and restoration contractors who have analogous provisions in their agreements, as noted in the Amicus Curiae Briefs attached in the Appendix.

The issue is important to insurance companies as well. The insurance contract is between the policyholder and the insurance company—not between the insurance company and the contractor selected to do the job. The policyholder’s rights to accept, reject or negotiate with the insurance company’s estimates of what is owed under the policy belongs to the policyholder. Only two classes of licensees in Texas may negotiate for a policyholder, Texas licensed lawyers and public adjusters. When speaking with contractors, I sometimes not only have to warn about not engaging in the practice of public adjusting, but also not engaging in the practice of law.

Departments of Insurance also understand that the insurance policy is between the policyholder and the insurance company. Insurance company adjusters have a good faith obligation to evaluate the amount of the damage. Part of that investigative step may be to look at contractor estimates and discuss how those estimates were made. This is why departments of insurance issue bulletins about this issue and often require insurance adjusters to review and analyze contractors estimates. They often warn, however, that the contractor is not an adjuster and not the policyholder and just a third party who has no rights to the insurance contract.

Yet, the policyholder has the right to repair any way he wants and not to return the property back to a pre-loss condition new, but to some other better, changed, or different manner. The insurance adjuster may find what is estimated by a contractor not inclusive of what is owed under the policy. The policyholder can select from a number of contractors and vary the materials to be used from what was originally there when rebuilding. The best time to remodel is often after a catastrophe. Insurance company adjusters are trained to know and understand all this and that the replacement cost to a pre-loss condition is a theoretical number.

One reason the assignment of benefits issue has upset the insurance industry and has consumer advocates, including myself, demanding reform, is that some contractors are using the assignment of benefit clause in construction contracts to change this dynamic. Those contractors are negotiating for their own interests rather than the best interests of the policyholder and take over interpretation of the policy and negotiation of the entire claim, often for benefits that have nothing to do with the construction. The current use of the assignment of benefits clause is often expanding far beyond the protection of the contractor’s lien to get paid once the work is done. I understand that contractors claim they need some leverage against the lowballing gamesmanship that is so prevalent with the majority of property insurance carriers, but along with reform of assignment of benefits clauses should come more claims practice reform to stop property insurance claims departments in their race to the bottom. Today, roofs in Texas cannot get repaired in a legal manner for the prices most insurers pay. Shoddy workmanship and roofs not repaired to code are the normal state of Texas construction, in part because of the lowballing property insurance industry.

Quote For The Day

I own buildings. I’m a builder; I know how to build. Nobody can build like I can build. Nobody. And the builders in New York will tell you that. I build the best product. And my name helps a lot.
—Donald Trump

  • shirley heflin

    Dear Chip:

    The bottom line is obvious: The insurance policy is for the benefit of the insured and only the insured! The insurance policy is between the ins. co. and the insured!

    Following a catastrophic loss, an Insured just wants to return to a pre-loss condition (one that’s either equal and/or superior to the pre-loss date). Many Insureds are vulnerable and emotional during this time and many do not understand the full ramifications of signing an “Assignment of Benefits” “form” and/or “contract” with a Contractor for repair/restoration purposes. They may not know that – among other things – signing this form allows THEIR insurance company to send an insurance draft DIRECTLY to the contractor (often before the insured has even indicated and/or approve of the contractor’s work).

    In many instances, the best interests of the insured are being set aside by some contractors negotiating in their own best interests.

    The insured is being “set aside”, ignored, short-changed, etc., enough already by their own insurance company and to add another “party” to this mix is UNJUST to say the least!

    Tampa, FL

  • Scott deLuise, CCIM, SPPA

    Well said, Chip! The bottom line is that a Public Adjuster is a fiduciary to his policyholder, and is, or should always be working in the best interest of his principal, the insured. A roofer/contractor, on the other hand, is a vendor, working in his own best interest, not the best interest of the insured. The unauthorized practice of law will become more of an issue as contractors attempt to use assignments of benefits as a legal maneuver to skirt Public Adjusting laws.

    Personally, I’m excited and hopeful that the Texas Supreme Court will grant certiorari on this case and define fiduciary vs. vendor/seller once and for all. NAPIA, TAPIA, RMAPIA, United Policyholders and other consumer organizations have been arguing UPPA for years, and Texas may be the venue that brings the plaintiff and defense bars together with the carriers and their alphabet organizations to stop this abusive practice!

    • Chip Merlin


      My post brings up a very confusing area with many different considerations.

      Repair contractors going into areas and doing quality repairs and restorations provide a very valuable service to a ravaged community. They deserve to make money to do so and enough money so that it is worth their while to leave other parts of the country and help. So, I am not against quality contractors and builders.

      Over the past 15-20 years, however, the maturation of the insurance restoration industry has created a dedicated response from property insurance claims management trying various tactics to lower claims payment severity.. Contractors are almost required to play the Xactimate or Simsol claims game and submit estimates in the manner that adjusters do. Reinspectors for claims departments travel with field adjusters and go over “leakage” considerations and ding field adjusters for what they feel are overpayments rather than being concerned that proper and legal repair to manufacturers specifications and building codes have been followed.

      The bottom line is that the insurance adjusters are in the face of all contractors demanding concessions for costs of rebuilding. Some demands are legitimate and some ridiculous, if not illegal. The builder is in an almost no win situation and sometimes steps over the bounds and negotiates with the insurance adjusters.

      Then, there is an element of the construction business that uses AOB’s and now AOC’s–assignment of claims to demand whatever ridiculous amount they want. Remember the pill manufacturer CEO who increased his product price by 500% and more? Those types of contractors are often using high pressured sales tactics, AOB’s, AOC’s and Power of Attorney contracts and then supported by lawyers who previously were not in the insurance field and teaching these contractors how to game the system.

      So, you have insurance adjusters that are not paying enough, some contractors buying into the “bill whatever we can get away with mentality” prevalent in the medical billing system and medical insurance billing industry which those lawyers have now entered into the property insurance field, and the quality contractors looking to do things the right way getting hurt by underpaying insurers and losing business to the new storm contractors interested in short term profit at any cost. I feel for those guys.

      But, we all have to follow the law. The law properly limits the negotiating of claims to policyholders, public adjusters and lawyers. It also properly limits the practice of law to lawyers. I think this serves the public well.

      • Lisa F

        There are two other factors at play here which are rarely discussed. Some contractors also race to the bottom with their estimates, then use uninsured and/or cash paid workers. This practice makes it more difficult for legitimate contractors to appropriately yet competitively price a project. Second, there are homeowners who do not pay their contractor. This forces a contractor to go to court or take a loss. There is no provision for benefits paid to be put into escrow so that a contractors’ compensation is protected. I do agree with Kyle Larson (above commenter)who stated that of the parties involved, the homeowner is more aligned with the contractor. It is absurd to limit a contractor ‘s discussion with anyone else involved.

  • Chip Merlin


    I always enjoy your comments and hearing from you. Here is a link to an attorney with a slightly different view on this matter: https://www.fortheinjured.com/blog/homeowners-ins-assignment-benefits/

  • Kyle Larson

    What is lost in all of this is that restoration contractors are usually the “first responders” if you will. Whether called in by the homeowner, or through solicitation by the contractor, in most cases contractors are the first ones to inspect, and put a dollar amount on the extent of the damage. The contingency contract most contractors use is most likely very similar to what Lon Smith used. As a contractor it is near impossible to ask a homeowner to sign a straight dollar amount contract that is, in some cases tens of thousands of dollars more then what their carrier has estimated. At that point it does not matter how much trust or confidence the homeowner has in said contractor they are not going to sign their name to thousands of dollars more then their insurer has committed too. Most contractors understand this and are more then willing to take on the burden of providing, and discussing a complete scope of repairs with the insurer. The contingency contract just insures that once the contractor has spent the time required to educate the insurer as to what all needs to be done, said contractor can then get paid for their efforts by completing the work.

    This argument that contractors have some sort of conflict of interest is not based in reality. Lets remember that a contractor is the only party with any real skin in the game. Contractors are the ones who have to go out and purchase the materials and pay the labor that completes the repairs. By comparison PA’s stand to loose nothing if their negotiations do not go well, a PA gets paid their fee no matter what. That said, do PA’s generally get more money from insurers then contractors? yes, but how much of that ends up just covering a portion of the PA’s fee? I am in no way advocating that contractors should be out there discussing coverages or policy. A legitimate, ethical contractor should stick to the scope of the repairs.. If through the scope discussions it becomes clear there is some debate as to coverage issues, said ethical contractor needs to let the homeowner know things have moved beyond their ability, and it might be time to engage a PA or attorney.

    The bottom line is that there has to be a place in insurance restoration work for a contractor to impact the scope and price of the repairs paid by the insurer, and a homeowner should not have to engage a PA just to get fair settlement from their insured. Nor should a contractor have to worry that in their attempt to get the scope of the repairs correct, they are in danger of crossing a line that puts them in UPPA territory.

    I believe, here in Colorado, we have found a pretty good balance. Our statues make it clear that contractors can discuss the scope of the repairs with insurers without those efforts being considered practicing public adjusting. Through litigation we have also been able to establish that when insurers do not play fair, a contractor, on behalf of a homeowner, has the legal right to pursue an insurer for unreasonable delay or denial of benefits. Through litigation started by contractors we are beginning to get answers to many nagging questions that reside in the gray area of most insurance policies. Most of these litigated issues started by contractors have to do with what is, and what is not a component of the scope of the repairs. Legitimate, ethical contractors have no choice but to complete repairs that adhere to building code, and building material manufactures requirements. By allowing contractors to pursue insurers directly, we have made it possible for contractors to assume all the risk when it comes to getting work done that does adhere to best practices and code requirements. I cannot see where empowering contractors has somehow hurt consumers, if anything it has raised the bar of both contractors and insurers in Colorado. A shady contractor is not going to get much traction here in Colorado because the landscape has created an environment where ethical legitimate contractors can thrive because they are secure in the knowledge that they can earn a legitimate, sustainable living..

    • Chip Merlin


      Thank you for your comment.

      In my reply to Scott, I noted:

      “Repair contractors going into areas and doing quality repairs and restorations provide a very valuable service to a ravaged community. They deserve to make money to do so and enough money so that it is worth their while to leave other parts of the country and help. So, I am not against quality contractors and builders.”

      Explaining price and scope is fine. Negoatiating a settlement, explaining coverage and legal options is not what the contractor is supposed to do.

      Construction theory teaches that contractors are not the owners representative. The triangle realtionship taught in construction theory usually has the owner represented by the architect and the engineer enforcing the public standards of sound construction and then the contractor. In theory and practice, contractors are not aligned with the owner’s interest because the contractor wants to charge as much as possible and do the minimum required by the construction contract.

      Quality contractors do their job well and get solid reputations over time. Architects, engineers and owners all come to respect them and even rely upon the sound advice given by good contractors.

      I guess you agree that contractors should not negotiating the claims and should not practice law. And I also agree that contractors play an extraordinary role in the rebuilding after a disaster.

      • Kyle Larson

        I have been thinking about your take on the contractor/homeowner relationship. While I agree in a normal contractor/homeowner relationship a contractor is obviously not an agent for the homeowner and a contractor’s interest is not aligned with the homeowner. When it comes to completing repairs to be paid by an insurance claim, I believe the relationship changes.

        In the vast majority of insurance claims the homeowners, by proxy if nothing else, depend on the contractor to represent their interests in the dealings with the insurer regarding the scope and price of the repairs. The contractor can’t really invoice for items they are not doing, and the pricing for the most part is set by third party software. So the contractor really can’t work towards a goal of doing as little as possible for as much as possible.

        In reality the contractors and homeowners interest are aligned because they both benefit when the contractor is able to secure a complete scope of repairs from the insurer. This is why I do not agree that a contractor, when acting on behalf of themselves and the homeowner, somehow creates a conflict of interest.

        Again, by comparison how is a PA’s role not more geared towards a conflict of interest. One of a PA’s primary objectives is to drive claim value as high as possible. Partially because their pay is in direct relation to what that total is. As I stated above I would fully expect that if I, and a PA, both wrote a scope of repairs for the same claim, the PA’s scope and price would come in higher, and often times much higher, then my own. This difference would not be due to the fact that I missed anything, after all I am the one who knows how to, and would be completing the repairs.

        All that said I do believe their is a place for both of us. PA’s are very valuable and often times required when there is damage disputes, or issues regarding policy or coverages. What I do not appreciate is how our industry tries to paint this picture whereby if a contractor does any more then show up, prepare a bid and then go back to their office and wait, they are somehow crossing a line. I know for a fact that the insurers would love a world where they could shut contractors down by passing legislation designed to forbid contractors from being able to talk to insurers. They toured many state capitols touting the “benefits” of such in 2012, and in many cases they were aligned with the PA lobby and their national organizations.

        I do believe this issue is only going to become more contentious and I believe it would benefit all of us, contractors, PA’s, atty’s, insurers and insureds alike, to figure out how best to deal with it.