Public Adjuster Ownership of a Mitigation Vendor and an Undisclosed Referral Fee
Daniel holds a public adjuster license and owns 60% of DryFast, a water-mitigation company. On a $280,000 commercial water loss at a dental office, Daniel’s public adjuster agreement sets a 10% contingency fee. During the first visit, he tells the insured that DryFast must begin drying immediately to preserve the claim and presents a $46,000 DryFast contract. The DryFast contract includes a 2% consulting referral payment to Daniel’s adjusting firm. Daniel does not disclose his ownership or the referral payment in the adjusting agreement. The insurer later questions $18,000 of drying charges as excessive and says the equipment count is inflated. The insured asks Daniel whether they can use a different mitigation contractor and whether the 2% payment is normal.
1. Identify the conflicts of interest and disclosures Daniel should have made before the insured signed either agreement.
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Daniel had a fiduciary duty to put the insured’s interests first. Before either agreement was signed, he should have disclosed in writing: (1) he owns 60% of DryFast; (2) he earns adjusting compensation and DryFast earns mitigation profit from the same loss; (3) DryFast pays a 2% referral to his adjusting firm; (4) the insured may use any qualified mitigation contractor; and (5) emergency drying should be based on moisture readings, not on a sales deadline. He should have given the insured the referral payment disclosure and obtained written consent after explaining the conflict. The failure to disclose makes the arrangement look like self-dealing and undermines the insured’s ability to make an informed choice.
2. Analyze whether the 2% referral payment and the contingency fee create an improper double recovery or divided loyalty.
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The 10% contingency fee and the 2% referral can create a divided loyalty and a double recovery. The contingency fee is paid by the insured on the claim amount; if the $46,000 DryFast invoice is included in the claim, Daniel’s firm earns 10% of that invoice while also receiving 2% from DryFast. That is two streams of compensation tied to the same mitigation work. The 2% payment is not automatically illegal, but it must be disclosed, reasonable, and consented to; hidden referral fees are an ethical problem. The PA should not inflate the mitigation scope to increase either fee. If the $18,000 in drying charges is excessive, Daniel must correct the invoice even though it reduces his own affiliate’s revenue.
3. Recommend how Daniel should cure the conflict and how the PA should document the mitigation charges.
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Cure the conflict by giving the insured a written disclosure and a new choice: keep DryFast with the referral payment credited or removed, or hire an independent contractor at DryFast’s cost. Daniel should consider excluding DryFast charges from his contingency fee base to avoid double compensation. He should document moisture readings, equipment logs, daily monitoring, drying goals, and invoices, and obtain competitive bids for the disputed $18,000. If the insured wants to cancel, Daniel should not penalize them.
The PA should keep the adjusting file separate from DryFast’s mitigation file and document all communications. If the insurer suspects fraud, the PA should provide the records and correct any inflated charges promptly.