Following a catastrophic event (such as a hurricane, tornado, or earthquake), insureds sometimes will not have the resources up
front to make the repairs to their property.
In many states, an insured can hire a contractor to perform the work in
exchange for a post-loss assignment of benefits (AOB) whereby the insured
assigns their rights in their insurance claim to the contractor making the
repairs. From there, the contractor, not
the insured, pursues payment of the claim from the insurer.
However, the arrangement discussed above is not permitted
in the State of Texas. Texas courts
enforce anti-assignment provisions in insurance policies that prevent an
insured from assigning its interest in an insurance claim to another.
To circumvent Texas law prohibiting AOBs, in the wake of
Hurricane Harvey we have seen some contractors and policyholders entering into contracts
whereby an insured purportedly grants a contractor a limited power of attorney
to pursue the insurance claim on the insured’s behalf. The consideration for acting in that capacity
is to receive the proceeds of the insurance claim.
As an initial matter, it is likely that a Texas court
would see through the limited power of attorney arrangement and find that it is
simply an assignment in “wolf’s clothing,” in which case the court would likely
find that the limited power of attorney was void on its face. However, there are several other problems with
this arrangement which could land a contractor in some serious hot water.
First, if a contractor negotiates a settlement of an
insurance claim pursuant to the limited power of attorney, he/she will be in
violation of the licensing requirements for public adjusters. In Texas, only licensed attorneys and
licensed public adjusters are permitted to negotiate or effect the settlement
of an insurance claim on behalf of a policyholder. See Lon
Smith & Associates v. Key, 527 S.W.2d 604 (Tex.App.‑Fort Worth 2017, no
pet.).
Second, the law is clear in Texas that negotiating an
insurance claim, even with a limited power of attorney, constitutes the
unauthorized practice of law. Green v. Unauthorized Practice of Law
Committee, 883 S.W.2d 293 (Tex.App.-Dallas 1994, no writ); Brown v. Unauthorized Practice of Law Comm.,
742 S.W.2d 34, 41 (Tex.App.—Dallas 1987, writ denied). Accordingly, not only
does a contractor risk having its contract voided by a limited
power-of-attorney arrangement, but it also risks being prosecuted by the State
Bar of Texas.
While obtaining an assignment of an insured’s
claim and controlling the claim process is certainly appealing for a contractor,
the consequences of engaging in such conduct in the State of Texas
significantly outweighs any purported benefit.
Posted by David Winter
