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By Brett A. Wallingford
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Many Texas contractors hold themselves out as “Insurance Claim Specialists” and offer to handle insurance claims for their homeowner customers. These Texas contractors may soon receive the final word as to whether their conduct in negotiating insurance claims is improper under Texas law. The Texas Supreme Court is presently considering whether to hear an appeal by Lon Smith Roofing of an order granting class certification to a group of consumers who executed contracts giving Lon Smith Roofing the right to negotiate their insurance claims. A decision adverse to Lon Smith Roofing could have widespread ramifications for all Texas contractors who attempt to negotiate insurance claims.

The problems for Lon Smith Roofing started with the 2013 ruling in Reyelts v. Lon Smith Roofing and Construction et al.[1] In Reyelts, the homeowners agreed to hire Lon Smith Roofing and signed an agreement on June 27, 2011, which provided the following: 

The agreement is for FULL SCOPE OF INSURANCE ESTIMATE AND UPGRADES and is subject to insurance company approval. By signing this agreement homeowner authorizes Lon Smith Roofing and Construction (“LSRC”) to pursue homeowners[‘] best interest for all repairs, at a price agreeable to the insurance company and LSRC, and at NO ADDITIONAL COST TO HOMEOWNER EXCEPT THE INSURANCE DEDUCTIBLE AND UPGRADES. The final price agreed to between the insurance company and LSRC shall be the final contract price.[2]

The agreement also stated:

I hereby authorize my insurance company and/or mortgage company to make payment for completed repairs directly to LSRC and mail directly to same.[3]

The agreement also listed the homeowners’ insurance carrier and a purported claim number, which was later determined to be a policy number. However, Lon Smith Roofing failed to reach an agreement on a “final price” with the insurance carrier for the repair of the storm damage before it completed the repairs. When the insurance carrier refused to make payment, the homeowners filed suit against Lon Smith Roofing in federal court.

The federal court determined the agreement’s provisions induced the homeowners into believing that Lon Smith Roofing was “experienced and knowledgeable in working with various insurance carriers to secure payment for their services from clients’ homeowners insurance policies.”[4]

The federal court also found that the agreement’s terms purported to give Lon Smith Roofing the authority and obligation to act on behalf of the homeowners “in negotiating for or effecting the settlement of a claim for the loss or damage” to the roof under the homeowners’ policy and that the homeowners relied upon the contractor to complete the claims process.[5]

The problem was that Lon Smith failed to do what the agreement purported to provide. Specifically, Lon Smith Roofing failed to:

• contact the insurance carrier in an attempt to secure an agreement on the price with the insurance company on behalf of the insureds;
• secure an agreement with the insurance carrier concerning the price it would pay for the roof repairs; and
• obtain payment from the insurance carrier for the roof repairs performed by Lon Smith Roofing.[6]

Rather than following through with its promises, Lon Smith Roofing simply replaced the roof and sent the homeowners an invoice totaling $15,951.48, along with subsequent demands from a collection agency for payment.

Not understanding why their insurance carrier failed to pay Lon Smith Roofing, the homeowners contacted their insurance company directly. The insurance company advised that it knew nothing about the damage, and later denied the claim because Lon Smith Roofing completed the repairs prior to giving the insurance carrier an opportunity to evaluate the reported damage.[7]

The federal court ruled that the written agreement between the homeowners and Lon Smith Roofing was “illegal, void and unenforceable” because it violated provisions of Texas Insurance Code Section 4102 in that a company or individual cannot both negotiate an insurance claim on behalf of an insured and make the repairs. [8]

That decision was affirmed by the Fifth Circuit Court of Appeals. The “Reyelts decision” became well known as the seminal case addressing the unauthorized practice of public adjusting by Texas roofing contractors.

Lon Smith Roofing’s problems arising from this issue did not end with Reyelts. That same year Joe and Stacci Key filed a class action lawsuit against Lon Smith Roofing on behalf of Texas residents who signed contracts that contained the same language found in the Reyelts contract.[9]

The Key decision stems from an underlying case involving damage to the Keys’ roof due to a May 2011 hailstorm.[10] The Keys notified their insurance carrier and signed a contract with A-1 (also known as Lon Smith Roofing and Construction) for roof replacement in the amount of $33,769.50.[11] The contract contained almost identical language as the Reyelts contract. The Keys received $18,926.69 from their homeowners’ insurer and paid that amount to A-1. To collect the balance owed, A-1 filed suit against the Keys and obtained a default judgment. The Keys challenged the default judgment and were able to void the judgment. A-1 appealed. The Keys then filed a declaratory judgment against A-1, claiming, consistent with the Reyelts decision, that the contract was null and void since A-1 was not licensed to act as a public adjuster. They also alleged violations under Texas’ Deceptive Trade Practices Act and requested class certification for both claims.

On Oct. 13, 2015, Judge Tom Lowe signed an order certifying the class and ruled that “[t]he primary issue to be resolved is whether the contractual provision violates the Texas Insurance Code and, thereby, renders such contracts illegal, void, and unenforceable.”[12] A-1 appealed the class certification order.

On Aug. 3, 2017, the Fort Worth Court of Appeals held as follows:

1. Class members could state viable claims under DTPA, so as to support class certification;
2. Acting as an unlicensed insurance adjuster rendered the contract between homeowners and roofing company void, rather than voidable;
3. Company acted as unlicensed insurance adjuster in violation of Insurance Code;
4. Conduct in acting as unlicensed insurance adjuster in violation of Insurance Code constituted violation of Deceptive Trade Practices Act (DTPA);
5. Homeowners failed to satisfy commonality requirement for class certification of DTPA unconscionability claim; and
6. Homeowners satisfied requirements for class certification for remainder of claims.[13]

The Court of Appeals concluded that “[c]lass-action treatment is particularly useful in this situation because it will determine the propriety of the behavior of the party opposing the class in a single action.” The case was remanded to the trial court to continue the class action litigation.[14]

Faced with a multimillion dollar exposure, Lon Smith Roofing appealed the decision of the Fort Worth Court of Appeals to the Texas Supreme Court. On Jan. 26, 2018, the Texas Supreme Court ordered the parties to file briefs on the merits but, consistent with Texas Supreme Court procedures, made it clear that the “petition for review remains under consideration by this Court.”[15]

Lon Smith Roofing recently filed its brief on the merits. Interestingly, the North Texas Roofing Contractors Association and the Roofing Contractors Association of Texas filed an Amicus Curiae brief in support of Lon Smith Roofing’s position. The respondents’ brief on the merits is currently due in mid-April.

Lon Smith Roofing will now have to wait and see what the Texas Supreme Court does with the matter. The case will be closely watched given that many Texas contractors routinely engage in the very same conduct found by both the Reyelts and Key courts to be illegal, thereby rendering contracts used by all of these contractors void and unenforceable.

One thing is clear: until the Texas Supreme Court decides whether it will hear Lon Smith Roofing’s appeal — Contractors Beware! Texas courts have also held that the remedy for an aggrieved homeowner is the return by the contractor of all amounts — that is, the entire contract amount — paid by the homeowner under each and every one of the illegal contracts. That could be a lot of money.

Brett A. Wallingford is a senior partner at Zelle LLP in the firm’s Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm 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] Reyelts v. Lon Smith Roofing and Construction et al., 968 F. Supp. 2d 835 (N.D. Texas July 26, 2013).

[2] Id. at 839

[3] Id.

[4] Id.

[5] Id. at 840.

[6] Id. at 841-842.

[7] Id. at 842.

[8] Id. at 844.

[9] Lon Smith Roofing & Associates v. Key, 527 SW3d 604 (Ct. App. Fort Worth 2017).

[10] Id.

[11] Id. at 612.

[12] Id. at 619.

[13] Id. at 604.

[14] Id. at 631. 

[15] Case Number: 17-0755 in the Texas Supreme Court.