The Adjuster's Fee on a Fire Loss With a Mortgage and a Depreciation Dispute
A public adjuster licensed in Arizona signs a contract with a homeowner to handle a kitchen fire claim. The dwelling is insured under an HO-3 with Coverage A of $420,000, a $2,000 all-perils deductible, and replacement cost on the dwelling plus actual cash value on personal property unless the insured submits a replacement-cost claim within 180 days. The carrier's initial estimate is $61,500 replacement cost, with $14,800 depreciation withheld on the dwelling and $6,300 depreciation withheld on contents. The homeowner has a $310,000 first mortgage and a $45,000 HELOC. The adjuster's contract states a fee of 15% of the "gross claim settlement." The homeowner asks whether the fee applies to the withheld depreciation, and the carrier's adjuster tells the homeowner that public adjuster fees cannot be paid from claim proceeds because the mortgagee's clause gives the lender priority. The homeowner is anxious and wants to sign a release for the undisputed amount immediately.
1. Explain how the fee should be computed and applied to the depreciation holdback, and identify the ethical issue in the adjuster's contract language.
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The fee base must be defined before any money moves. "Gross claim settlement" is ambiguous and, drafted by the adjuster, is generally construed against the drafter. A defensible approach is to compute the fee on the amount actually paid to or for the insured - that is, the net settlement after the deductible and after recoverable depreciation is actually released, not on depreciation that may never be paid. If the contract truly intends a fee on the full replacement-cost figure, that must be disclosed in writing with a worked example before signing.
Work the numbers: the carrier's replacement-cost estimate is $61,500; net of the $2,000 deductible the payable replacement cost is $59,500. Initially only ACV is paid, so the adjuster's fee should not be charged on the $14,800 dwelling depreciation or the $6,300 contents depreciation until those sums are recovered. If the insured later replaces and collects the $21,100 holdback, the fee on that increment is properly chargeable at that time. Charging 15% up front on money the insured has not received creates a conflict and can look like fee-splitting on unrecovered funds.
Ethically, the adjuster owes the insured undivided loyalty and full disclosure of compensation. The contract should state the fee percentage, the exact base, how deductibles and depreciation are treated, and that the insured may cancel. The adjuster should also correct the carrier's misstatement rather than let it stand.
2. The carrier's adjuster asserts that the mortgagee clause bars paying the public adjuster from claim proceeds. Evaluate that assertion and describe how the adjuster should advise the client.
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The assertion overstates the mortgagee clause. A standard mortgage clause protects the lender's interest to the extent of its insurable interest and typically allows the insurer to pay the mortgagee and the insured jointly, or to pay the insured where the mortgagee's interest is otherwise protected. It does not create a general rule that a licensed public adjuster's fee can never be paid from claim proceeds. In practice, claim checks for dwelling damage are commonly made payable to the insured and the mortgagee, and the lender's servicer releases funds through an escrow or draw process after inspecting completed work.
The practical consequence is timing, not prohibition. The adjuster should explain to the homeowner that: (1) the mortgagee will likely be a payee on dwelling checks; (2) the HELOC holder may also claim an interest depending on its recorded lien and the policy's loss-payable wording; (3) the adjuster's fee is a contractual obligation of the insured and should be budgeted from the insured's share, not assumed to come off the top before the lender releases funds; and (4) the insured should not sign a release of the entire claim to get the undisputed portion. A partial payment or an advance can be requested without a full release. The adjuster should document the carrier's misstatement in writing, request the policy's mortgage clause and loss-payable language, and confirm the fee arrangement in a signed disclosure so the homeowner understands net proceeds.