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by Shannon O'Malley

The vast majority of states in the US have laws that regulate the roles of public adjusters in order to ensure they are qualified and to avoid conflicts of interest. In June 2003, Texas joined those states and enacted Section 4102.001 of the Texas Insurance Code, defining the profession of public adjuster as follows:

(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.

The law requires the public adjuster to be licensed. And it specifically prohibits a contractor, even if licensed as a public insurance adjuster, to “act as a public adjuster or advertise to adjust claims for any property for which the contractor is providing or may provide contracting services[.]” Tex. Ins. Code §§ 4102.163(a); 4102.158. “In other words, a person may not serve in a dual role—as both contractor and adjuster—in connection with property subject to an insurance claim or falsely advertise an ability to do so. A person violating the statute is subject to administrative, criminal, and civil penalties.” Texas Dep't of Ins. v. Stonewater Roofing Co., No. 22-0427, 2024 WL 2869414, at *2 (Tex. June 7, 2024).

Despite the twenty-plus years the law has been in effect, recently, a contractor challenged its constitutionality, claiming it infringed on the contractor’s First Amendment rights and the Fourteenth Amendment’s fair notice requirements. In Texas Dep't of Ins. v. Stonewater Roofing Co., No. 22-0427, 2024 WL 2869414 (Tex. June 7, 2024), roofing contractor, Stonewater Roofing, filed a declaratory judgment action against the Texas Department of Insurance in response to a complaint that its actions violated the Texas public adjuster laws. In particular, Stonewater advertised that it had “extensive experience in facilitating settlement of insurance claims.” Id. at *6. Stonewater’s website described it as an insurance specialist and a “Leader In Insurance Claim Approval” with a system to help its “customers settle their insurance claims as quickly, painlessly and comprehensively as possible.” Id. Moreover, Stonewater’s contract with clients specifically authorized Stonewater “to negotiate on [the customer’s] behalf with [the] insurance company and upon insurance approval to do the work.” Id.

These statements and the contract were challenged as violations of the Texas Insurance Code. Stonewater argued that the public adjuster laws infringed on its free speech rights and were void for vagueness. The Texas Supreme Court stepped in and definitively determined the public adjuster laws were constitutional and clear.

First, the Court determined that while free speech is “one of ‘our most cherished liberties,’” the government has a “freer hand in regulating commerce and conduct; such laws generally do not offend the First Amendment and are often upheld under rational-basis review.” Id. at *10-11. Based on that, the Court had “little trouble concluding that sections 4102.051(a) and 4102.163(a) do not regulate speech protected by the First Amendment.” Id. at *11-12.

The Court found section 4102.051(a)’s licensing requirement prescribes what a person must do, rather than infringed on protected expression. As with other regulated professions, the Court found “the State may permissibly require a license to engage in the profession [and] may permissibly prohibit false commercial speech about the same.” Id.at *12. Similarly, the court found the dual-capacity prohibition affected business actions rather than constraining speech. “Section 4102.163(a) dictates what a contractor may not do: undertake a business engagement giving rise to a conflict of interest. Regulated persons are permitted to provide either contracting services or adjusting services but not both types of services for the same property on the same claim….Like the licensing requirement, the dual-capacity prohibition circumscribes nonexpressive commercial activity.” Id. at * 13 (emphasis in original).

Nonexpressive commercial activity is not protected by the First Amendment. “‘The First Amendment does not prevent restrictions direct at commerce or conduct from imposing incidental burdens on speech,’ and professionals are no exception to this rule.” Nat'l Inst. of Fam. & Life Advocs. v. Becerra, 585 U.S. 755, 769, 138 S.Ct. 2361, 201 L.Ed.2d 835 (2018) (citations omitted) (quoting Sorrell v. IMS Health Inc., 564 U.S. 552, 567, 131 S.Ct. 2653, 180 L.Ed.2d 544 (2011). The Court recognized that a public adjuster’s role is to act as an agent of the insured – to represent the insured to the insurance carrier. “As defined, the profession’s actuating activity and dominant focus is employment in a representative (or agency) capacity.” Stonewater at *13. And a person’s status as an agent and work, including negotiating on behalf of an insured, is part of the person’s role. The speech necessary to negotiate for the insured are “incidental to the nonexpressive commercial activities delimiting the profession.” Id. at *17. In other words, if the person is speaking or advertising as part of the person’s role as the insured’s agent, it is not protected by the First Amendment but instead is part of a regulated commercial representative relationship. Given this, the Court determined the statute did not impermissibly infringe on the First Amended.

Next, the Court addressed whether the laws were too vague under the Fourteenth Amendment’s Due Process clause. The Court explained that “a vague statute offends due process in two ways. First, it fails to give fair notice of what conduct may be punished, forcing ordinary people to guess at the statute’s meaning. Second, the statute’s language is so unclear that it invites arbitrary or discriminatory enforcement.” Id. at *22. The Court determined that the Texas public adjuster laws pass muster under both circumstances.

The Court found fair notice because “[d]ue process is satisfied so long as the prohibition is ‘set out in terms that the ordinary person exercising ordinary common sense can sufficiently understand and comply with.’” Id. at 23. The ordinary person standard here is contractors and public adjusters. The Court noted that the statute does not prohibit contractors like Stonewater to discuss repairs that are subject to an insurance claim. Specifically, contractors “may ‘discuss’ and ‘answer questions about’ topics like ‘the amount of damage to the consumer’s home,’ ‘the appropriate replacement,’ ‘reasonable cost of replacement,’ ‘estimate for a consumer’s claim,’ ‘the scope of work in [a] repair estimate,’ or ‘supplements and clarifications concerning the revised estimate.’” Id. at 24. Essentially contractors can share their knowledge and experience to discuss repairs.

What the statute expressly prohibits is communications that evidence a prohibited engagement – i.e. if the contractor is acting in the role of public adjuster and communicating in a manner that is limited to a licensed public adjuster. Thus, the Court found that Stonewater’s advertisement and contract discussing its ability to “negotiate” with the insurance company “on the consumer’s behalf” and perform work “upon insurance approval” fell under the public adjuster bucket, rather than simply repair assessment. The Court determined there was fair notice given the language of the statute.

Ultimately, the Court determined that Stonewater’s website and contract violated the Texas public adjuster laws because “the messaging, which is the sum of its parts, describes conduct an ordinary industry participant exercising common sense would understand to violate section 4102.051(a)’s prohibition on an unlicensed person acting, advertising, or holding itself out as an insurance adjuster.” Id. at 26.

This clear-cut opinion should be a warning to those contractors who hold themselves out as insurance experts who can negotiate with carriers to get the most out of a claim. There is a clear conflict of interest when a contractor both negotiates a claim and tries to do the work – the contractor is encouraged to make the claim as large as possible. Keeping the roles between public adjusters and contractors separate maintains a semblance of fairness to the process and encourages contractors to bid work at accurate pricing.

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The opinions expressed are those of the authors and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.