Court Hammers Roofer Who Was Acting as an Adjuster
Insurers have frequently battled with sometimes-unscrupulous parties who encourage homeowners to file claims for unneeded repairs. (These battles, in fact, spurred recent legislation that you can read about on our blog here and here.) A recent decision out of the Fort Worth Court of Appeals makes it clear that contractors who try to get around regulations for public adjusters – in other words, who offer to do work and seek payment from insurance companies – do so at their own risk. Lon Smith & Associates v. Key, No. 02-15-00328-CV, 2017 WL 3298391 (Tex. App.—Fort Worth Aug. 3, 2017, no pet h.).
In 2011, a hailstorm damaged the Keys’ roof. After notifying their homeowners’ insurance company of the damage, Joe Key signed a contract with Lon Smith Roofing and Construction to perform repairs for a total of $33,769.50. The contract included a section that stated the homeowner “authorize[d] Lon Smith Roofing and Construction (“LSRC”) to pursue homeowners best interest for all repairs, at a price agreeable to the insurance company and LSRC. The final price agreed to between the insurance company and LSRC shall be the final contract price.”
When the insurance payment did not cover the $33,769.50 total price, Lon Smith sued the Keys to collect on the rest of the contract. The Keys then sued Lon Smith in a class-action suit over the contract, arguing it was illegal, void, and unenforceable because it violated the Texas Insurance Code. Under the Code, a person cannot hold himself out as a public adjuster unless he has the required license. The code defines a public adjuster as a person who “acts on behalf of an insured in negotiating for or effecting the settlement of a claim.” Tex. Ins. Code. § 4102.001(3)(A)(i), (ii). Not only is advertising as a public adjuster without a license illegal – public adjusters are forbidden from participating directly or indirectly in repairing property that’s the subject of a claim because of the inherent conflict of interest. Id. § 4102.158(a)(1).
The court noted that the language in the Lon Smith contract about pursuing the homeowners’ best interests with insurance companies was in other contractor agreements that had already been litigated – at least one federal court found that the quoted language violated chapter 4012 of the Insurance Code and was void and unenforceable. See Reyelts v. Cross, 968 F. Supp. 2d 835 (N.D. Tex. 2013), aff’d, 566 Fed. App’x. 316 (5th Cir. 2014). Because the contract was void – not merely voidable at the election of the insured – the entire contract was completely unenforceable, and the insured was not liable for any payment for services rendered under it. Not only that, the federal court found that the contract’s language promising to advocate for the homeowner against the insurance company constituted a violation of the Deceptive Trade Practices Act’s prohibition on “unconscionable” actions against consumers, since it was illegal for the contractor to do so without a public adjuster license.
The Fort Worth court agreed with the prior federal court decision, ruling that the Lon Smith contract violated public policy and was void and unenforceable. The court flatly rejected Lon Smith’s argument that it was merely discussing the amount of damage to the consumer’s home and the reasonable cost of replacement with the insurance company, which is permitted – the contract expressly stated that Lon Smith would advocate for the homeowner by “pursu[ing] homeowners best interest.”
The court also rejected Lon Smith’s argument that because it was not an insurance adjuster, it couldn’t have violated the DTPA. The “tie-in” statute from the Insurance Code that allows consumers to sue for violations of the DTPA is Chapter 541, which governs insurance adjusters. Since Lon Smith was not an adjuster, his attorneys argued, there could be no cause of action under the DTPA for any insurance violations. The court concluded that the fact that Lon Smith misrepresented that it could and would advocate for homeowners as an adjuster was an unfair or deceptive act or practice in the business of insurance under chapter 541 of the Insurance Code.
The takeaway: not only did promising to act as an adjuster render the contract unenforceable (and, by extension, allow the homeowners or insurance companies to refuse to pay any amounts due), it also subjected the contractor to liability under the Insurance Code and DTPA, which allows recovery of treble damages. Given the fact that at least two cases have addressed identical language from separate contractors, there may be similar lawsuits on the horizon.