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It is a fairly regular occurrence for claim representatives to be faced with an insured represented by a Public Adjuster who becomes dissatisfied with the service being provided and, thereafter, "fires" the Public Adjuster. Once the Public Adjuster is terminated, the claim representative can expect a deluge of letters and faxes from the Public Adjuster threatening suit against the insurance company if the Public Adjuster's interest is not protected on the settlement draft. This situation leaves the insurance company in the middle of a dispute essentially between the insured and his agent, the Public Adjuster. This past fall, the Pennsylvania Superior Court gave guidance on this issue in the case of Insurance Adjustment Bureau, Inc. v. Allstate Insurance Company, 2004 Pa. Super. 381.

The facts of the Insurance Adjustment Bureau, Inc. ("IAB") case are familiar. The insured suffered a fire loss on June 5, 2002. On June 7, 2002, the insureds retained the services of IAB in exchange for a 10 percent contingency fee. The pertinent Public Adjuster contract language is as follows:

The insured agrees to pay [IAB] for such services, a fee of 10% of the amount paid or agreed to be paid by the insurance companies in settlement of the loss, and reasonable expenses, hereby assigning to [IAB] all monies due or to become due from the insurance companies. The fee shall be due after proofs of loss are sworn to and/or first proceeds issued. [IAB] hereby agrees to perform the said services and to receive therefore the consideration described below. This agreement contains the entire agreement between the parties and may not be changed, altered, or amended except by a writing signed by all the parties hereto. ...

You, the insured, may cancel this contract at any time prior to midnight of the fourth calendar day after the date of this contract." Id. at 2.

For whatever reason, on August 7, 2004, the insured terminated IAB's services. Because of the insured's termination of the contract, Allstate issued payment of the settlement proceeds directly to the insureds, without including IAB's name on the settlement draft.

IAB subsequently sued not the insured but the insurance company for breach of contract and conversion. Allstate demurred, and the trial court ultimately dismissed the plaintiff's Complaint. IAB appealed, arguing that the insured's termination of the contract after the Public Adjuster performed services does not "constitute an effective revocation of [the] assignment." Id. at 5.

The court recognized that in an assignment situation like the Public Adjuster/Insured agreement, "the principal has power to revoke, and the agent has the power to renounce, although doing so is in violation of a contract between the parties…." Id. citing Restatement of Agency 2.d § 118 (b). The court set forth that the homeowner's policy is a contract between the insured and the insurance company and the Public Adjuster agreement is a contract between the insured and the Public Adjuster. Thus, IAB and Allstate were not parties to the same agreement. Id. at 9.

Accordingly, because the Public Adjuster contract at issue created a principal/agent relationship in which the principal, as a matter of law, retained the power of revocation, despite any language in the agreement to the contrary, the court found that Allstate did not owe a contractual responsibility to IAB. The court recognized that IAB's remedy would be to sue the insured for breach of contract not the insurance company.

IAB also argued that Allstate's conduct amounted to the tort of conversion. For technical reasons, the court found that IAB's claims sounded in contract and not tort. The court recognized that conversion claims cannot be "based on refusal to pay insurance policy proceeds." Id. at 14.

Please note that the court's opinion did not address the situation where a Public Adjuster is fired subsequent to the settlement but prior to the issuance of payment. If such a situation occurs, it could change the analysis because the insured may no longer be able to terminate the agency agreement.

If a claim representative receives a call directly from an insured who is dissatisfied with his Public Adjuster, that claim representative must be cautious not to say anything to interfere with the agency relationship. Claim representatives should not deal directly with the insured until such time that they are provided with a written revocation of the Public Adjuster agreement from the insured. Whether a revocation is sufficient may vary from case to case and should be evaluated carefully to determine whether the revocation is legally sufficient to sever the insured's relationship with the Public Adjuster and allow the insurer to deal directly with the insured. Given the Insurance Adjustment Bureau, Inc. case, if it is determined that the revocation is sufficient, it would be appropriate to issue payment directly to the insured.

*Jim is an associate in our Doylestown, PA office. He can be reached at (267) 880-2026 or jcole@mdwcg.com.