Undisclosed Ownership Interest in a Restoration Vendor
An adjuster in Helena handles a large fire loss for a restaurant. The adjuster is a 20% owner of a restoration company, Rapid Dry, that is not on the insurer's preferred vendor list. After the fire, the insured calls the adjuster in a panic because water from firefighting is standing in the kitchen. The adjuster dispatches Rapid Dry without telling the insured or insurer about his ownership, and Rapid Dry performs $38,000 of mitigation and $12,000 of contents cleaning. The adjuster approves the invoices the same day. The policy has $500,000 building coverage, $100,000 contents coverage, and a $10,000 deductible. The insurer's panel has two other restoration firms within 30 minutes. The insured later learns of the ownership and complains that Rapid Dry's invoice was 40% above the panel firm's estimate. The adjuster says he 'got a good result' and that disclosure was unnecessary because the insured was in a hurry.
1. Identify the ethical violations and the specific risks in the adjuster's handling of the mitigation assignment and invoice approval.
Read the worked answer
The central problem is a conflict of interest. The adjuster is both the claim decision-maker and a 20% owner of the vendor being paid. That is self-dealing. Even if Rapid Dry did good work, the adjuster had a personal financial interest in dispatching it, setting the scope, and approving the invoice. Montana adjusters owe good faith and fair dealing, and an adjuster may not use the claim position to obtain an undisclosed benefit. The adjuster also failed to give the insured a meaningful choice among vendors, failed to disclose the ownership to the insured and insurer, and approved his own company's invoice without independent review. The emergency justified immediate mitigation, but not secrecy; the adjuster could have called the insurer's panel or told the insured, 'I own Rapid Dry; you may use it, but here are alternatives.' The 40% cost difference is a red flag for reasonableness and could support an unfair claim practice allegation if the insurer paid an inflated bill. The adjuster should have recused himself from vendor selection and invoice approval.
2. What should the adjuster do now to correct the situation, and what should the insurer do about the $50,000 in mitigation and cleaning invoices?
Read the worked answer
The adjuster should immediately disclose the ownership in writing to the insured, the insurer, and his supervisor, and withdraw from any decision involving Rapid Dry. The insurer should assign an independent adjuster or reviewer to evaluate the $38,000 mitigation and $12,000 contents cleaning. That review should compare Rapid Dry's scope, labor rates, equipment charges, and daily reports with the panel firms' estimates, and separate reasonable emergency work from unnecessary or betterment work. The insurer should pay the reasonable and necessary amount promptly and dispute or seek reimbursement of the excess rather than simply denying everything. The insured should not be penalized for the adjuster's conflict. The file should document the disclosure, the bids, the independent determination, and any recovery from Rapid Dry. The adjuster should also be reviewed for discipline and retraining. If the insurer concludes the conflict affected the claim, it should consider self-reporting to Montana regulators. The ethical lesson is that urgency does not eliminate disclosure; it makes a clear vendor-choice conversation more important.