Obvious to anyone in the insurance industry, Texas courts are experiencing an explosion of first-party property insurance lawsuits arising from wind and hail related insurance claims. Dozens of lawsuits are filed every day in courts all across Texas. Some insurers are reporting that in one Texas county, upwards of 40 percent of all hail damage claims result in litigation, with a significant percentage of those lawsuits arising from claims that were believed to have been amicably resolved during the adjustment process.
This disturbing trend has not gone unnoticed. In recent months the Texas legislature debated significant reform measures directed at addressing the underlying conduct giving rise to these lawsuits.[1] While the most significant of these reform measures failed to pass the Texas House of Representatives prior to the end of the session, legislation concerning the conduct of public adjusters received unanimous support from the insurance industry, the Texas Trial Lawyers Association and most importantly the Texas Association of Public Insurance Adjusters. This legislation, Senate Bill 1060, was passed by the legislature and recently signed into law by Governor Abbott. It will be effective on Sept. 1, 2015.
Senate Bill 1060 amends the Texas Public Insurance Adjuster Licensing Statute to address specific abuses being perpetrated by a small number of Texas public adjusters. Left unchecked, this conduct risked turning the legitimate public adjusting industry into nothing more than a vehicle for unscrupulous newcomers to the industry to act as either salesmen for construction companies or case runners for attorneys. Senate Bill 1060 brings an end to this conduct with several narrowly crafted statutory changes, ensuring that all Texas public adjusters actually provide the services contemplated by their industry and the Texas public adjuster licensing statute — legitimately acting on behalf of policyholders in negotiating for or effecting the settlement of a claim under a property insurance policy.
The significant provisions in Texas Senate Bill 1060 are as follows:
1) Repeal of the Public Adjuster Trainee License
Under Senate Bill 1060, Texas will no longer offer a trainee license for those attempting to enter the business.[2] While the trainee license started as an apprenticeship-like program for the new public adjuster, the license was exploited by individuals seeking a fast track entry into the insurance claims world. Formerly, under Section 4102.069, licensed public adjusters could hire employees to act as “trainees” for up to 360 days without their obtaining an actual public adjuster license. Individuals with little to no experience in the insurance industry or any knowledge of the adjustment of insurance claims — and with no intent to become a legitimate license holder — would abuse this loophole for quick financial gain. SB 1060 now requires all public adjusters to obtain the necessary experience and education prior to obtaining a license and performing services as a public adjuster.
2) Prohibition of Referral Payments
The addition of Tex. Ins. Code § 4102.164 now expressly prohibits the acceptance of referral payments to a public adjuster from any third-party “individual or firm, including an attorney, appraiser, umpire, construction company, contractor or salvage company.”[3] This new section addresses the all-too-common issue of a public adjuster referring work to others — such as construction companies, appraisers and lawyers — in exchange for payments to the public adjuster. The Texas licensing statute is clear that public adjusters can receive compensation only from their policyholder clients. This ensures that the interests of the public adjuster are aligned solely with its policyholder client.
3) Prohibition Against Public Adjusters Entering Into Contracts Without the Intent to Actually Adjust the Claim
Section 4102.103 now includes subsection (d) which prohibits a public adjuster from “enter[ing] into a contract with an insured and collect[ing] a commission as provided by Section 4102.104 without the intent to actually perform the services customarily provided by a licensed public insurance adjuster for the insured.”[4] The obvious intent of this provision is that public adjusters enter into contracts with policyholders with the intent to actually assist the property owner with its insurance claim — the very clear role of the public adjuster. This seems simple enough. Unfortunately, however, certain public adjusters were not signing up clients with this intent, but instead appeared to sign up clients for the sole purpose of immediately referring the policyholder to an attorney. In turn, the attorney would handle the claim on a “reduced” 30 percent contingency fee and the public adjuster would receive a 10 percent contingency fee. Obviously, this far-too-common process subverted the role to be played by the legitimate public adjuster. Indeed, it sounded more like illegal barratry. By ensuring that public adjusters enter into contracts with the intent to actually perform public adjusting services, Senate Bill 1060 helps ensure legitimacy in the public adjuster profession.
4) Prohibition Against Public Adjusters Entering Into Contracts Solely for Referrals to Attorneys
Expanding on the issue above, Section 4102.158 underwent substantial changes to preclude public adjusters and/or their agents from illegal case-running on behalf of policyholder attorneys in violation of Texas barratry laws. Citing the Texas Penal Code provisions addressing barratry, Section 4102.158(d) states that “[a] license holder may not directly or indirectly solicit, as described by Chapter 38, Penal Code, employment for an attorney or enter into a contract with an insured for the primary purpose of referring an insured to an attorney and without the intent to actually perform the services customarily provided by a licensed public insurance adjuster.”[5] Section (d), however, goes on to note that the industry has a legitimate need for the recommendation of an attorney and this prohibition should not be “construed to prohibit a license holder from recommending a particular attorney to an insured.”[6]
Having lucrative referral agreements with policyholder attorneys is now expressly prohibited under this statute. Some public adjusters were in the practice of affixing attorney representation agreements to their contracts to be executed simultaneously with the public adjuster contract. Policyholders in many instances simply signed what was placed in front of them, not realizing they were not only hiring a public adjuster but also an attorney to file a lawsuit against their insurance company. Section 4102.158(e) addresses this issue head on, stating that “[a] license holder may not act on behalf of an attorney in having an insured sign an attorney representation agreement.”[7] This practice should now come to an end.
Section 4102.158 further addresses these barratry issues with the addition of subsection (f), requiring all public adjusters to conform to the Texas barratry laws. “A license holder must become familiar with and at all times act in conformance with the criminal barratry statute set forth in Section 38.12, Penal Code.”[8] While legislative intent indicates that SB 1060 does not intend to create a criminal offense against the public adjuster or preclude a public adjuster from legitimate business development practices, the addition of subsection (f) should ensure that public adjusters do not fall victim themselves as participants in illegal barratry schemes conducted by attorneys.
5) Prohibition Against Payments by a Public Adjuster
While this prohibition is not new, Senate Bill 1060 expands on the existing law. Under the prior version of Tex. Ins. Code § 4102.160, a public adjuster was permitted to pay up to a $100 fee to nonpublic adjusters for the referral of an insured to the public adjuster. SB 1060 strikes this exception to the prohibition of referral payments by a public adjuster.[9] The significance of this change is far reaching and eliminates (or at least removes the financial incentive) for unlicensed individuals to go door-to-door following a storm and receive $100 for each contract they are able to sign on behalf of a public adjuster (who likely had no intent to actually adjust the claim and instead would then simply refer the client to an attorney). With the repeal of Section 4102.160(3), this improper solicitation conduct should be eliminated.
6) Prohibition Against Insurance Adjusters Having Any Ownership in Construction Companies Involved in Claim Repair Work
The Texas public adjuster licensing statute has always contained a prohibition against a public adjuster also having a role in the repair work to be performed for a claim. The intent of this prohibition is also clear — to avoid the obvious conflict of interest that arises when a public adjuster has incentive to receive additional profits as the contractor performing the repair work. Unfortunately, a few public adjusters sought to circumvent this prohibition by forming construction companies owned by family members, but were actually operated by the public adjusters. In these situations, the public adjuster/contractor was effectively serving both roles in violation of the statute’s clear intent. Senate Bill 1060 eliminates any uncertainty as to the legality of this conduct by making it clear that a public adjuster may not “deriv[e] any direct or indirect financial benefit from” a construction, repair, salvage or other firm involved in the claim. This clarification ensures that a public adjuster cannot play a dual role in a claim. An individual can be a licensed public adjuster and can also be a contractor. The individual simply cannot do both for the same claim.
In summary, effective Sept. 1, 2015, Senate Bill 1060 will bring about important changes to the practice of public adjusting in Texas. Certain policyholder lawyers and public adjusters have exploited the public adjusting industry for personal financial gain apart from the intended role of a public adjuster and to circumvent Texas barratry laws. Senate Bill 1060 takes significant strides in dismantling this emerging trend of illegal solicitation and improper conduct by this small group of abusers. Its unanimous and bipartisan support by industry groups who are typically adverse to each other speaks volumes as to the need for this welcome change. Senate Bill 1060 will help ensure the legitimacy of the public adjusting industry in Texas and the role to be played by the qualified Texas public adjuster.
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[1] Senate Bill 1628 contained the majority of the proposed changes, which as stated in Sen. Larry Taylor, R-Galveston’s, bill analysis, was intended to establish a clear deadline for an initial claim to be filed, prohibit certain public adjuster activity, require notice of policyholder suit and proof of loss, create a practical standard for bona fide disputes, define actual damages, address liability for a person working on the adjustment of a claim on behalf of the insurer, clarify illegal insurance practices and estimate practices, eliminate improper solicitation by public adjusters and others including, but not limited to, the purpose of an attorney referral and enforce the current policy appraisal process.
[2] Tex. Ins. Code § 4102.069, repealed by S.B. 1060, 84th Leg. (Tex. 2015)
[3] Tex. Ins. Code § 4102.164
[4] Tex. Ins. Code § 4102.103(d)
[5] Id.
[6] Id.
[7] Tex. Ins. Code § 4102.158(e)
[8] Tex. Ins. Code § 4102.158(f)
[9] Tex. Ins. Code § 4102.160(3), repealed by S.B. 1060, 84th Leg. (Tex. 2015)
