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By David B. Winter
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When an insured suffers a loss, they sometimes do not have the resources up front to make the repairs to their property. In many states, an insured can hire a contractor to perform the work in exchange for a post-loss assignment of benefits (AOB) whereby the insured assigns their rights in their insurance claim to the contractor making the repairs. From there, the contractor, not the insured, pursues payment of the claim from the insurer. 

As discussed in my Nov. 16, 2015, article, “Insurance Benefit Assignment to Contractors: Not in Texas,” the arrangement discussed above is not permitted in the state of Texas.[1] Texas courts enforce anti-assignment provisions in insurance policies that prevent an insured from assigning its interest in an insurance claim to another. 

To circumvent Texas law prohibiting AOBs, some contractors have asked their clients to enter into contracts whereby an insured purportedly grants the contractor a limited power of attorney to pursue the insurance claim on the insured’s behalf. The consideration for acting in that capacity is to receive the proceeds of the insurance claim.

As an initial matter, it is likely that a Texas court would see through the limited power of attorney arrangement and find that it is simply an AOB in “wolf’s clothing,” in which case the court would likely find that the limited power of attorney was void on its face according to the terms of the insurance policy prohibiting such assignments. However, there are several other problems with this arrangement which could land a contractor in some serious hot water.

First, if a contractor negotiates a settlement of an insurance claim pursuant to the limited power of attorney, he/she will be in violation of the licensing requirements for public adjusters. In Texas, only licensed attorneys and licensed public adjusters are permitted to negotiate or effect the settlement of an insurance claim on behalf of a policyholder.[2] As demonstrated by the recent case of Lon Smith & Associates v. Key, acting as an unlicensed public insurance adjuster can void a contract between a roofing company and an insured.[3] Moreover, the Lon Smith court found that acting as an unlicensed public adjuster was both a violation of the Texas Insurance Code as well as the Deceptive Trade Practices Act.[4] Thus, not only would the power of attorney be illegal, void, and unenforceable, the contractor has engaged in the unauthorized practice of public adjusting in violation of Section 4102 of the Texas Insurance Code. This violation carries criminal penalties.

Second, the law is clear that negotiating an insurance claim, even with a limited power of attorney, constitutes the practice of law. The Texas legislature has defined the practice of law as: 

[T]he preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court, including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.[5]

However, courts are not constrained by the above definition. They have the ability to determine what constitutes the practice of law on a case-by-case basis.[6]

In Green v. Unauthorized Practice of Law Committee, for example, Green owned and operated a consulting firm that helped insureds settle their person injury and property damage claims with their insurance carriers pursuant to a limited power of attorney.[7] The committee filed suit against Green seeking a declaration that his activities in in making settlement offers and negotiating claims on behalf of his clients constituted unauthorized practice of law. The court held that “contracting with persons to represent them with regard to their personal causes of action for property damage or personal injury” and “entering into contracts with persons to represent them in their personal injury or property damage matters on a contingent fee basis” constituted the practice of law.[8]

Similarly, in Brown v. Unauthorized Practice of Law Committee, Brown entered into contracts with individuals to “represent them in resolving their personal injury and/or property damage claims on a contingent fee basis.”[9] Under the contracts, Brown reserved the right to hire legal counsel if necessary.[10] The Dallas Court of Appeals held as follows: 

Contracting with persons to represent them with regard to their personal causes of action for property damages and/or personal injury constitutes the practice of law. Quarles, 316 S.W.2d at 801 & 804; cf. Davies v. Unauthorized Practice Committee of State Bar of Texas, 431 S.W.2d 590, 594 (Tex. Civ. App. -- Tyler 1968, writ ref'd n.r.e.) (acting in representative capacity in the presentation of claims). Advising persons as to their rights and the advisability of making claims for personal injuries and/or property damages constitutes the practice of law. See Quarles, 316 S.W.2d at 800 & 804. Advising persons as to whether to accept an offered sum of money in settlement of claims for personal injuries and/or property damages entails the practice of law. Cf. Stewart Abstract Co. v. Judicial Commission, 131 S.W.2d 686, 689 (Tex. Civ. App. -- Beaumont 1939, no writ) (all advice to clients connected with the law). Entering into contracts with persons to represent them in their personal injury and/or property damage matters on a contingent fee together with an attempted assignment of a portion of the person's cause of action involves the practice of law. Quarles, 316 S.W.2d at 800-01 & 803. Entering into contracts with third persons which purport to grant the exclusive right to select and retain legal counsel to represent the individual in any legal proceeding constitutes the practice of law. Cf. id. at 804 (peddling and offering to attorneys legal business of claimants). Advising “clients” of their rights, duties, and privileges under the laws entails the practice of law. Id. at 802.[11]

Subsequent to these opinions, the Texas Legislature enacted the public adjuster licensing statute creating a narrow “carve-out” allowing licensed public insurance adjusters to engage in conduct that would otherwise be considered the practice of law. But this safe-harbor protection only applies to Texas licensed public insurance adjusters. It does not protect contractors. Therefore, any contractor negotiating insurance settlements on behalf of an insured is engaged in the unauthorized practice of law. Accordingly, not only does a contractor risk having its contract voided, but it also risks being prosecuted by the State Bar of Texas for the unauthorized practice of law.

Appearing before the Unauthorized Practice of Law Committee of the state of Texas is probably not where any contractor wants to be.

While obtaining an assignment of an insured’s claim and controlling the claim process is certainly appealing for a contractor, the consequences of engaging in such conduct in the state of Texas significantly outweigh any purported benefits.

David B. Winter is counsel with Zelle LLP in Dallas.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] David B. Winter, Insurance Benefit Assignment to Contractors: Not in Texas, Texas Law360, Nov. 16, 2015.

[2] Tex. Ins. Code. § 4102.001.

[3] 527 S.W.2d 604 (Tex.App.‑Fort Worth 2017, no pet.).

[4] Id. at 621-22.

[5] Tex. Gov't Code Ann. § 81.101(a) (Vernon 1988).

[6] Tex. Gov't Code Ann. § 81.101(b) (Vernon 1988); see also Brown v. Unauthorized Practice of Law Comm., 742 S.W.2d 34, 41 (Tex.App.—Dallas 1987, writ denied).

[7] 883 S.W.2d 293 (Tex.App.-Dallas 1994, no writ).

[8] Id. at 299.

[9] Brown, 742 S.W.2d at 37.

[10] Id.

[11] Id.