To What Extent Must California Property Adjusters Consider Public Adjusters' Evidence When Settling Claims?

AUTHOR’S NOTE: This article is written based on property claim adjusting practices, regulations, and statutes specific to California. However, most of what follows is also applicable in other states with similar regulations.

Property insurance claims for building, dwelling, or other structure damage are typically investigated by insurers’ staff or independent adjusters (IA). The investigation usually involves obtaining or preparing a construction repair or replacement estimate for the covered property. When an insured or an insured’s public adjuster (PA) disagrees with the adjuster’s estimate, one of two things most often occurs: The insured or PA either submits a competing estimate written by the PA or by the PA’s expert, or the insured or PA submits a list of items or costs believed to be inadequate or missing from the insurer’s adjuster’s or IA’s estimate.

In response, if requested, the insurer can refer the insured or PA to a repair entity or individual to do the work for the adjuster’s estimate. If such a request is not made, the insurance company at this point has two options:

1. “Pay the difference” between the insurance adjuster’s or IA’s estimate and the public adjuster’s estimate or the public adjuster’s expert’s estimate (Section 2695.9[d][1] of the California Fair Claims Settlement Practices Regulations); or

2. “Reasonably adjust any written estimates prepared by the repair individual or entity of the insured’s choice and provide a copy of the adjusted estimate” to the insured (Section 2695.9[d][3] of the California Fair Claims Settlement Practices Regulations).

For good reasons, rarely will an insurer choose option 1. This is because PAs are paid based on the amount they obtain in settlement from the insurer on behalf of the insured. Therefore, a PA will never submit a repair estimate or expert report that disagrees with the PA’s or insured’s position. It never, ever happens and never will happen because it runs contrary to the purpose of using a PA in the first place: To identify and to negotiate items or costs owed but not included in the insurer’s estimate or settlement. Therefore, simply ‘paying the difference’ between an insurer’s adjuster’s or IA’s estimate and a higher estimate submitted by a PA, as a matter of practice, is financially nonsensical for any insurer.

Occasionally, there may be a small claim dispute where it makes more financial sense to “pay the difference.” Or there may be a claim where, though the difference is more significant, the insurance adjuster or IA obviously omitted a key item or cost. In such instances, an insurer might simply “pay the difference between its written estimate and a higher estimate obtained by” the PA or by an insured. Otherwise, insurers, staff adjusters, and IAs regularly settle claims based on 2., a ‘reasonably adjusted’ estimate from the insured’s chosen “repair individual or entity.” It is also possible an insurer may obtain a third-party estimate and attempt to use it to negotiate a settlement with the insured or PA.

Insurance adjusters and IAs are required to consider PA estimates and expert reports to see if they contain information we missed or could use in the claim settlement. But this is much different from relying on PA estimates or experts to settle claims. Insurance adjusters and IAs are not even required to “reasonably adjust” estimates other than those written by “the repair individual or entity of the insured’s choice” (Section 2695.9[d][3]). We are only required to consider submitted PA evidence to a reasonable extent consistent with Section 2695.7(g)(1) of the California Fair Claims Settlement Practices Regulations:

 

Section 2695.7 – Standards for Prompt, Fair and Equitable Settlements

 

(g) No insurer shall attempt to settle a claim by making a settlement offer that is unreasonably low. The Commissioner shall consider any admissible evidence offered regarding the following factors in determining whether or not a settlement offer is unreasonably low:

 

(1) the extent to which the insurer considered evidence submitted by the claimant to support the value of the claim;

 If insurance staff adjusters or IAs are not required to reasonably adjust PA estimates other than those provided by the repair individual or entity chosen by the insured, to what “extent” must we ‘consider’ estimates or expert reports submitted by PAs? As far as Section 2695.7(g)(1) quoted above is concerned, the “extent” to which insurers must ‘consider’ other (non-repair-entity) evidence submitted by the PA is not defined. Therefore, we must define what qualifies as a reasonable ‘extent of consideration’ for an insurance adjuster’s or IA’s review of submitted PA evidence.

 Where it concerns plumbing, electrical, general construction, or other PA experts, every insurer, staff adjuster, and IA should consider the submitted evidence. To “consider” such evidence consistent with Section 2695.7(g)(1), quoted above, can be understood according to the use of the same term (“consider”) in subsection (g) of the same regulation, “The Commissioner shall consider any admissible evidence.” Then follows subsection (g)(1)’s use of “consider” for what insurers are to do toward submitted evidence. If we understand and use “consider” consistently between the two immediately connected subsections, it’s clear insurers must document a reasonable ‘extent of consideration.’ This can only be determined according to the evidence the insurer receives.

 Since insurance adjusters and IAs are not required to “reasonably adjust” written estimates prepared by anyone but the insured’s chosen repair entity or individual, how is an insurer to show a reasonable ‘extent of consideration’ to PA estimates? Based on my nearly three decades of experience adjusting claims in California, and in other states with similar regulations, there are three primary ways insurance adjusters and IAs can show a reasonable extent of consideration toward PA estimates:

 1.     “Reasonably adjust” the PA’s (non-repair entity’s) estimate. I know. We don’t have to do this. But insurance adjusters and IAs can still choose this option. The main problem with this approach to documenting an insurer’s ‘extent of consideration’ is it likely will have to be done all over again! This is because unless the insured is settling at Actual Cash Value, once a repair contractor is chosen by the insured the insurer is still obligated by Section 2695.9(d)(3). This is why I recommend a combination of options 2. and 3. (below) rather than ‘reasonably adjusting’ a PA’s estimate. After the insured chooses a repair contractor, an insurer can fulfill its obligation to Section 2695.9(d)(3) by ‘reasonably adjusting’ that estimate and providing a copy of the adjusted estimate to the insured or PA.

 2.     Call or meet with the PA and document the conversation in the claim file. Section 2695.9(g)(l) and Section 2695.3(a) of the California Fair Claims Settlement Practices Regulations are relevant here, with the latter referencing the former in the quotation below. These two Regulations show that documenting a conversation over the phone or in person represents a proper ‘extent of consideration’ toward PA estimates or expert reports. Properly documented conversations with sufficient details can even be used as the basis for accepting or denying a claim:

 

 Section 2695.7 – Standards for Prompt, Fair and Equitable Settlements

 

(l) No insurer shall deny a claim based upon information obtained in a telephone conversation or personal interview with any source unless the telephone conversation or personal interview is documented in the claim file pursuant to the provisions of Section 2695.3.

 

 Section 2695.3 – Standards for Prompt, Fair and Equitable Settlements

 

(a) Every licensee’s claim files shall be subject to examination by the Commissioner or by the Commissioner’s duly appointed designees. These files shall contain all documents, notes and work papers (including copies of all correspondence) which reasonably pertain to each claim in such detail that pertinent events and the dates of the events can be reconstructed and the licensee’s actions pertaining to the claim can be determined.

           

      3.     Provide “a complete written response” including a “statement” explaining what is accepted, what is denied, and why any items are denied. Even if the detailed conversation notes described in 2. (above) are in the claim file, insurers still must provide PAs with complete written responses (Section 2695.5[b]). This includes a written “statement listing all the bases for such rejection or denial and the factual and legal bases for each reason given for such rejection or denial” (Section 2695.7[b][1]).

 After reviewing the above three options, the most effective way insurance adjusters and IAs can show a reasonable ‘extent of consideration’ toward PA estimates and expert reports is a combination of 2. and 3. This involves documented conversations with the insured or PA (item 2.) followed by a written response to the submitted evidence (item 3.). The written response does not require a “reasonably adjusted’ copy of the PA’s estimate, as it does with chosen repair entity estimates. Some insurance adjusters and IAs might argue for all three to be used for this purpose. But 2. and 3. satisfy the existing communication and settlement regulations and they show reasonable consideration of non-chosen-repair-entity or non-chosen-repair-individual evidence. This helps prevent insurers from duplicating the ‘reasonable adjustment’ required only for estimates obtained from the insured’s chosen repair contractor.—Section 2695.9(d)(3).

Once the insured or PA submits the chosen contractor’s repair estimate, the insurance adjuster or IA can “reasonably adjust” that estimate and provide a copy of the reasonably adjusted estimate to the insured or PA. Until then, insurance adjusters and IAs should consider using a combination of 2. and 3. when responding to PA estimates. Use option 1. only to show a reasonable extent of consideration toward a PA’s estimate for an Actual Cash Value payment if the insured has not chosen a repair contractor. Even here I recommend holding off on any ‘reasonable adjustment’ of any estimate other than the one from the insured’s chosen repair contractor. Otherwise, the adjustment could take longer and the insurer will likely end up paying more than is necessary after adjusting two estimates, when adjusting only one estimate is required.

If the insured intends to repair or rebuild the property, there are few legitimate reasons to delay the process of contractor selection. This means apart from an Actual Cash Value settlement not involving property repair or replacement, there are also few if any legitimate reasons for an insured or a PA to submit any estimate for ‘reasonable adjustment’ except the one from the insured’s chosen contractor. This is particularly the case if the insured has the benefit of an insurance adjuster, an IA, or a PA to assist with evaluating repair contractors and obtaining an estimate from the one chosen by the insured. 

Until the insured chooses a repair contractor to provide an estimate, the insurance adjuster or AI can simply duplicate the claim files notes described in 2. and use them in the written response and statement described in 3. This will save the insurance adjuster or IA time, help the insurer maintain file consistency, and fulfill the requirement for a reasonable ‘extent of consideration’ toward PA estimates and expert reports.

Greg Stafford operates Claim Affirm, LLC, an independent insurance adjusting company specializing in claims, appraisals, construction estimating, and exert witness services to insurance companies, TPAs, and other adjusting companies. Greg is a licensed claim adjuster in twenty states, including California, Florida, and Texas. He is also a Certified Construction Project Manager, and a court-qualified expert on claim adjusting, bad faith practices, and construction costs. For more information, please contact Greg at GregStafford@ClaimAffirm.com.