Shannon W. Conway
Associate Professor at UNT Dallas College of Law
ISSUE 16 | FALL 2024 | CONSUMER PROTECTION |
Since 2003, the Texas Insurance Code has included Chapter 4102, titled Public Insurance Adjusters, a comprehensive licensing statute regulating public insurance adjusters.¹ Chapter 4102 was enacted to require such licensing to protect the public from unlicensed individuals and companies performing public adjusting services without being properly licensed as a public insurance adjuster.²
In June 2020, Stonewater Roofing, Ltd. Co. sued the Texas Department of Insurance (TDI) to declare these licensing requirements invalid so as “to protect and preserve its rights to free speech and due process” and allow Stonewater to continue to advertise and engage in unlicensed public insurance adjusting services on behalf of its roofing business customers.³ Stonewater’s claims were dismissed by the Travis County District Court;⁴ the Amarillo Court of Appeals reversed the dismissal;⁵ and in June 2024, the Texas Supreme Court reversed again, agreeing with the trial court that Stonewater’s petition did not “state cognizable speech and due process claims under the First and Fourteenth Amendments.”⁶
This article briefly discusses the problem that sections 4102.163(a) and 4102.051(a) of the Texas Insurance Code are intended to solve, the constitutional pleas made by Stonewater and rejected by the Texas Supreme Court, and the reasons why such statutory provisions are necessary for the protection of Texas insureds.
A. The Problem Solved by Chapter 4102 of the Texas Insurance Code
Most Texas homeowners and commercial property owners are insured under various forms of Homeowners Insurance policies, Property Insurance policies, or other forms of insurance intended to protect the insureds’ property. Such insurance is generally required of property owners whose homes or commercial buildings are encumbered by a mortgage held by a lending institution.⁷ When a weather event or other damage-causing event affects insured property, these property insurance policies kick in to help absorb the costs of, for example, replacing a damaged roof. Weather-related disasters breed potential for insurance and repair scams, often with the property owners as the sole victims.
Imagine, for example, a homeowner who experiences roof damage from a hailstorm. Within a day or two, a roofing contractor approaches the homeowner and promises to “handle the claims process” with the homeowner’s insurance company and make the necessary repairs to the homeowner’s roof or replace it altogether. The homeowner—stressed by the prospect of a damaged roof and associated additional problems—readily agrees and contracts with the roofer to handle the claim by communicating and negotiating with the insurance company on the insured homeowner’s behalf.
This situation is rife with risk. When an insured homeowner lets a contractor handle his claim, the insurance company pays the contractor directly for the repairs rather than the homeowner. Thus, if the contractor performs inadequate repairs, fails to replace the roof with a roof of similar quality, or inflates the costs of repairs, the insured homeowner is left without recourse because the insurance company has already paid the contractor the amount negotiated. Even good-intentioned contractors may not have the requisite expertise to interpret insurance policy provisions and may negotiate a bad claim settlement on behalf of the insured homeowner. Often, this process leaves insured homeowners uninformed, uncompensated, and unhappy if the insurance company has paid the contractor the negotiated settlement, then the insured homeowner is not only stuck with that negotiated settlement but rendered nearly helpless if the roof repair or replacement is not completed properly.⁸
In 2003, the Texas legislature set out to remove the above-described situation from legal possibility by adopting laws to “close a gap in the regulatory scheme and address concerns that unscrupulous contractors were preying on unwary Texans in the aftermath of catastrophic weather events.”⁹ The Public Adjusters Act, codified as Chapter 4102 of the Texas Insurance Code, defines a “Public insurance adjuster” as:
(A) a person who, for direct, indirect, or any other compensation:
(i) acts on behalf of an insured in negotiating for or effecting the settlement of a claim or claims for loss or damage under any policy of insurance covering real or personal property; or
(ii) on behalf of any other public insurance adjuster, investigates, settles, or adjusts or advises or assists an insured with a claim or claims for loss or damage under any policy of insurance covering real or personal property; or
(B) a person who advertises, solicits business, or holds himself or herself out to the public as an adjuster of claims for loss or damage under any policy of insurance covering real or personal property.¹⁰
The Public Adjusters Act, at sections 4102.051(a) and 4102.163, also provides:
4102.051. LICENSE REQUIRED . . . (a) A person may not act as a public insurance adjuster in this state or hold himself or herself out to be a public insurance adjuster in this state unless the person holds a license issued by the commissioner . . .¹¹
4102.163. CERTAIN CONTRACTOR BUSINESS PROHIBITED. (a) A 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 contracting services, regardless of whether the contractor:
(1) holds a license under this chapter; or
(2) is authorized to act on behalf of the insured under a power of attorney or other agreement.¹²
The Public Adjusters Act allows for administrative penalties, criminal penalties, and gives an insured the option to void their contract for the unauthorized provision of unlicensed public adjuster services.¹³ Texas is not the only state to enact prohibitions against persons assuming the role of a public insurance adjuster without the requisite license. At last count, forty-five of the fifty United States have similar provisions.¹⁴
After the Public Adjusters Act’s enactment, many contractors were undeterred by—or perhaps unaware of—the illegality of their business practices. Areas hit by particularly intense rainstorms, windstorms, and/or hail were still sprinkled with roofing contractors’ advertisements touting themselves as “insurance specialists”, or “leader[s] in insurance claim approval.” Contractors still required their customers to execute contracts authorizing the contractors to negotiate on behalf of the customers with their insurance companies and to accept payment for the work directly from the insurance companies.¹⁵
However, insured homeowners, commercial property owners, and their counsel began fighting back. In one case of note—a class action by homeowners against a large roofing contractor, Lon Smith Roofing and Construction—the class was certified by the Fort Worth District Court, which was affirmed by the Fort Worth Court of Appeals.¹⁶ In Lon Smith, the class plaintiffs sought a declaratory judgment¹⁷ to declare their agreements with Lon Smith “illegal, void, and unenforceable” and a judgment “restoring all monies paid to [Lon Smith] under the illegal contract[s].”¹⁸ The class also sought damages based on, among other things, violations of the Deceptive Trade Practices Act, the Texas Debt Collection Practices Act, and fraud.¹⁹
After another case involving “a dissatisfied commercial customer” was instituted against Stonewater Roofing for alleged violations of Chapter 4102,”²⁰ Stonewater Roofing launched an unsuccessful workaround to the provisions and their enforcement. In a collateral lawsuit, Stonewater sought, to have sections 4102.051(a) and 4102.163 of the Public Adjusters Act declared unconstitutional as an invasion of Stonewater’s First Amendment right to free speech.
B. No Constitutional Impediments to Enforcing the Public Adjusters Act Provisions
Stonewater Roofing initiated its lawsuit against the Texas Department of Insurance (TDI) under the First and Fourteenth Amendments to the United States Constitution and Article I of the Texas Constitution.²¹ Characterizing its communications with its customers as truthful commercial speech, Stonewater complained that sections 4102.051(a) and 4102.163 “both facially and as applied to [Stonewater’s] alleged conduct, infringe speech protected by the First Amendment and are void for vagueness under the Fourteenth Amendment’s due process clause.”²²
TDI moved to dismiss Stoneware’s claims, arguing that the laws regulate professional conduct, which is not protected by the First Amendment, and clearly prohibit Stonewater’s alleged actions.²³ The TDI contended this invalidated Stoneware’s vagueness challenges under the Fourteenth Amendment. The district court agreed with TDI and dismissed the suit.²⁴ The Amarillo Court of Appeals reversed, finding that the First Amendment could apply because “the business of public insurance adjusting necessarily and inextricably involves speech.”²⁵ The Court of Appeals further concluded that the provisions were subject to strict scrutiny as both content- and speaker-based speech restrictions and that, in the alternative, they required intermediate scrutiny “even if these prohibitions restrict speech only incidentally in the regulation of non-expressive professional conduct.”²⁶
The Texas Supreme Court agreed with the district court, holding that sections 4102.051(a) and 4102.163:
are conventional licensing regulations that are triggered by the role a person plays in a nonexpressive commercial transaction, not what any person may or may not say. The statutes are also clear enough in proscribing the roofer’s alleged conduct to preclude both its as-applied and facial vagueness challenges.
With respect to the First Amendment, whether it applied at all depended on “whether the challenged statutes are directed at protected speech (as Stonewater contend[ed]) or not (as TDI maintain[ed]).”²⁷ Section 4102.051(a)’s licensing requirement does not regulate protected expression because it only prescribes what a person must do to serve the role of a public adjuster—get a license, which only “pertains to status or capacity, neither of which is speech.”²⁸ That this statutory provision also prohibits holding oneself out as a public insurance adjuster if unlicensed did not matter because, according to the Stonewater court, “there is no question that if the State may permissibly require a license to engage in the profession, it may permissibly prohibit false commercial speech about the same.”²⁹
And the same holds true for the dual-capacity prohibition in section 4102.163. Prohibiting a contractor from acting “as a public adjuster or advertising to adjust claims for any property for which the contractor is providing or may provide contracting services” does not constrain speech. Rather, it “dictates what a contractor may not do: undertake a business engagement giving rise to a conflict of interest.”³⁰
The Court was similarly dismissive of Stonewater’s as-applied and vagueness claims, refusing to “consider whether the statutes might be vague as applied to hypothetical situations not before us.”³¹ The Court focused primarily on what the statute does not prohibit Stonewater from doing, citing the TDI’s formal guidance that allows contractors to freely “discuss” and “answer questions about” issues such as the “amount of damage to the consumer’s home,” appropriate repair or replacement costs, and scope of work and repair estimates.³²
C. The Necessary Protections Afforded by the Public Adjusters Act to Texas Insureds
The circumstances described in the hypothetical at the beginning of this article are not all that hypothetical. Rather, they describe the unfortunate situations in which far too many insured homeowners and commercial property owners have unwittingly found themselves: in a state of emergency or duress, blindly authorizing a contractor to negotiate on the insured’s behalf with an insurer, arranging for payment to be made by the insurer directly to the contractor, and risking that the work is never completed or is defective.
Indeed, in 2012, the TDI issued a bulletin prior to the 2013 effective date of the dual-capacity prohibition of section 4102.163.³³ In it, the TDI warned all insurance agents, public insurance adjusters, and insurance companies that contractors, roofing companies, and others not licensed by TDI “have been advertising or performing acts that would require them to hold a public insurance adjuster license” and “that the tactics used by these unlicensed individuals include visiting neighborhoods and areas of the state where languages other than English are commonly spoken. These unlicensed individuals often prey on unknowing consumers by promising to ‘work’ insurance claims to achieve a higher settlement.”³⁴ The notice cautioned the agents, licensed adjusters, and insurance companies that working with such unlicensed individuals or entities also subjects them to penalties under the Public Adjuster Act. The Lon Smith class action evidences that the unlicensed public adjuster actions of just one roofing contractor affects “approximately 3,000 persons.”³⁵
While the Public Adjusters Act’s existence alone may not dissuade contractors unaware of its provisions and prohibitions from continuing to provide unauthorized and illegal public adjuster services to their customers, it certainly serves as an incentive for the insurance companies, insurance agents, licensed public adjusters, and others to refrain from working with those unlicensed individuals and entities. Moreover, with the Texas Supreme Court now confirming the constitutionality of the prohibitions contained in the Public Adjusters Act, the certification of a class action against a roofer for such prohibited conduct, and the ability for insured homeowners and commercial property owners to void their illegal contracts with contractors engaging g in such conduct, the protections provided to insureds against opportunistic contractors are more robust than ever.
Suggested Citation: Shannon W. Conway, The Texas Supreme Court’s Rejection of a Stonewatered-Down Version of the Insurance Code Protects Property Insureds, ACCESSIBLE LAW, Fall 2024, at 1.
Sources:
[1] Tex. Ins. Code Ann. § 4102.
[2] Lon Smith & Assocs. v. Key, 527 S.W.3d 604, 618 (Tex. App.—Fort Worth 2017, pet. denied).
[3] Plaintiff’s Original Petition, Tex. Dep’t of Ins. v. Stonewater Roofing, Ltd., 696 S.W.3d 646 (Tex. 2024) (No. D-1-GN-20-003172), 2020 WL 13490214.
[4] Stonewater Roofing, Ltd. v. Tex. Dep’t of Ins., No. D-1-GN-20-003172 (201st Dist. Ct., Travis County, Tex. Dec. 20, 2020).
[5] Stonewater Roofing, Ltd. v. Tex. Dep’t of Ins., 641 S.W.3d 794 (Tex. App.—Amarillo 2022), rev’d, 696 S.W.3d 646 (Tex. 2024), and reh’g denied, 2024 Tex. LEXIS 440 (Sep. 27, 2024).
[6] Stonewater Roofing, 696 S.W.3d at 653.
[7] See, e.g., What is homeowner’s insurance? Why is homeowner’s insurance required?, Consumer Fin. Prot. Bureau (Aug. 8, 2024), https://www.consumerfinance.gov/ask-cfpb/what-is-homeowners-insurance-why-is-homeowners-insurance-required-en-162/ (“Homeowner’s insurance pays for losses and damage to your property if something unexpected happens ... lenders generally require proof that you have homeowner’s insurance.”); see also James E. Branigan & Joshua Stein, Benchmark Insurance Requirements for Commercial Real Estate Loans, And Why They Say What They Say, 19 The Real Estate Finance Journal 10, 10 (2004) https://www.joshuastein.com/PDF/Benchmark_Insurance_Requirements_1414.pdf.
[8] The problem of unlicensed individuals or companies performing public insurance adjusting services “has become pervasive throughout the United States, particularly in times immediately following a catastrophe” and is “known as the Unauthorized Practice of Public Adjusting (UPAA).” Brian S. Goodman & Justin A. Redd, The unauthorized practice of public adjusting, ALM Property Casualty 360 (Jan. 16, 2020. 12:00 AM), https://www.propertycasualty360.com/2020/01/16/the-unauthorized-practice-of-public-insurance-adjusting/?slreturn=2024110283827.
[9] Stonewater Roofing, 696 S.W.3d at 653 (citing Act of June 1, 2004, Tex. S.B. 78th Leg., R.S., ch. 207, § 3.02, 2003 Tex. Gen. Laws 962, 964-76 (regulating “public insurance adjusters” effective June 11, 2003)); S. Comm. on Bus. & Com., Bill Analysis, Tex. S.B. 127, 78th Leg., R.S. (2003); H. Rsch. Org., Bill Analysis, Tex. S.B. 127, 78th Leg., R.S. (2003).
[10] Tex. Ins. Code Ann. § 4102.001(3).
[11] To secure a license as a public insurance adjuster one must, among other requirements, have sufficient experience or training in the assessment of property values and losses; be sufficiently informed about the terms and effects of typical insurance contracts; and successfully pass an examination of the applicant’s technical competence, basic knowledge of relevant topics, and understanding of governing law and ethical standards. Tex. Ins. Code Ann. §§ 4102.053, 412.057.
[12] Section 4102.163 was not added to the Public Adjusters Act until 2013.
[13] Tex. Ins. Code §§ 4102.204, 4102.206, 4102.207.
[14] See Stonewater Roofing, 696 S.W.3d at 652 n.17 (listing citations to 45 state statutes with similar language to §§ 4102.051(a) and .163).
[15] See id. at 653 (“The roofer also touts itself as ‘highly experienced with the insurance claims process,’ having ‘done thousands of roof restorations due to insurance claims over the years’” and “the company’s customer contracts specifically ‘authorize’ Stonewater ‘to negotiate on [the customer’s] behalf with [the] insurance company and upon insurance approval to do the work specified.’”); Lon Smith & Assocs., Inc. v. Key, 527 S.W.3d 604, 615 (Tex. App.—Fort Worth 2017) (quoting language from a roofer’s agreement with its customer: “This 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 homeowner[s’] 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.”).
[16] Lon Smith & Assocs., 527 S.W.3d at 640.
[17] A declaratory judgment is court ruling that defines the legal relationship between parties and clarifies their rights. It resolves uncertainty about legal obligation or rights between parties by providing an enforceable decision. declaratory judgment, Cornell Legal Info. Inst. https://www.law.cornell.edu/wex/declaratory_judgment#:~:text=A%20declaratory%20judgment%20is%20a,means%20to%20resolve%20this%20uncertainty(Sept. 2022).
[18] Lon Smith & Assocs., 527 S.W.3d at 611.
[19] Id.
[20] Stonewater Roofing, 696 S.W.3d at 652.
[21] Id. at 649.
[22] Id.
[23] Stonewater Roofing, 696 S.W.3d at 652.
[24] Id.
[25] Stonewater Roofing, 641 S.W.3d at 803.
[26] Id. at 805.
[27] Stonewater Roofing, 696 S.W.3d at 655.
[28] Id.
[29] Id.
[30] Id.
[31] Id. at 663.
[32] Id. at 664–65 (quoting Tex. Dep’t of Ins., Frequently Asked Questions: Unlicensed Individuals and Entities Adjusting Claims (2014), https://www.tdi.texas.gov/bulletins/2014/documents/unlicensedfaq.pdf)
[33] Tex. Dep’t of Ins., Commissioner’s Bulletin #B-0017-12 (June 26, 2012), https://www.tdi.texas.gov/bulletins/2012/cc16.html
[34] Id.
[35] Lon Smith & Assocs., Inc. v. Key, 527 S.W.3d 604, 625 (Tex. App.—Fort Worth 2017).
