Fee on a Split Payment and a Pending Appraisal
On March 2, a kitchen fire damaged a 12-unit apartment building. The owner signed a written public adjuster contract on March 5 that provides for a 10% fee on "net insurance proceeds recovered" and includes the required three-business-day cancellation notice. The building limit is $1,800,000 replacement cost; the insurer has paid $250,000 actual cash value and is holding back $350,000 depreciation. The insurer also disputes $90,000 of smoke-damage cleaning, saying the work is "betterment." The mortgagee is listed on the policy, and the $250,000 check is payable to the owner and the mortgagee. The insurer's adjuster has scheduled an examination under oath of the owner and has demanded five years of maintenance records. The owner wants the public adjuster to "just demand appraisal" and to take the 10% fee out of the $250,000 now. The policy contains a two-year suit limitation and an appraisal clause.
1. Is the public adjuster entitled to the 10% fee on the $250,000 ACV payment now? Analyze the contract, the source of the payment, and the ethical issue.
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The contract says 10% of net proceeds recovered, and the $250,000 is proceeds. But "net" must be defined: after the deductible, after any mortgagee entitlement, and after costs the contract makes the insured responsible for. The adjuster should not simply subtract 10% from the gross check without a written explanation.
The ethical problem is that the insurer paid the $250,000 without the adjuster's leverage; the disputed money is the $350,000 depreciation holdback and the $90,000 smoke-cleaning item. Charging the full 10% on the undisputed ACV payment can look like a fee on money the adjuster did not recover. The better practice is to disclose this in writing and either (a) defer the fee until final settlement, or (b) charge only on amounts recovered above the insurer's pre-retention position. If the contract clearly allows a fee on all proceeds, the adjuster may bill it, but must show the calculation and credit any later fee against the total.
The mortgagee's interest also matters. The owner may not control the entire $250,000, so the adjuster should not treat the check as fully available for fees.
2. The owner wants to demand appraisal immediately. Should the adjuster do that, and what issues are appraisable?
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Appraisal resolves disputes about the amount of loss, not whether coverage exists. The $90,000 smoke-cleaning dispute and the $350,000 depreciation holdback are amount-of-loss issues and are generally appraisable. A dispute over whether smoke damage is covered at all is a coverage issue and is not for the appraisal panel.
The examination under oath is a policy condition. The adjuster should not tell the owner to ignore it. Appraisal and the EUO can proceed on parallel tracks, but the insurer may argue that it is entitled to finish its investigation first. The practical approach is to submit to the EUO promptly, produce the reasonably relevant maintenance records, and simultaneously send a written appraisal demand that identifies the disputed items and names an appraiser. If the insurer refuses to participate, the remedy is a motion to compel appraisal through counsel, not a self-help demand.
The two-year suit limitation must be diaried. Appraisal does not automatically toll it unless the policy or a written agreement says so.
3. How should the mortgagee be handled, and what are the risks if the owner cashes the check without the mortgagee's endorsement?
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The mortgagee clause gives the lender a right to receive loss payment and usually requires its name on the check. The owner cannot negotiate a check payable to the owner and the mortgagee without the mortgagee's endorsement. Attempting to do so may violate the policy conditions and the mortgage documents, and it can delay the entire claim.
The adjuster should coordinate directly with the mortgagee's loss-draft department, obtain the endorsement, and confirm whether the lender will escrow the funds for repairs. Lenders commonly require a contractor's affidavit, plans, and lien waivers before releasing money. The adjuster should build those requirements into the repair schedule.
If the mortgagee insists on applying the funds to the loan balance, that is a borrower-lender issue, not an insurance coverage issue. The adjuster should document the lender's position and refer the owner to counsel. The adjuster should not promise that the mortgagee will release funds.