The Texas Supreme Court, in Texas Department of Insurance v. Stonewater Roofing, Ltd. Co., affirmed the licensing requirements for public adjusters and the prohibition of public adjusters to also act as repair contractors. How did the Court reach this opinion and what impact will it have on the construction industry?

In Stonewater, a commercial customer of Stonewater Roofing Ltd. Co. (Stonewater) sued Stonewater for violating the Public Insurance Adjusters Act (“Act”), Texas Insurance Code Chapter 4102. Stonewater then filed a declaratory judgment action against the Texas Department of Insurance (TDI), alleging that the Act regulated protected free speech under the First Amendment of the US Constitution and was unconstitutionally vague, violating the 14^th Amendment of the Constitution.

The Texas Legislature promulgated the Act in its 2003 Session, seeking to prevent construction contractors from taking advantage of property owners after catastrophic weather events.  The prime target of the statute was and remains roofing contractors, but the Act applies to all construction trades.

Under the Act, a person who acts on behalf of an insured in “negotiating for or effecting the settlement of a claim” for loss or damage under a policy of insurance covering real or personal property must be licensed as a public insurance adjuster. The Act also prohibits certain conflicts of interest.  For instance, a licensed public adjuster may not also be the contractor performing the repairs.

On its website, Stonewater advertises that it is an “insurance specialist”, “the leader in insurance claim approval”, has developed a system to help customers “settle their insurance claims” quickly, painlessly and comprehensively, and is highly experienced in the insurance claims process. Stonewater’s customer contract authorizes Stonewater to negotiate on the customer’s behalf with the insurance company and, upon insurance approval, to perform the specified work.

The trial court dismissed Stonewater’s declaratory judgment action on a preliminary motion to dismiss, finding no basis in law or fact existed for Stonewater’s constitutional challenges.  The Amarillo Court of Appeals reversed, finding that the Act regulated protected free speech. The Texas Supreme Court agreed with the trial court and affirmed dismissal of Stonewater’s claims.

The Court quickly disposed of Stonewater’s First Amendment challenge, finding that the Act prescribes what a person must do: get a license.  That mandate “pertains to status or capacity”, neither of which is speech. As for the dual-capacity prohibition (acting as both adjuster and repair contractor), the Court likewise found that the statute dictates what a contractor may not do: “undertake a business engagement giving rise to a conflict of interest”. At its core, the Court reasoned, the Act requires contractors to make business decision about whether to be a construction contractor or an insurance adjuster. It cannot be both.

While the statute has the effect or regulating some expressive activity such as “negotiating” and “effecting” claims, the Court found that those activities are “merely incidental” to the more dominant non-expressive commercial activities of evaluating coverage, assessing the value of the property and the loss, and calculating repair costs. As such, the Act does not constrain Stonewater’s First Amendment rights to free speech.

The Court also disposed Stonewater’s 14^th Amendment Due Process challenge, finding that the Act only constrained discussing insurance coverage and advocating on behalf of the consumer in the context of the claims settlement process. Looking to Stonewater’s website and contract, the Court found that the representations “fall plainly within the scope of a public insurance adjuster” as defined under the Act. Taken together, Stonewater’s online representations and contractual language “describe conduct an ordinary industry participant exercising common sense would understand” violates the Act.

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