When Your Borrower Hires a Public Adjuster: A Guide for Mortgage Servicers

Even outside of the annual Hurricane and wildfire seasons, natural disasters, accidents and unfortunate events occur on a daily basis. Many of these catastrophic events result in damage to the mortgagor’s property. The mortgagor often elects to have professional representation and hires a public insurance adjuster. The adjuster contacts the mortgagee to inform them they have been hired by the mortgagor to resolve the insurance claim on their behalf.

Many mortgage servicers do not fully understand the role of a public adjuster. This article provides some basic information and answers a few common questions.

There are three types of insurance adjusters:
1) Company Adjuster – Works in-house for an insurance company and only represents the interests of the insurer.
2) Independent Adjuster – Performs field work and investigates claims for an insurer.
3) Public Insurance Adjuster – The only type of adjuster licensed to work solely on behalf of the insured.

A public insurance adjuster will review all policies in effect to evaluate coverages and calculate the amount of loss. The claim will be presented to the insurer and eventually settled. Sometimes there is a difference of opinion between the insurer and the insured on the claim amount owed. The public adjuster will strongly advocate for the insured.

How does the PA interact with the mortgage servicer?

Since the insured has certain duties under the terms of the policy, they often rely on a public adjuster to assist them in identifying and completing those duties. For example, the insured must notify their mortgage servicer of their loss and will be required by the servicer to complete certain forms and provide claim-related documents.

When loss drafts are issued for building damage, the name of the insured/borrower, the PA and mortgagee should be included. The public adjuster and the borrower will endorse the checks and forward them to the servicer. The servicer then places the insurance proceeds into a restricted escrow account. Funds will be released from the account based on the loan status and specific language in the Deed of Trust.

Most often the PA will charge a percentage of the claim amount and will expect to be paid their percentage from each check that is issued. This is where some of the challenges may arise.

Additional tips:

1) In order for the insured (borrower) to retain a public adjuster they must sign a contract with the public adjuster and it should spell out any fees being charged. Servicers should obtain a copy of this agreement as well as a document, signed by the insured (their borrower), authorizing the public adjuster to communicate with the servicer. It should spell out the nature of their relationship and what types of information the public adjuster can obtain (if any) about the loan.

2) While dealing with damages to their property, many borrowers will experience a temporary inability to pay their mortgage. This is an excellent opportunity to refer the insured to the servicer’s loss mitigation unit to assist the borrower during this period.

3) How does the public adjuster get paid if the servicer does not release the proceeds?

a. It is the insured’s obligation to pay the public adjuster. They can pay them from other proceeds – such as from the personal property claim.
b. Servicers should obtain authorization from the insured before making any payments to the public adjuster.
c. Courts have held that a PA has an equitable lien on the insurance proceeds for their fee. If a borrower retains a PA and then eventually loses their property to foreclosure, the mortgagee is still obligated to pay the public adjuster’s fees.

4) What if the proceeds are not sufficient to repair the property?
a. Is the PA pursuing additional proceeds?
b. What is the reason for the difference?
c. Is the PA contemplating referring the claim to an appraiser (for an independent valuation of the claim)?
d. Has counsel been retained?

5) Be on the lookout for PAs that are heavily involved in the repair process. In some states, if a public adjuster has handled a claim on a property they are prohibited from also repairing the same property, or having a financial interest in the repair, due to a conflict of interest. The servicer should make sure the property is inspected at each stage of repair, and ensure that the borrower documents their satisfaction with the repairs, to prevent problems down the road.

6) What if the public adjuster refuses to endorse the settlement check and send it to the mortgagee?
a. The mortgagee should be in direct communication with the insured and public adjuster. If necessary, the mortgagee can ask the insurer to interplead the funds and ask the court to assist in resolution.

7) Is the mortgagee advised to cooperate with the public adjuster? Yes.
a. As the representative of the borrower, the adjuster is the most knowledgeable about the claim and in the best position to keep the mortgagee informed.
b. If the mortgagee finds the public adjuster to be non-cooperative or hostile they can reach out to the borrower to resolve whatever issue is at hand.

8) Who regulates public adjusters?
a. Public Insurance Adjusters are currently regulated in 46 states by each state’s Department of Insurance – or its equivalent. There are only a handful of states that do not require licensing.
b. Some states have fee caps regulating the amount a PA can charge for their services. You may want to make sure your borrower is aware of this.
c. As of the date of this article, three states, Alabama, Arkansas and Alaska, do not allow PAs to charge any fees and do not recognize PAs.

9) What are some of the things a servicer can do to check the background of the PA?
a. Licensing status can be verified on most state’s Department of Insurance website, in the state where the loss occurred in. This verification is made easier by asking the public adjuster for their license number.
b. Servicers can determine if the PA belongs to any professional trade association. The most reputable and oldest trade association is the National Association of Public Insurance Adjusters NAPIA has a strict Code of Ethics that members must comply with. Additionally, NAPIA has minimum educational requirements that must be met.

Public Adjusters provide valuable services by assisting the insured in correctly valuing, adjusting and settling their claim. As the only licensed advocates of the insured, they should be considered a valuable resource in time of need. Maximizing the insurance settlement benefits the mortgagee as well as the borrower. Like all professions, not all PAs are created equal. If you encounter a public adjuster that seems to be a problem consider contacting their state insurance regulatory authority for assistance.