By Suzanne Ganier / Published October 2023
Currently 46 states require licenses for public adjusters. Most states have yet to go beyond licensing to regulate the use of public adjusters. However, that is changing, with several states passing legislation in 2023 addressing retention and professional standards for public adjusters. This legislation reaffirms the right of insureds to retain public adjusters to assist them with their insurance claims. It establishes standards to protect those insureds who retain them. To date seven states have passed such legislation.
Prohibit insurers from writing policies that bar the use of public adjusters.
Since public adjusters are not dissimilar to attorneys in that both represent the interests of insureds with their insurance carriers, public adjusters should be required to adhere to professional standards just as attorneys must adhere to professional standards (perhaps not to the same degree). As public adjusters are frequently hired by frustrated and vulnerable insureds dealing with the stress of a loss, establishing standards to protect insureds is desirable and necessary.
But do these standards go far enough? Do these standards sufficiently protect insureds? Are these standards adequately addressing potential harm to insureds from public adjusters? I don’t think so.
Before I go further, I want to recognize that public adjusters provide a valuable service to insureds. Primarily, they help insureds navigate a claims process that is opaque to most insureds. They can also ensure that insureds are paid for all the damages that should be paid under their policy. But public adjusters don’t always aid insureds in resolving claims, and retaining a public adjuster can sometimes complicate and extend the claim process.
How does this happen? An example can help answer this question.
A tropical storm hits an area, causing widespread damage. Insured Smith observes damage to his fence, water leaks in the primary bedroom and living room, and shingles from his roof strewn across the backyard. Insured Smith makes a claim to his insurance carrier. While he’s waiting for his insurance carrier to send out an adjuster to inspect the damage, a public adjuster drops by the house and offers to assist Insured Smith with his insurance claim. Insured Smith has never made an insurance claim. His only experience with his insurance carrier is paying his premiums. He has no experience with the claims process and isn’t sure if he will get paid for the damage to his house. So, he agrees to retain the public adjuster to help him through the process and to ensure that he gets paid appropriately for the damage to his home.
When the adjuster from the insurance carrier comes to the house to inspect the damage, Insured Smith’s public adjuster walks the property with the adjuster, pointing out the damage from the storm. The adjuster observes and notes the same damage that Insured Smith observed—damage to the fence, a small area of water damage to the ceilings in the primary bedroom and living room, and some roof damage, including damaged and removed shingles.
After the inspection, the adjuster completes his estimate, paying $10k to repair the damage. Insured Smith’s public adjuster also prepares an estimate. This estimate is for $50k and includes replacing the entire roof, all the drywall, ceilings, walls in the primary bedroom and living room, and the whole fence. She explains that she observed significantly more damage than the insurance carrier’s adjuster, resulting in the difference between her and the insurance adjuster’s estimates. She encourages Insured Smith to pursue the difference between her estimate and the insurance adjuster’s. Insured Smith, trusting the public adjuster and with no background in construction, agrees to allow her to push for the $40k difference between the estimates. But rather than waiting for the insurance carrier to pay the difference, Insured Smith goes ahead and has the entire roof, fence, and drywall replaced consistent with the public adjuster’s estimate, at a total cost of $50k, with $10k coming from his insurance payment and the other $40k coming from Insured Smith’s savings.
The public adjuster goes back to the insurance carrier, arguing that the damage was much more extensive than that reported by its adjuster, and thus its claim payment was insufficient. The insurance carrier sends an adjuster to reinspect the damage to determine if any storm-related damages were missed. Based on the reinspection, the insurance carrier pays Insured Smith an additional $5k, 15 percent ($750) of which goes to his public adjuster; the balance reduces Insured Smith’s out-of-pocket expense to $35,750. Notwithstanding the public adjuster’s continuing arguments that Insured Smith should be paid the total amount of the public adjuster’s estimate, the insurance carrier holds firm and refuses to make any more payments on the claim, leaving Insured Smith with the following two options: 1) abandon attempts to get his insurance carrier to pay for the additional damage claimed, leaving him out of pocket $35,750; or 2) hire an attorney to sue his insurance carrier to recover for the damages his public adjuster says are caused by the storm.
Option 1 means he’s out $35,750 that he cannot recover.
Option 2 has the potential to result in recovery of what he’s paid out of pocket, but whatever he recovers is going to be reduced by the public adjuster fees, attorneys’ fees, and other costs/expenses of litigation, which likely means he’s unlikely to recover what he’s paid fully. Then there’s the amount of time associated with litigation. It could reasonably take years before he sees any money from litigation—assuming he wins, which isn’t guaranteed. Insured Smith wonders, “How did I get here?”
In my experience with litigated first-party property claims, the answer often lies with the public adjuster. In my example, Insured Smith understandably, but unfortunately, hired a public adjuster who provided an estimate that was much higher than that prepared by the adjuster for the insurance carrier and, more importantly, was not justified by the damages observed by both the insurance carrier adjuster and the insured. This is an unfortunate consequence of how public adjusters get paid, i.e., a percentage of what they recover for the insured.
I do not suggest that public adjusters should not be paid for their services. I am also not suggesting that all public adjusters do this. But those who engage in this practice do a disservice to their clients.
First, insureds are given unrealistic expectations. In my example, Insured Smith’s public adjuster convinced him that the damage to his home from the storm was much more extensive than either he or the insurance carrier adjuster observed. Based on her representations, Insured Smith paid out of pocket for extensive repairs, expecting his insurance company to pay based on the public adjuster’s estimate. As she was purportedly representing Insured Smith’s best interests, it was reasonable for him to trust her and follow her lead regarding the damage and required repairs, especially given his lack of experience with insurance claims or home construction. However, given the limited damage, a claim payment of $40k was unrealistic.
Second, claims stretch on much longer than necessary. Because of the significant difference between the insurance company’s estimate and the public adjuster’s estimate, it will take much longer to resolve the claim. Whether the policy goes through an appraisal process (assuming the policy allows for such a process), or it goes to litigation, the time required to resolve the claim will be much longer than it would have been had the public adjuster not exaggerated the extent of the damage and the needed repairs. Undoubtedly, the extended claim process will cause insureds stress as they wait and wonder if and when their claim will finally be resolved.
Third, and most importantly, this practice puts the insured at risk of not recovering what they have paid out of pocket. Because Insured Smith reasonably accepted the representations of his public adjuster, he paid out of pocket to complete the extensive repairs included in the public adjuster’s estimate. Suppose neither the public adjuster nor the insured’s attorney can recover the insured’s out-of-pocket through a suit against the carrier. In that case, the insured is stuck with the bill and has no recourse.
Fourth, even if the public adjuster and the attorney can recover the balance of the estimate prepared by the public adjuster, the insured is still out of pocket as both the public adjuster and the attorney will be entitled to their fees from whatever is recovered. In my example, after the supplemental claim payment to the insured minus the public adjuster’s fee for obtaining the supplemental payment, Insured Smith is out of pocket $35,750. Let’s assume that through litigation, the public adjuster and the attorney recover the entire $35,750 that Insured Smith was still out of pocket. With the public adjuster and attorneys’ fees, Smith, unfortunately, will still be out of pocket a substantial sum. If the public adjuster fee is 15 percent of what is recovered, her fee is $5,362.50.
Attorneys typically take these cases under a contingent fee structure, i.e., the attorney recovers a percentage of what is recovered for his fees. Standard contingency fees are at least 33 percent of the recovery, or $11,797.50. Total fees on the $35,750 recovered are $17,160, leaving Insured Smith with $18,590—and this number assumes that there are no other costs or suit expenses, which is unlikely.
Because Insured Smith’s public adjuster inflated the damage and the necessary repairs, it likely took years to resolve the claim, and he is out of pocket $17,160. Insured Smith is angry and disillusioned with his insurance company, public adjuster, attorney, and the system. This is not an ideal result. This scenario occurs far too often and results in more litigation, and it’s a scenario not currently addressed by the professional standards discussed previously.
These standards deal with two issues: public adjusters’ contracts and conflicts of interest. Both issues are important and should be regulated by public adjusters. However, current professional standards do not address the problems discussed in the scenario. Professional standards that remove the incentive for public adjusters to inflate estimates are required. Following are three suggestions:
1. Cap on Fee Percentage—One state, Illinois, is trying to pass legislation that would cap public adjuster fees at 10 percent of what the insurance carrier pays for the loss. This is a good start. Capping public adjuster fees protects insureds by limiting the percentage of the claim payment(s) that will be paid to the public adjuster as fees. But a cap alone isn’t sufficient to protect insureds from the scenario previously discussed. A fee cap, combined with other fee-related standards, is required.
2. Reduced Fees in Litigated Claims—As discussed, if an insured retains a public adjuster and then has to retain an attorney to file suit against his carrier and recover, the insured will owe fees to both the public adjuster and the attorney. In my experience, insureds sue their insurance carriers because 1) the claim is denied without payment or 2) there is a significant dispute between the insured and the insurance carrier regarding the extent of damage and the scope/price of repairs. In cases where the source of the dispute between the insured and insurance carrier is associated with an inflated estimate from the public adjuster, the public adjuster should not be able to recover her or his full fee. Instead, the public adjuster’s fee should be reduced to reflect that the public adjuster’s actions have led to litigation and that the insured will be responsible for attorney and public adjuster fees. If the public adjuster knows that the fees will be reduced if the claim results in litigation, presumably, she will avoid actions that are likely to lead to litigation.
3. Limit Fees to Difference Between Initial and Final Claim Payment—For those claims that result in litigation and reduction in the public adjuster’s fee, the reduction should be based not on the final claim payment but on the difference between the initial claim payment and the final claim payment. Let’s see how this works in my example:
Claim Payment Public Adjuster Fee (15 percent of payment)
– $10k initial $0
– $5k supplemental $750
– $35,750 final $5,362.50
Total Fees Paid to Public Adjuster: $6,112.50 (fee paid on supplemental payment + fee paid on final payment)
Claim Payment Public Adjuster Fee (15 percent of difference)
– $10k initial $0
– $5k supplemental $0 (fee not calculated until final payment)
– $35,750 final $3,862.50 (final payment of $35,750 minus initial payment of $10k = $25,750 @15% = $3,862.50)
Total Fees Paid to Public Adjuster $3,862.50
Total fee reduction – $2,250 ($6,112.50 – $3,862.50)
Reducing fees in this way compensates the public adjuster for the value of their efforts that presumably, combined with the actions of the insured’s attorney, resulted in the final payment. At the same time, however, the fee reduction recognizes the impact of the additional time and cost associated with the litigation claim. Limiting fees in this way will be particularly impactful in those situations, as opposed to my example, in which there is much less of a difference between the initial and final claim payments, i.e., the public adjuster’s estimate is inflated. Coupling fee reductions with a cap on the fee percentage should reduce the number of inflated claims and, in turn, reduce the number of litigated claims. If public adjusters understand that their fees will be reduced (possibly to zero) if the claim is litigated, they will presumably have less incentive to inflate estimates and take other actions likely to result in litigation.
Efforts to regulate public adjusters should protect insureds from actions that result in extended claim processes, litigation, and unnecessary fees. Regulating public adjuster fees is a good start.
Recovering Attorney, Claims GPS
Suzanne Ganier is a recovering attorney who has been working in the insurance industry for over 25 years. She provides expert and consulting services nationwide and is a licensed independent adjuster in over a dozen states, including Florida. She lives in Rosemary Beach, Florida. She can be reached at GanierEnterprises@outlook.com.