In a significant ruling, Texas Department of Insurance et al. v. Stonewater Roofing, Ltd., Co., 2024 WL 2869414 (June 7, 2024), the Texas Supreme Court upheld state regulations mandate licensing for public insurance adjusters and prohibit dual roles as both a contractor and adjuster. This decision came after Stonewater Roofing, a roofing contractor, challenged the constitutionality of these regulations, arguing they violated First and Fourteenth Amendment rights. The court's decision has critical implications for insurers and contractors, reinforcing the legal boundaries within which they must operate.
Background
In 2003, the Texas Legislature enacted Chapter 4102 of the Insurance Code, establishing comprehensive regulations for public insurance adjusters. These laws were introduced to protect consumers from potential exploitation in the aftermath of catastrophic natural disaster events. Public insurance adjusters are defined as individuals who, for compensation, act on behalf of insured parties to negotiate or effectuate the settlement of insurance claims. They must be licensed, demonstrating sufficient knowledge and expertise in the field, and are prohibited from serving as both contractor and adjuster on the same property.
In the case at issue, Stonewater Roofing, a company without an adjuster's license, sued to invalidate these regulations asserting they infringed upon its First Amendment right to free speech and were unconstitutionally vague under the Fourteenth Amendment's Due Process Clause. Despite not having an adjuster's license, Stonewater advertised and held itself out to the public as a having extensive experience settling insurance claims. Stonewater's contracts with customers also authorized them to negotiate with insurance companies on their behalf. The trial court dismissed Stonewater's claims, a decision the court of appeals later reversed. TDI then sought review from the Texas Supreme Court.
Chapter 4102 of the Texas Insurance Code
Chapter 4102 of the Insurance Code defines a public adjuster as: "a person who, for direct, indirect, or any other compensation:
- Acts on behalf of an insured in negotiating for or effecting settlement of a claim for loss or damage under any policy of insurance covering real or personal property, or
- On behalf of any other public insurance adjuster, investigates, settles, or adjusts or advises an insured with a claim or claims for loss or damage under any policy of insurance covering real or personal property, or
- A person who advertises, solicits business, or holds himself or herself out to the public as an adjuster of claims for loss or damage under any policy of insurance covering real or personal property.
Insurance adjusters must be licensed. To obtain a license adjusters must:
- Have sufficient experience or training in the assessment of property values and losses;
- Be sufficiently informed about the terms and effects of typical insurance contracts; and
- Successfully pass an examination of the applicant's technical competence, basic knowledge of relevant topics, and understanding of governing law and ethical standards.
Individuals who do not possess a valid license may not hold themselves out as an adjuster or advertise services as such. In addition, the law specifically states a contractor, even if a validly licensed public adjuster, may not adjust claims for any property for which it is also providing contracting services. Under the law, this is deemed an impermissible conflict of interest.
The Court's Holding
The Texas Supreme Court agreed with the trial court, concluding the licensing and dual-capacity laws regulate professional conduct rather than speech. The court emphasized these statutes aim to control non-expressive commercial activities, such as acting on behalf of an insured party in negotiating insurance claims, rather than regulating what individuals may or may not say. Consequently, the First Amendment's protections of free speech do not apply in this context.
Moreover, the court found the statutes in question provided clear guidance on prohibited conduct, thereby satisfying due process requirements. The laws were sufficiently specific to inform individuals about the legal boundaries of their professional activities precluding claims of vagueness.
First Amendment Concerns
The First Amendment prohibits laws restricting the freedom of speech. It applies to the states through the Fourteenth Amendment. Stonewater contends in this action sections 4102.05() and 4102.163(a) restrict their protected speech under the First Amendment. The court disagreed and found licensing requirements do not attempt to regulate protected expression. The selection Stonewater points to as a violation of its rights states, "A person may not act as a public insurance adjuster in this state or hold himself or herself out to be a public insurance adjuster in this state without a license." 37 Section 4102.051(a). Section 4102.051 prohibits "holding oneself out as a public insurance adjuster if unlicensed."
Although it arguably involves expression, a state may impose licensing requirements upon certain professions and along with that make it illegal to promote false commercial speech to the public. In fact, settling a property-loss claim implicates a great deal of non-expressive activity the Public Insurance Adjusters Act regulates only in the context of an agency relationship: evaluating insurance coverage, assessing property value, assessing property damage, and calculating repair costs. The court concluded that providing guidelines for what a public adjuster may or may not do is not restricting free speech rights, but rather attempts to protect the public from unscrupulous insurance agents.
The Fourteenth Amendment
Stonewater argued that the Insurance Code violated its Fourteenth Amendment rights as it was vague and deprived it of due process. A statute is unconstitutionally vague if it does one of the following:
- "Fails to give fair notice of what conduct may be punished, forcing ordinary people to guess at the statute's meeting.
- The statute's language is so unclear that it invites arbitrary or discriminatory enforcement." Holder v. Humanitarian Law Project, 561 U.S. 1, 20 (2010).
Stonewater asserted the Public Adjuster Licensing Act failed on both fronts. The court disagreed and found "due process is satisfied so long as the prohibition is set out in terms the ordinary [person exercising ordinary common sense can sufficiently understand and comply with." Broadrick v. Alabama, 413 U.S. 601, 608 (1973).
The statute does not prohibit contractors like Stonewater from discussing repairs with their customers or an insurer regarding a pending insurance claim and providing relevant information. Contractors are allowed to share their knowledge and expertise about repairs. The Act restricts these activities only when the contractor is acting as the insured's representative or agent on the claims settlement process. Since the statute is concerned only with the role a person plays in the settlement transaction, such communications could indicate a prohibited engagement, rather than implying that the Public Adjuster Act regulates all such communications.
In this case, although Stonewater is not a licensed public insurance adjuster, the contracts it presents to customers explicitly authorize it to negotiate with the insurance company on the customer's behalf and to perform construction work upon insurance approval. Additionally, Stonewater's website promotes it as "The Leader In Insurance Claim Approval,” a “Trusted Roofing and Insurance Specialist,” “highly experienced with the insurance claims process,” and the developer of “a system which helps [its] customers settle their insurance claims as quickly, painlessly and comprehensively as possible.” These contracting and advertising activities, whether viewed together or separately clearly fall within the scope of a public insurance adjuster as defined and regulated by the statute.
Not only does Stonewater's contractual engagement run afoul of section 4102.051(a)’s licensing requirement, it also squarely invokes section 4102.163(a)’s dual-capacity prohibition by contracting for authority to both negotiate settlement of a claim and perform the ensuing repair work. Sections 4102.051(a) and 4102.163(a) do not merely prohibit the actual conduct; they also prohibit a person from illegally claiming an ability to engage in that conduct and agreeing to provide prohibited services. Thus, both the as applied and facial vagueness claims fail as a matter of law.
Key Takeaways
- The Texas Supreme Court upheld state regulations mandate licensing for public insurance adjusters and prohibit them from serving as both contractor and adjuster on the same property.
- Licensing and dual-capacity laws regulate professional conduct, not speech, and do not violate the First Amendment.
- The statutes provide clear guidance on prohibited conduct, satisfying due process requirements and precluding claims of vagueness. Therefore, the Fourteenth Amendment was not violated.
- This decision emphasizes the importance of adhering to licensing requirements and dual capacity prohibitions against acting as both an insurance adjuster as well as a contractor.