Roofing Contractors, Don’t Mess With Texas Insureds!

by Zelle LLP

Texas Law360 - November 15, 2013

Hailstorms are inevitable in Texas, and so is the experience of the typical homeowner in their aftermath. Countless flyers are taped to the front door, yard sign ads spring up in the neighborhood, and the phone and doorbell start ringing — all efforts by roofing contractors to make a familiar pitch: “Let us work with your insurance carrier to ensure your hail damage claim is fully paid, and then let us reroof your home with the insurance money we recover,” with some even offering to pay or rebate the homeowners’ deductible.

Thousands of Texas homeowners sign up for this deal each year. The deal, however, violates Texas law. And according to one Texas federal court, the deal is illegal, void and unenforceable.

Since 2003, Texas law has required individuals to be licensed as public adjusters if they intend to adjust claims on behalf of insureds.[1] Among other things, licensed public adjusters are allowed to act on behalf of Texas insureds “to negotiate or effect the settlement of a claim for loss or damage under any policy of insurance covering real property or personal property.”[2]

Licensed public adjusters are allowed to receive compensation for their services. However, Texas law also states that a conflict of interest exists if a licensed public adjuster attempts to: 1) adjust a claim on behalf of an insured and 2) make the repairs associated with the claim.[3] Specifically, the public adjuster licensing statute states the following:

(a) A license holder may not:

(1) participate directly or indirectly in the reconstruction, repair or restoration of damaged property that is the subject of a claim adjusted by the license holder; or

(2) engage in any other activities that may reasonably be construed as presenting a conflict of interest, including soliciting or accepting any remuneration from, or having a financial interest in, any salvage firm, repair firm or other firm that obtains business in connection with any claim the license holder has a contract or agreement to adjust.[4]

Under this provision, it is a violation of the Texas Insurance Code for a public adjuster to profit from both adjusting an insurance claim and making the required repairs. Knowing violations can subject public adjusters to loss of license, disciplinary proceedings, and fines or penalties.[5]

Surprisingly, this provision has historically failed to stop Texas roofing contractors (not licensed as public adjusters) from engaging in similar conduct. The Texas Legislature recently addressed this problem with additional legislation consistent with the Texas Public Insurance Adjuster Licensing Statute. In July 2013, the Texas Legislature added the following provisions to Section 4101 of the Texas Insurance Code:

(a) An insurance adjuster licensed under this chapter may not adjust a loss related to roofing damage on behalf of an insured if the adjuster is a roofing contractor or otherwise provides roofing services or roofing products for compensation, or is controlling a person in a roofing-related business.

(b) A roofing contractor may not act as an adjuster or advertise to adjust claims for any property for which the contractor is providing or may provide roofing services, regardless of whether the contractor holds a license under this chapter.[6]

The Texas Legislature also added the following to Section 4102 of the Texas Insurance Code:

(a) A roofing contractor may not act as a public adjuster or advertise to adjust claims for any property for which the contractor is providing or may provide roofing services, regardless of whether the contractor holds a license under this chapter.

Under these provisions, both roofing contractors and public adjusters are now subject to loss of license, disciplinary proceedings, and possible fines or penalties if they are found to violate the statutes.[7] Moreover, these additions make it very clear that roofing contractors are not allowed to both negotiate property insurance claims and make repairs on behalf of Texas insureds.

A recent Texas federal court opinion illustrates why this new legislation is absolutely necessary.

In Reyelts v. Lon Smith Roofing and Construction et al., a home sustained hail damage during a May 2011 storm.[8] Soon thereafter, a representative of Lon Smith Roofing and Construction personally visited the homeowners offering their roofing services, including an assessment of the hail damage and assistance with the insurance claim. The homeowners, having no special knowledge about roofing or hail damage, agreed to work with Lon Smith Roofing and Construction and signed an agreement on June 27, 2011, providing the following:

The agreement is for FULL SCOPE OF INSURANCE ESTIMATE AND UPGRADES and is subject to insurance company approval. By signing this agreement homeowner authorizes Lon Smith Roofing and Construction (“LSRC”) to pursue homeowners[‘] best interest for all repairs, at a price agreeable to the insurance company and LSRC, and at NO ADDITIONAL COST TO HOMEOWNER EXCEPT THE INSURANCE DEDUCTIBLE AND UPGRADES. The final price agreed to between the insurance company and LSRC shall be the final contract price.[9]

The agreement also stated:

I hereby authorize my insurance company and/or mortgage company to make payment for completed repairs directly to LSRC and mail directly to same.[10]

Finally, the agreement listed the homeowners’ insurance carrier and a purported claim number, which was later determined to be a policy number. However, Lon Smith Roofing and Construction failed to reach an agreement on a “final price” with the insurance carrier for the repair of the storm damage before it completed the repairs. And when the insurance carrier refused to make payment, the homeowners filed suit against Lon Smith Roofing and Construction in federal court.

The federal court determined the agreement’s provisions induced the homeowners into believing that Lon Smith Roofing and Construction was “experienced and knowledgeable in working with various insurance carriers to secure payment for their services from clients’ homeowners insurance policies.”[11]

The federal court also found that the agreement’s terms purported to give Lon Smith Roofing and Construction the authority and obligation to act on behalf of the homeowners “in negotiating for or effecting the settlement of a claim for the loss or damage” to the roof under the homeowners’ policy and that the homeowners relied upon the contractor to complete the claims process.[12]

The problem, as the federal court determined, was that Lon Smith Roofing and Construction failed to do what the agreement purported to provide. Specifically, Lon Smith Roofing and Construction failed to:

  • contact the insurance carrier in an attempt to secure a settlement on behalf of the insureds;
  • secure an agreement with the insurance carrier concerning the price it would pay for the roof repairs; and
  • obtain payment from the insurance carrier for the roof repairs performed by Lon Smith Roofing and Construction.[13]

Rather, Lon Smith Roofing and Construction simply replaced the roof and sent the homeowners an invoice totaling $15,951.48, along with subsequent demands from a collection agency for said payment.

Initially, the homeowners did not understand why their insurance carrier failed to pay Lon Smith Roofing and Construction, so they contacted the insurance carrier directly. The insurance carrier advised that it knew nothing about the damage, and subsequently denied the claim because Lon Smith Roofing and Construction completed the repairs prior to giving the insurance carrier an opportunity to evaluate the reported damage.[14]

Ultimately, the federal court declared the written agreement between the homeowners and Lon Smith Roofing and Construction “illegal, void and unenforceable.”[15] The federal court determined the agreement was illegal, void and unenforceable because it violated provisions of Texas Insurance Code Section 4102 in that a company or individual cannot both negotiate an insurance claim on behalf of an insured and make the repairs.[16]

As a result, the federal court held the homeowners were not liable for payment of any past or future services under the agreement with Lon Smith Roofing and Construction. Significantly, Lon Smith Roofing and Construction was also ordered to pay the homeowners more than $225,000 in actual damages, mental anguish and attorneys’ fees for its conduct.

There is little case law interpreting or applying Texas Insurance Code Section 4102. However, Reyelts v. Lon Smith Roofing and Construction et al. is the classic example for why the statute is necessary.

Insureds should think twice before agreeing to have their roofing contractor perform services other than replacing or repairing a roof, particularly if those services involve negotiations with an insurance carrier. Insurance carriers should refuse to communicate with roofing contractors acting in violation of the statute.[17]

And roofing contractors should consider evaluating their current form contracts to ensure boilerplate terms are not in violation of the statute, including terms that call for paying or rebating deductibles as part of an agreement with an insured, practices that are characterized as insurance fraud under Texas law.[18]

The next hail season will be here in just a few months. It remains to be seen if this new legislation and the recent decision in Reyelts v. Lon Smith Roofing and Construction et al. will bring about a change in how roofing contractors market and provide their services subsequent to Texas hailstorms.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Tex. Ins. Code § 4102.051 (generally referred to as the “Texas Public Insurance Adjuster Licensing Statute”).

[2] § 4102.001(3).

[3] § 4102.158.

[4] § 4102.158(a).

[5] §§ 4102.201-204.

[6] § 4101.251.

[7] §§ 4101.201-203 and 4102.201-204.

[8] Reyelts v. Lon Smith Roofing and Construction et al., 4:12-CV-0112-BJ, 2013 WL 3870285 (N.D. Texas July 26, 2013)

[9] Id. at *2.

[10] Id.

[11] Id.

[12] Id.

[13] Id. at *5.

[14] Id.

[15] Id. at *6.

[16] Id. (citing §§ 4102.206(a), 4102.207(a-b)).

[17] Texas insurance carriers have a duty to report such conduct to the Texas Department of Insurance. Tex. Bus. & Comm. Code § 701.051.

[18] Tex. Ins. Code § 27.02.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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