The Debate about Referral Fees


It was a standing room only in the hotel banquet hall filled with angry mitigation contractors. They were small mom-and-pop firms mixed with mid-sized regional franchise players. The speaker, a burly man in overalls sporting a restoration logo, approached the podium. He started his speech by raising a fist and saying something to the degree of, “I am sick and tired of insurance adjusters thinking they know more than us; they’re trying to tell us how to do our jobs!”

The room erupted in raised fists and shouts of solidarity. As an adjuster, I began to shrink down in my seat a bit
for fear that they’d find out that an adjuster was in their midst. I honestly expected to hear, “Let’s string up the next adjuster we see!”

This occurrence happened at a meeting of contractors that had formed an association to thwart what they perceived were unfair practices imposed upon them by claim adjusters and the insurance industry. I had been invited by a collections attorney. He represented many in this group and had great empathy for their plight.

Ironically, I consider myself to be supportive of the restoration industry. I am a self-employed adjuster and have a place in my heart for small businesses. A son of immigrants, I’m all about the American dream, free enterprise, making a profit, and leaving a legacy. My dealings with contractors have always been above board and respectful, not deceptive.

I foolishly fantasized that I’d come to this meeting and be introduced as a friend of the industry, perhaps say a few words from the podium and be thanked for attendance and support. However, there was no such introduction. These folks had obviously never heard of me. They’d never heard that there was an adjuster who helped contractors market to and position their companies with the insurance industry and adjusters, or that there was an adjuster who wrote for industry publications about solving problems encountered on insurance claims.

It left me wondering about this significant discord that existed between the insurance and restoration industries.

Fast forward to a claims litigation conference I attended with a room full of insurance defense lawyers and their claims executive benefactors. The speaker, the head of a state’s insurance fraud division with a booming voice, was pounding the podium. “I promise that before I leave office I will see to it that a law is passed that makes it illegal for any contractor to waive a deductible on an insurance claim! And as to anyone paying a referral fee to get a restoration job, I’ll arrest him myself!”

By Ed Cross

Paying referral fees is a misdemeanor in the State of California, unless, of course, you are a lawyer, in which case it is perfectly legal. Realtors can pay them, too. But when contractors pay them — or even offer them — it
is considered an illegal kickback. Contractors caught committing this act risk disciplinary action against their contractor’s licenses. The California State License Board (CSLB) issued this statement in its Winter 2011 newsletter:

CSLB is aware that referral fees in the disaster response industry are prevalent and are becoming more of a concern during difficult economic times. There is evidence that such referral fees result in the artificial inflation of charges to homeowners and to the insurance companies called upon to reimburse homeowners for the costs.

One of the concerns is that contractors who refuse to pay these referral fees are losing out on business and are victims of an uneven playing field. That’s like saying driving automobiles must be illegal because law-abiding citizens who comply will be at a disadvantage to those who drive cars illegally.

And it’s not just the payment of money that’s illegal — it’s any form of incentive, credit, compensation, or gift. The first offense could result in a citation with civil penalties of $1,000. Subsequent violations will prompt an accusation that could result in further penalties, including revocation of the contractor’s license.

Contractors are licensed and highly regulated in California, just like lawyers and realtors. But they have been singled out for disparate treatment by our legislature because they fail to coalesce and pool resources to engage a lobbyist to protect their interests. They have no voice and lose by forfeiture every time an issue hits the senate floor.

The audience jumped to their feet to applaud, wildly cheering and raising their fists in solidarity. Pardon the cliché, but the clamor really was deafening. I’ve never seen insurance executives and their attorneys show this much passion about anything.


I teach a class on ethics for adjusters. In each class, I pose the ethical dilemma where a contractor, in order to secure a restoration contract, agrees to waive the collection of the homeowner’s deductible. The contractor’s logic is simple and seemingly reasonable.

This will come to resolution either by lobbyists fashioning legislation, the dreaded courts or a detente of sorts between the two.

He knows that he stands to make a profit of $10,000 if he gets the job. But in order to get the job, he rationalizes that he is willing to make less profit ($9,000) and absorb the $1,000 expense that would have been covered by payment of the homeowner’s deductible.

In this way, he reasons the homeowner is relieved of the burden of paying the deductible, the contractor gets the job and the insurance company’s interests are protected because they haven’t paid more for the claim. They paid as agreed.

Such a discussion in the classroom filled with adjusters usually takes a familiar path: “There’s no way the contractor is going to take less profit. He’s inflating costs and that’s how the deductible will be covered.”

To this, I interject, raising the question: “What if the contractor and adjuster agreed as to the scope and pricing of the project? Scopes and pricing were not inflated, only the contractor took a financial hit.”

The consensus adjuster’s response was that the whole concept of indemnity requires that the insured incur the deductible amount whatever it may be. In fact, one adjuster emphatically stated, “A policyholder is supposed to incur that deductible. It has to sting when they have a loss. That’s the whole meaning of indemnification, of lessening the burden of a loss. That’s what insurance is; insureds have to bear some burden in this loss and payment of the deductible serves that purpose.” They would accept no opposing argument nor would they even concede that the opposing view had any merit whatsoever.

Attorney Harvey Cohen, a strong crusader for contractor rights in Florida, echoed that referral fees have been a contentious issue in Florida, pointing out that, in his words, “surprisingly, the fight to do away with referral fees for contractors is led by public adjusters.”

Public adjusters in Florida are restricted to a $25 referral fee; it is a rule that they want to be imposed on contractors as well. Insurers argue that contractors who pay referral fees artificially inflate their bills to cover the cost of the referral fee. However, contractors in Florida argue that the referral fee is simply their marketing strategy.

For example, if a contractor in Florida spent $100,000 per month on TV and radio ads, which brought them, 200 new clients, from their marketing budget, this would be acceptable. At the same time, if that same contractor gave a $500 referral 200 times per month and spent the same $100,000, the insurance company would argue that the contractor artificially inflated the bill.

Neither side appears to be conceding its position. I think I know which choice the consuming public (i.e., policyholders) would make. I believe that this will come to resolution either by lobbyists fashioning legislation, the dreaded courts, or a detente of sorts between the two industries at the heart of the controversy.

Which resolution path would you choose?

This has been a slow, painful learning process for the industry, with ongoing lessons still emerging. Let’s hope the lessons have been learned well and will not be repeated as the industry continues to evolve. RIA

Harvey Cohen, an attorney at Cohen Grossman, contributed to this piece. For more information, visit

Peter Crosa has been a licensed independent adjuster for over 30 years, handling large complex losses throughout the United States and Latin America. In addition, he has traveled the country conducting workshops for restorers and giving keynote speeches to contractor associations on the topic of marketing restoration services to and building relationships with adjusters, agents, and insurance companies. He is the author of The Complete Marketing Manual for Restoration & Mitigation Contractors. See

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