The Public Adjuster's Fee Line
A public adjuster, Ms. Okafor, represents a restaurant owner after a kitchen fire. Her written contract provides for 15% of the amount paid on the claim. The policy has a $2 million building limit, $300,000 business-income coverage, and $50,000 extra expense. You determine covered building damage of $410,000, business income of $120,000 for four months, and $25,000 in code upgrades that are not covered because the policy has no ordinance-or-law coverage. Okafor submits a settlement demand of $610,000: building $410,000, business income $120,000, 'public adjuster fee' $45,000, and 'permit/code' $35,000. She says the fee line is standard and that 'the carrier always pays it so the insured nets the same.' She also asks you to allocate the $45,000 to business income so it will be covered. The insured has not reviewed the demand.
1. Is Ms. Okafor's $45,000 fee a covered part of the fire loss? How should you respond to the demand?
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No. The policy responds to direct physical loss to covered property and to the specified business-income and extra-expense losses. A public adjuster's fee is a cost of the insured's chosen representation; it is not damaged property and is not an expense the policy insures unless the policy contains a specific claim-preparation or professional-fee endorsement. Nothing in this policy does.
Evaluate the demand line by line: $410,000 for building, $120,000 for business income, $0 for the $25,000 code item, and $0 for the $45,000 fee. Send a written explanation that identifies the policy provisions relied on and separates covered from uncovered items. Do not pay a global $610,000 simply to close the file. Also avoid expressing an opinion on whether the 15% fee is reasonable or enforceable; that is a private contract issue between the insured and the public adjuster. Your job is to pay the covered loss correctly and explain the basis clearly.
2. What is wrong with Okafor's request to allocate the fee to business income, and what should you document?
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Reallocating the fee to business income would mislabel an uninsured expense as an insured loss. That is not a coverage interpretation; it is a misrepresentation of the claim. Business-income coverage replaces actual lost earnings during the period of restoration, supported by financial records. A public adjuster's fee does not become lost earnings because the parties agree to call it that.
Document the original demand exactly as submitted, the request to reallocate, your refusal, and the factual basis for the business-income calculation. If the request is repeated in writing, escalate to management or compliance and consider whether a fraud referral is appropriate under company policy. Keep the covered business-income calculation transparent and separately stated. Your documentation should show that you evaluated the claim on its merits, not that you traded a coverage decision for a faster settlement. This protects both the insured and you if the file is later reviewed.
3. What should you communicate to the insured about the fee, and how should payment be handled?
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Tell the insured in writing that the carrier's payment is based on covered damage, not on the public adjuster's fee. Provide the covered and uncovered breakdown, including the code item and the fee, and invite questions. Explain that the fee is a private contract between the insured and Ms. Okafor and that the insurer is not adding it to the loss payment.
Do not pay the public adjuster directly unless the insured gives clear written direction and the mortgagee and policy requirements are satisfied. Even then, the payment should be identified as proceeds due the insured, not as a covered claim expense. If the insured disputes the fee, refer the insured to independent counsel rather than becoming the referee. Confirm that a written public adjuster contract exists and contains the required disclosures, but do not opine on its enforceability. Document all communications and keep the settlement offer separate from the fee dispute.