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By Todd M. Tippett
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Somewhere in Texas at this very moment a public adjuster is knocking on the door of a home or business owner offering to inspect the roof for wind or hail damage and assist with the submission of an insurance claim. It is inevitable the public adjuster will find some “evidence” of wind or hail damage. At that point, the public adjuster will encourage the homeowner or business owner to sign a 10 percent contingency fee contract that in essence states the public adjuster will not get paid unless he can convince the building owner’s insurance carrier the structure incurred covered storm damage. Once the homeowner or business owner signs the public adjuster’s 10 percent contingency fee contract, the public adjuster has a vested interest in making sure the claim is paid. The larger the claim, the more interested the public adjuster becomes.

Insurance carriers and public adjusters obviously do not always agree on the existence or extent of coverage for a claim. Disagreements can include, among other things, scope of damage issues, unit pricing issues or even whether there was a weather event during the policy period significant enough to have caused the damage claimed. In such instances insurance carriers often deny claims either in whole or in part and litigation ensues. Each week, hundreds of hail damage lawsuits are filed all across Texas.[1]

During litigation, the attorney representing the building owner must decide which fact witnesses to call and which expert witnesses to retain. Given their knowledge about the alleged damage and claim history, the public adjuster who initially handled the claim is often designated by counsel for the building owner as a fact or expert witness.

This designation is not without considerable risk.

Rule 3.04 of the Texas Disciplinary Rules of Professional Conduct provides as follows:

A lawyer shall not:

                                                           ***

(b) ... pay, offer to pay or acquiesce in the offer or payment of compensation to a witness or other entity contingent upon the content of the testimony of the witness or the outcome of the case. But a lawyer may advance, guarantee or acquiesce in the payment of:

(1) expenses reasonably incurred by a witness in attending or testifying;

(2) reasonable compensation to a witness for his loss of time in attending or testifying;

(3) a reasonable fee for the professional services of an expert witness.

In a nutshell, Rule 3.04 states that a Texas lawyer (and his client) cannot pay a fact witness or an expert witness on a contingent fee basis. It is simply unethical to do so. There are no Texas cases addressing whether a public adjuster who signed a contingency fee contract presuit can serve as an expert witness or even as a fact witness, in litigation and expect to retain his contingency fee. However, the Texas Center for Legal Ethics issued an opinion in August 2004 that is instructive on the issue.

In Opinion 553, the Texas Center for Legal Ethics considered the contingency fee arrangement of a property tax consulting company that assisted real property owners in protesting property tax assessments.[2] The consulting company’s services included presenting the protest and negotiating with the tax assessor to determine an appropriate tax assessment value. If an agreeable tax assessment could not be reached, the consulting company’s contract obligated it to assist the property owner’s lawyer with a lawsuit against the local tax assessor and to provide expert witness services. The consulting company was paid a contingency fee based on the achieved tax savings — 12 percent presuit and 50 percent if the consulting company assisted with litigation. The Texas Center for Legal Ethics determined that a lawyer’s use of the consulting company’s services as an expert witness was unethical due to the contingent fee agreement:

It is a violation of the Texas Disciplinary Rules of Professional Conduct [Rule 3.04] for a lawyer to use in a case as an expert witness an employee of a business entity that has a contingent fee interest in the outcome of the case.[3]

The fee arrangement described in Opinion 553 is no different than the arrangement sought by most public adjusters in Texas. They expect to be paid their contingent fee regardless of whether litigation is necessary. And they are willing to testify as either a fact witness or an expert in court to earn that fee. So, may a Texas attorney ethically present a public adjuster as a witness when the public adjuster is entitled to a contingent fee? While Texas courts have not opined on the issue, other jurisdictions have found that contingency fee arrangements for fact and expert witnesses are against public policy.[4] In such instances, it is not only unethical for the lawyer to use a public adjuster on a contingent fee as an expert or fact witness, but it could also serve as the basis for a malpractice claim. In Pennsylvania, for example, a court struck the expert testimony of a public adjuster who held a contingent interest in the property insurance claim at issue:

In the instant matter, the court finds the defendants’ attempt to segregate [the public adjuster’s] work as an expert witness from his work as a public adjuster “merely one of form.” It is also of no consequence that the public adjuster contract was entered into prior to the commencement of litigation. What does matter is that [the public adjuster’s] preparation of the expert report followed the commencement of litigation and, as the defendants admit, [the public adjuster] will be entitled under the contingent fee arrangement to a percentage of any damages awarded for their loss. The court cannot help but conclude, therefore, that the opinion rendered in the report is “so undermined as to be deprived of any substantial value”.[5]

The lawyer in this Pennsylvania case likely faced a difficult discussion with his client once the expert opinion on a key issue in the case was struck. Policyholder lawyers must be mindful of such consequences in considering whether to use a public adjuster as an expert witness or even a fact witness. It is unethical, and possibly malpractice, to ignore the ramifications of the public adjuster’s contingent fee.

Given these authorities, a policyholder lawyer has no choice but to tell the public adjuster that he must make a decision — either keep the contingent fee and be prohibited from testifying in the litigation or convert the contingency fee to an hourly fee and be permitted to testify. To proceed in a different fashion exposes the lawyer to ethics and malpractice claims.

Were both policyholder attorneys and public adjusters to abide by this ethical rule, perhaps the actual parties to the insurance claim would also benefit not merely from unbiased witness testimony but from the incentive the rule creates for public adjusters to truly make a good-faith attempt to amicably resolve a claim before ever referring it to counsel.

—By Todd M. Tippett, Zelle Hofmann Voelbel & Mason LLP

Todd Tippett is a partner in Zelle Hofmann's Dallas office.

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] Over the last few years, the number of hail damage lawsuits filed across Texas has been staggering. This is especially true for recent storms that occurred in McAllen, Amarillo and Dallas. See Steven J. Badger, "What The Hail™ Is Going On In Texas?" Law360, Dec. 19, 2013.

[2] Opinion 553, Texas Center for Legal Ethics, Professional Ethics Committee for the State Bar of Texas (August 2004).

[3] Id.

[4] Taylor v. Cottrel Inc., 795 F.3d 813, 816 (8th Cir. 2015); Stranger v. Raymond, No. 08-2170, (C.D. Cal. May 9, 2011); J&J Snack Foods Corp. v. Earthgrains Co., 220 F.Supp.2d 358 , 367 n.8 (D.N.J. 2002); Accrued Financial Services Inc. v. Prime Retail Inc., 298 F.3d 291, 300 (4th Cir. 2002); Buckley Powder Co. v. State, 20 P.3d 547, 559 (Colo. App. 2002); Farmer v. Ramsey, 159 F.Supp.2d 873, 883 (D.Md. 2001); Cresswell v. Sullivan & Cromwell, 922 F.2d 60, 73 (2d Cir. 1990).

[5] Everett Cash Mutual Insurance Co. v. Gibble, No. 01-01,640, (Pa. Com. Pl. May 14, 2004).