The Public Adjuster Paradox

A little known or little discussed fact about pubic adjuster-represented claims is that there is only one of two possible outcomes. One result is that the claim is paid correctly at the actual repair/replacement cost and the insured is not indemnified because a percentage of the claim payment goes to the public adjuster. The second possible outcome is that the claim is inflated above the actual repair/replacement cost and the insured is indemnified. Fraud has been committed by the amount of inflation needed to pay the public adjuster's fee and the amount of the claim paid above actual repair or replacement cost of the damage.

Neither of these outcomes is good public policy. Why do insureds contract with public adjusters when both outcomes are negative? Are insureds irrational -- as in the first example -- or do they intend to commit fraud (the second result)? Most probably, neither answer is correct.

One of the most common reasons that insureds retain the services of public adjusters is the perception that insurance companies do not fully disclose and fulfill the promises of the insurance contract. The "all risk (with certain exclusions)" policies created a lot of confusion and unreasonable expectations primarily because insureds tend to hear or read the "all risk" part of the policy and disregard the "exclusions" section. The most disturbing situation that re-enforces distrust of insurance companies is when carriers try to increase their bottom line through the use of restrictive claim payment processes. The recent revelation that some of the personal lines carriers adopted claim practices that resulted in delays, denials, and litigation of valid claim payments has only amplified that perception. Are the carriers assuming these practices irrational in thinking that restricting legitimate claim payments is the key to success? Do they intend to commit fraud by using tactics that may result in paying less than is actually owed? Again, neither answer is probably correct.

How can we resolve the public adjuster paradox in an equitable manner without trying to ascertain the motives of insureds and insurers? It will require the cooperation of insureds, consumer advocates, and insurance companies. It is also imperative that we have a clear understanding of the results of public adjuster-represented claims. There is no good outcome. The first step is to restore the public's faith in their insurance companies. A simple but effective method would be to make it in the insurers' best interest to pay all benefits available on legitimate claims. This should be the goal of all insurance companies. Full disclosure of contract benefits to insureds at the time of a claim is -- or should be -- the adjuster's responsibility. This process could be re-enforced with legislation that requires the carrier to pay the contract fee of the public adjuster above the additional benefits paid to the insured after the carrier had settled the claim with the insured. This will resolve the issue of the insured not being fully indemnified when they are represented by a public adjuster. It will also alleviate the need to inflate the claim to pay the public adjuster's fee.

There is a corresponding quid pro quo that should be implemented to resolve this paradox. Public adjusters will have to be restricted to payment for services rendered after the insurers have effectively settled claims with insureds. The public adjuster should not be enriched on the portion of the claim that the carrier disclosed and paid benefits. For the states that have valued policy laws, total losses are paid at policy limits. The public adjuster involvement has little effect on the payment of these types of claims and the insured is harmed by the amount of the fees paid to the public adjuster. The public adjuster is able to contract with insureds because of the reputation of carriers. The perception has to be changed. Legislative intervention requiring carriers to fully disclose and pay benefits while requiring public adjusters to benefit only from the additional payments the insured receives after settlement with the carriers is a logical first step in resolving the detrimental effects of public adjuster-represented claims.

The resolution of the public adjuster paradox is not quite that simple. Some states have enacted legislation that has created an (almost) impossibility of performance. Florida changed the Replacement Cost Statute (627.7011, subsection 3) in 2006 requiring homeowners' policies with replacement cost provisions to pay replacement cost "whether or not the insured replaces or repairs the dwelling or property." This subsection was added after the 2004 storms generating numerous complaints from insureds that they could not engage contractors without full payment upfront. Instead of addressing the real issue of dubious contractor activities, the legislature imposed this seemingly simple solution. The effects have been dramatic and unintended. How is it possible to determine the replacement/repair cost of damage to a building that has not been repaired? It's not so easy. Carriers have field adjusters that write repair estimates or, in some cases, they engage contractors to complete estimates. Is that the replacement cost that is owed whether or not repairs are completed? Maybe not. Much like Bugs Bunny in the old cartoons drawing line after line in the sand, public adjusters and some insureds have estimate after estimate that are often multiples of the carriers' adjuster or contractor estimate. Is that the replacement cost? It is obvious that the changes to 627.7011 will have to be corrected legislatively or the homeowners' insurance carriers in Florida will have to make a decision concerning the viability of offering this coverage.