Contractors acting as public adjusters illegally could face class action lawsuits, according to a new decision by a Texas appeals court.
The finding could result in a pool of 3000 affected customers of A-1 Roofing.
The decision stems from an underlying case involving damage to the plaintiffs’ roof due to a May 2011 hailstorm. The plaintiffs notified their insurance carrier and signed a contract with A-1 (also known as Lon Smith Roofing and Construction) for roof replacement in the amount of $33,769.50. The plaintiffs received $18,926.69 from their homeowners’ insurer and paid that amount to A-1. To collect the balance owed, A-1 filed suit against the plaintiffs, obtaining a default judgment. The plaintiffs challenged the default judgment and obtained a judgment voiding it. A-1 appealed. The plaintiffs then filed a declaratory judgment against the roofer, indicating the contract was null and void since it wasn’t licensed to act as a public adjuster. They also alleged violations under Texas’ Deceptive Trade Practices Act and requested class certification for both claims.
According to the court, all class actions must satisfy four threshold requirements contained in the Texas Rule of Civil Procedure 42(a):
(1) numerosity (“the class is so numerous that joinder of all members is impracticable”); (2) commonality (“there are questions of law or fact common to the class”); (3) typicality (“the claims or defenses of the representative parties are typical of the claims or defenses of the class”); and (4) adequacy of representation (“the representative parties will fairly and adequately protect the interests of the class”)
According to the court, “Class-action treatment is particularly useful in this situation because it will determine the propriety of the behavior of the party opposing the class in a single action.”
The decision should cause roofers and other contractors to reconsider their solicitation tactics.
Steve Badger, a partner with Zelle LLP’s Dallas office, said the primary reason for the dramatic increase in the number of hail claims in Texas are contractors that inject themselves into the claims process. He said they solicit homeowners using door hangers, call centers, and other means to aggressively market to homeowners with the promises of a free roof. Badger said the homeowner then signs an agreement giving the contractor the right to negotiate the insurance claim and install the roof for the amount of the insurance proceeds.
These types of contracts are a favorite among storm chaser contractors who travel city-to-city looking for work after hail events, said Badger. There are even seminars and entire conferences that teach contractors how to market to homeowners using these contracts.
Badger brought attention to the issue of mounting hail claims in a 2015 article published by Claims Journal, “The Emerging Hail Risk: What the Hail is Going On?”
“The problem is that this entire business model is flat-out illegal,” said Badger, who noted that Texas law has been very clear that roofing contractors are not allowed to negotiate insurance claims.
The public adjuster licensing statute in was enacted in 2005 to curtail the unauthorized practice of public adjusting (UPPA) among contractors.
“The problem is so bad that a second statute was passed in 2013 stating the very same thing,” Badger said. “Both statutes contain criminal penalties for violators.”
Despite the two laws, there is little enforcement against the practice.
“Literally, every day I receive calls about contractors engaged in UPPA, both from insurance companies and homeowners. I routinely report contractors to the Texas Department of Insurance. The TDI will send a letter telling the contractor to stop. But that’s all that happens. There is no criminal enforcement. For every contractor I turn in, there are 25 others out there violating the law with no repercussions,” Badger said.
Insurers are under no obligation to negotiate with contractors and Badger often advises insurers to simply ignore them.
“The sad calls I receive are the ones from homeowners who have unwittingly signed-up with these contractors and only later realize their contractors are hucksters,” Badger said. “These homeowners believe they are stuck in the contract, as the contracts typically contain a penalty provision requiring the homeowner to pay 20-40 percent of the insurance proceeds to the contractor if the contract is canceled.”
Badger, who has been a vocal advocate against the rampant fraud he sees surrounding hail claims, said he could easily employ a team of lawyers that do nothing else but respond to calls related to contractor schemes.
“I have a dozen pro bono cases in the office right now where we are helping homeowners get out of these contracts,” he said. “But the toughest calls are from homeowners who have had their insurance proceeds ripped off after signing up with storm chaser contractors who never came back to put on their roofs. There is very little we can do to help these homeowners.”
Keys is an important decision, he said.
“Finally, the contractor is at risk. With this decision, there is now a strong body of case law in Texas helping consumers fight back,” Badger said. “The homeowner is no longer stuck in the contract. The homeowner can now argue that the contract is void, illegal and unenforceable and simply walk away from it.”
Badger is hopeful that the threat of lawsuits and class actions will cause contractors to think twice before engaging in UPPA.
“This opinion is a game changer. Under this decision, Lon Smith has to return all payments it has received from every single one of its homeowner clients who signed one of these illegal contracts. Every single dollar paid must be returned. That will be millions of dollars,” Badger said. “Now, every contractor in Texas who has employed this illegal scheme is at risk of similar lawsuits.”
Even if this decision deters contractors from engaging in this of type illegal conduct,
Badger said storm chasers and scammers will continue to operate under the radar and perpetuate the scheme.
“We’ll continue to knock these off one at a time,” said Badger. “But only when the Texas legislature finally realizes that we must have roofing contractor licensing and regulation, will Texas homeowners finally be protected from these crooks and frauds.
The Court of Appeals case is Lon Smith & Associates, Inc. and A-1 Systems, Inc., DBA Lon Smith Roofing and Construction v. Joe Key and Stacci Key.
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