Policyholders across the country are forced to pay annual premiums to an insurance company in order to comply with lenders’ requirements that borrowers obtain insurance coverage on a mortgaged property. In addition, after sustaining damage to insured property, policyholders often must pay a deductible on top of their premium before the insurance company makes any contribution to the insured’s recovery from the loss. Further, all too often, the policyholder must also pay out of pocket for the professional services of claim adjustment. Why? Because the insurance company intentionally or negligently underpays claims following incompetent or intentionally deceptive claim investigation practices.
It is unfair and economically inefficient to require insured property owners to pay out of pocket to insure their property against casualty and loss, then also to pay out of pocket for their losses to be competently investigated and properly paid by the insurance company. The insurance company is paid to investigate losses, however, when they fail to do so properly, the loss amount is systematically under-estimated. This dereliction of duty benefits the insurance company’s own financial bottom line. Therefore, a conflict of interest exists in the claims process: the insurance company is tasked with determining their own liability. The insured is paying for someone with a conflict of interest to investigate their claim. In order to receive a proper evaluation of the property loss, insureds must often hire their own professionals to grade the homework of the insurance company’s investigation. When insureds hire a public insurance adjuster or attorney to represent them, claim values dramatically increase on average, but the insured must then pay those professional fees. The expenses of these professionals should be borne by the insurance company who was paid to handle the claim properly in the first instance.
It is time to fix this market failure. With climate change causing the increased frequency and severity of extreme weather events, we are seeing an unprecedented rise in casualty and loss events nationwide. As long as policyholders have to pay out of pocket for losses to be properly investigated, our nation is at risk of a steadily eroding built environment, where damaged properties are not being restored, roofs are not being properly replaced, interior leaks turn into indoor air quality problems, resell prices are depressed, and so forth. For example, after a major coastal hurricane event, it may take a decade for an impacted community to recover, if ever—in large part because of the unreasonable delays, baseless claim denials, systematic underpayment, and overall incompetent claims handling practices of the insurance companies who are paid to do precisely the opposite. The bottom line is that the carriers’ negligence is forcing insureds to pay out of pocket for the services that are supposed to be performed by the insurance companies that have already been paid to perform by the insured’s premiums.
The purpose of insurance is to indemnify the policyholder. “Indemnify” means to make someone whole again, or to put the insured back into the position they were before the loss occurred. The notion that the insurance company should have to pay the fees associated with properly adjusting an insured loss is not a new idea. It is merely a straightforward application of the common law doctrine of consequential damages. Consequential damages is defined by the Pattern Jury Charge as:
“Consequential damages result naturally, but not necessarily, from the defendant’s wrongful act. Under the common law, consequential damages need not be the usual result of the wrong but must be foreseeable and must be directly traceable to the wrongful act and result from it.”
The typical fee for public adjusting services is usually no less than 10% of the total claim, depending on state law and the nature of the loss. The fee, when incurred as a result of the insurance carrier’s failure to comply with the insurance policy, is a recoverable consequential damage. In every case where these facts obtain, the insured should seek the public adjuster’s fee as part of the breach of contract damages. We encourage state lawmakers to codify the recoverability of the public adjuster fee in state statute, however this remedy should be available under the common law of virtually all jurisdictions.
There is no doubt that insurance companies know good and well that if they fail to properly settle an insurance claim, the insured will need to hire a professional—either a public adjuster or an attorney—to attempt to collect a proper settlement. The fees due to those professionals are natural, probable, and foreseeable consequences of the breach. In fact, attorney’s fees are recoverable for the non-breaching party in many jurisdictions under common law and statutory frameworks. The same treatment should apply to public adjuster fees as well. The non-breaching party should be made whole, including not only the actual damages but also the consequential damages such as professional fees required to obtain a proper settlement.
The reasoning provided in Hadley has become enormously influential on both sides of the Atlantic. The United States Supreme Court in 1894 recognized the influence of the Hadley decision on American law: this case “laid down … the principles by which the jury ought to be guided in estimating the damages arising out of any breach of contract.”[1] Indeed, the Hadley rule was later incorporated into Section 351 of the Restatement (Second) of Contracts. By 1994, the Hadley rule had been cited with approval by the State Supreme Courts of 43 U.S. states.[2] It is hard to find any rule with such universal approval by courts across the country.
Support the American Adjuster Association in our quest to make insured’s whole again. We will move lawmakers to adopt the principles of indemnity and consequential damages into state law.
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[1] Primrose v. Western Union Tel. Co., 154 U.S. 1 (1894).
[2] Thomas A. Diamond and Howard Foss, Consequential Damages for Commercial Loss: An Alternative to Hadley v. Baxendale, 63 Fordham L. Rev. 665 (1994).
Having been through it.. insurance companies don’t follow the rules… it’s common to ignore, delay, underfund, , insult, belittle, degrade, try and force the client to use their listed contracted companies and make you sign for it when they show up at the insurance companies request .. if the client says anything they can refuse the claim… saying you aren’t mitigating it…even if the client is reasonable and in the right with proof. They will use arbitration, which costs yet more money, where the odds are always stacked against the property owner. It isn’t right, but it’s the actual truth. You are allowed to recover attorney, adjuster costs, other fees associated out of pocket… however you also incur more out of pocket fees, delays etc… insurance has deep pockets most clients do not…they are just trying to feed themselves, deal with trying to survive… meanwhile you, the client and or property owner are mentally, physically, and financially worn down … the client loses all the way around… ..