Contingency Fees–A Moral Hazard?

Last week I participated in a panel discussion at a conference of carrier claim representatives; The Sunshine Claims Conference. Before, during, and after the program panel, I had numerous informal discussions about general insurance fraud–all of which eventually narrowed to comments about the public adjuster contingency fee system being  part of Florida’s problem.

The underlying issue with insurance fraud, of course, is getting the public to understand what it is and, once they do, to get them to react accordingly. When you get past obvious criminal acts like staged accidents, burglaries and arson, drawing the line against fraud isn’t so easy–not for policyholders and, unfortunately, not for some public adjusters.

The story is that far too many believe anything they do to inflate a claim is, well…acceptable, even legal. It’s not fraud, it’s “claim inflation”–doing what’s necessary to offset the carrier doing what it can to reduce the payout.  In the consumers mind, and as implied by too many PA’s and lawyers, collecting for damage that already existed at the time of the loss isn’t fraud…it’s “premium recoupment” or “deductible elimination” and…it’s “necessary to get you the best deal”.

Of course, the rub under a contingency fee system is that “claim inflation” is also necessary to pay the PA who gets his/her percentage (10% or 20%) out of the claim amount and regardless of how many hours they put in, how hard they work and sometimes, regardless of whether they were even needed. (See  NOTE #1 below).

This is exactly why some states don’t allow public adjusting or prohibit contingency fees. It’s against public policy to pay someone out of the claim amount, not because it diminishes the policyholders payout so much but, because it’s the quintessential moral hazard. It breeds fraudulent inflation of claims under the guise of “premium recoupment” or “deductible elimination.”   

Now, for those PA’s who don’t believe the contingency fee system acts as an incentive to commit fraud, don’t be angry at me for saying it does.  Your own association(s) say so! The National Association of Public Insurance Adjusters (NAPIA), for example, favors limiting contingency fees.  During legislative testimony one of the reasons given for limiting New Jersey’s fee arrangement to 12.5% was that, it works well in other states and a higher percentage is an incentive for “nefarious” activity or “…the building of a claim that didn’t exist in the first place.” Heck, Florida pays up to 20%!

One need look no further than neighboring Alabama which, as recently as last year, debated the issue.  An article in The Press Register referenced a white paper from the Property & Casualty Insurer’s Association (PCI) dealing with public adjusters and showing their contingency fees drive up the price of insurance. 

In Florida, where we have more PA’s than any other state (See NOTE #2 below) our Department of Financial Services (DFS) has arrested numerous PA’s saying their attempts to inflate, or stage a false claim, were done “…to inflate losses…in order to increase…commissions.”  Just for laughs, listen to this random cell phone solicitation and tell me if you think some “claim inflation” isn’t at least implied. I called the number and got an earful.

Finally, I have talked to a lot of public adjusters who tell me they never try to get more for their clients than what they deserve. If that’s true, then the only way to keep them from getting less than they deserve is to inflate the claim.

Let’s face it, a contingency fee system is, by definition, “contingent” on something–more often than not that something is a higher than deserved claim payment.

Florida needs to remove the moral hazard by adopting a fair and balanced hourly fee approach to compensate public adjusters.

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NOTE #1:In 2008 lawmakers capped PA contingency fees for Citizens at 10% of the amount above what Citizens initially offered. This was changed in 2013 (CS/SB-1770)and results in a fee of 10% for initial hurricane claims made in the first year, 20 percent for initial claims made in subsequent years, and 20 percent for all reopened and supplemental claims.  It also prohibits a public adjuster from receiving compensation from any source over the statu­tory fee cap and applies current disciplinary provisions to those who violate the contingency fee cap through “…any maneuver, shift, or device.”

NOTE #2: DFS licenses some 33,000 resident adjusters and 51,500 non-resident adjusters. Out of those, there are roughly 15,000 independent adjusters who live in the state and 16,000 who do business in the state but reside elsewhere. There are currently 1,612 public adjusters in the state.

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