When a Mortgage Company Tries to Hire a Public Adjuster: Understanding the Legal Boundaries

After a major wildfire destroyed or damaged thousands of homes in California, the insurance claims process became a battleground — not just between homeowners and their insurance companies, but between the homeowners' representatives and uninvited third parties trying to muscle their way into the claim.

This article explores a real situation (with names and identifying details changed) in which a public adjusting firm attempted to insert itself into a homeowner's fire insurance claim on behalf of the mortgage company. The conflict raised important questions about mortgagee rights under the insurance policy, the legal scope of a public adjuster's license, privacy protections for insured homeowners, and the proper boundaries between a lender's legitimate interests and overreach.

What Happened

A homeowner — call him Mr. Smith — suffered significant smoke damage to his home in a California wildfire. He hired a licensed public adjuster to represent him in the insurance claim. The claim was progressing normally: the public adjuster communicated with the insurance company's adjusters, submitted estimates, documented damage, and negotiated on behalf of the insured.

Then, one day, the insurance company forwarded an email to Mr. Smith's public adjuster. A different public adjusting firm — one that nobody on the insured's side had ever heard of — had contacted the insurance company. This other firm presented a “designee authorization” letter from the mortgage company (a major national bank) and demanded the following from the insurer:

• Who filed the claim and on what date
• The estimate of damages, including the settlement letter and full estimate, or any denial
• A copy of the settlement check showing the payee, date issued, and amount

The mortgage company's public adjusting firm was essentially demanding the claim file.

Mr. Smith's public adjuster immediately recognized the problem. The mortgage company is not an insuredunder the homeowner's insurance policy. And in California, a public adjuster is only licensed to represent insureds. Something was very wrong.

The Lender's Loss Payable Endorsement and the Mortgage Clause

To understand this conflict, you need to understand the mortgage clause — sometimes called the lender's loss payable endorsement — that appears in most homeowner's insurance policies. This endorsement (which in standard policy forms often carries a designation like “BFN” or similar) defines the rights of the mortgage company in relation to the insurance policy.

Here is what a typical mortgage clause provides, along with what each provision actually means:

1. Joint Payment for Dwelling Losses

What this means: If the balance on the mortgage is $160,000 and the dwelling repair payment is $200,000, the insurance company issues a check payable to both the insured and the bank for the first $160,000 (up to the mortgage balance). Any amount above the mortgage balance goes to the insured alone.

Important limitation: This applies only to Coverage A (Dwelling) and Coverage B (Other Structures). The mortgage company is notentitled to be a payee on personal property (Coverage C) or additional living expense / temporary housing (Coverage D) payments. Those coverages are for the insured's personal benefit and have nothing to do with the lender's collateral interest.

2. Priority of Multiple Mortgagees

What this means: If there are two mortgages on the property, the first mortgage gets paid before the second. This is a straightforward reflection of lien priority.

3. Independent Protection for the Mortgagee if the Insured's Claim Is Denied

What this means:This is the most powerful provision the mortgage clause gives the lender. If the homeowner's claim is denied (for example, because the homeowner committed fraud or violated a policy condition), the mortgage company can still recover — but only if the mortgage company has been transparent about changes to the property, has kept the premiums current, and files its own sworn proof of loss within 60 days of being notified.

4. Subrogation Rights

What this means:If the insurance company pays the bank on a claim but denies the homeowner's portion, the insurance company can either step into the bank's shoes (and potentially foreclose) or pay off the entire mortgage and take over the loan.

5. Protection of Mortgagee's Recovery

What this means:The bank gets its full payment regardless of any subrogation action. If a third party caused the fire, the insurance company's effort to recover from that third party does not reduce what the bank receives.

6. Cancellation Notice

What this means: The bank gets advance notice before the policy lapses, giving it the opportunity to force-place insurance or take other protective action.

What the Mortgage Company Is — and Is Not — Entitled To

Based on the mortgage clause, the mortgage company has the following legitimate interests in the claim:

• Being included as a payee on dwelling (Coverage A) and other structures (Coverage B) checks
• Receiving copies of dwelling repair estimates and invoices
• Receiving accounting of dwelling-related payments
• Being notified of any denial or cancellation
• Filing its own proof of loss if the insured fails to do so

The mortgage company is not entitled to:

• The insured's personal property claim (Coverage C)— this includes inventories of personal belongings, credit card statements, purchase receipts, and total loss reports
• The insured's additional living expense claim (Coverage D)— this includes temporary housing costs, restaurant meals, mileage, and all the intimate details of how a displaced family is managing to survive
• The complete “claim file”— which includes private correspondence, personal financial information, and claim details having nothing to do with the lender's collateral interest
• Acting as though it were an insured with full access to all claim information

When Can a Mortgage Company Hire a Public Adjuster?

Under California law (and the law of most states), a public adjuster is specifically defined as someone who represents insureds. California Insurance Code Section 15007 reads:

“A Public Insurance Adjuster is a person who, for compensation, acts on behalf of or aids in any manner, an insuredin negotiating for or effecting the settlement of a claim or claims for loss or damage under any policy of insurance covering real or personal property…”

The key phrase is “an insured.” A public adjuster's entire licensing authority is predicated on representing an insured party. If the party is not an insured, the public adjuster has no legal basis to act in that capacity.

When the Mortgage Company IS an Insured

There is one important exception: force-placed insurance (also called lender-placed insurance).

When a homeowner falls behind on their mortgage payments and the insurance premium was being paid out of escrow, the mortgage contract typically gives the lender the right to purchase an insurance policy on the property. This force-placed policy is purchased by and for the mortgage company — making the mortgage company the actual insured under that separate policy.

In that situation, the mortgage company absolutely has the right to hire a public adjuster, because the mortgage company is the insured on the force-placed policy.

Force-placed policies can also arise in other situations:

• The homeowner lets the insurance policy lapse for any reason
• The homeowner's coverage is insufficient to meet the mortgage requirements
• The homeowner violates some other insurance-related provision of the mortgage contract

In each case where the mortgage company purchases its own policy, it becomes an insured and can engage a public adjuster.

When the Mortgage Company Is NOT an Insured

In the standard scenario — where the homeowner purchased and maintains their own homeowner's insurance policy — the mortgage company is merely a named loss payeeunder the mortgage clause. Having derivative contractual rights under someone else's insurance policy does not make you an insured. Being listed on the declarations page as a mortgagee is not the same as being listed as an insured.

In this scenario, the mortgage company cannotlegally hire a public adjuster to act as a public adjuster on the homeowner's insurance claim. The public adjuster's license simply does not authorize that representation.

The “Designee Letter” Problem

In the real case that inspired this article, the mortgage company's public adjusting firm did not present a proper Public Adjuster Contract. Instead, they presented a “designee authorization” letter from the bank.

This is significant for several reasons:

1. California law requires a specific contract form.Under California Insurance Code Section 15027, a public adjuster contract must contain specific elements including: the title “Public Adjuster Contract,” the licensee's name and license number, the insured's name and address, a description of the loss, the insurer and policy number, the fee structure, signatures of both the licensee and the insured, a surety bond disclosure, and a three-day cancellation notice.
2. The contract must be between the licensee and the insured.A “designee letter” from a mortgage company is not a contract with an insured. It is an authorization from a non-insured third party.
3. The contract must be filed with the insurance company within three days. Even if such a contract existed, there are strict filing requirements.

A generic authorization letter from a bank does not meet any of these requirements because the fundamental prerequisite is missing: the mortgage company is not an insured, so no valid Public Adjuster Contract can exist in the first place.

The Privacy Issue: Why the Claim File Is Not an Open Book

When a mortgage company (or its representative) demands the “claim file,” this creates serious privacy concerns. A homeowner's insurance claim file contains deeply personal information that has nothing to do with the mortgage company's collateral interest:

• Personal property inventories— detailed lists of every personal possession, from clothing to electronics to medications
• Credit card and bank statements— used to document pre-loss ownership of personal property
• Additional living expense records— hotel bills, restaurant receipts, mileage logs, and other records showing where the family has been living, eating, and traveling
• Personal correspondence— emails and letters between the insured, the insured's representative, and the insurance company about all aspects of the claim
• Financial information— income records, tax documents, and other financial information submitted in connection with loss-of-use claims

Federal Privacy Protections

The Gramm-Leach-Bliley Act (GLBA)imposes restrictions on financial institutions (including insurance companies) regarding the sharing of consumers' nonpublic personal information. Insurance companies are considered financial institutions under the GLBA and are generally prohibited from disclosing a customer's nonpublic personal information to unaffiliated third parties without proper notice and opt-out procedures.

An insurance company that hands over the complete claim file to a mortgage company's representative — including personal financial data, personal property records, and living expense details — without the insured's authorization may be violating the GLBA.

California Privacy Protections

California Insurance Code Section 791.13— the Insurance Information and Privacy Protection Act — prohibits insurance companies from disclosing personal or privileged information about an individual collected or received in connection with an insurance transaction unless specific exceptions apply. This is a strong privacy protection specific to the insurance context.

The California Financial Information Privacy Act (CFIPA, also known as SB-1) provides additional protections specific to the sharing of financial information by financial institutions in California. It goes beyond the GLBA and imposes stricter limitations on when financial information can be shared.

The California Consumer Privacy Act (CCPA) and its amendment, the California Privacy Rights Act (CPRA) provide broad consumer privacy rights, including the right to know what personal information is being collected and shared, and the right to opt out of the sale or sharing of personal information.

What an Attorney Advised

In the real claim, the insured's public adjuster consulted with an attorney who confirmed that the mortgage company's demand for the complete claim file was improper. The attorney explained that while the mortgage company has a legitimate interest in documents related to the dwelling repair — estimates, invoices, and payment records — it has absolutely no right to the insured's personal information.

The claim file includes credit card statements, personal property inventories, additional living expense receipts, and personal correspondence that have nothing whatsoever to do with the mortgage. Disclosing this information to a third party — even one with a financial interest in the property — without the insured's consent could violate both federal and state privacy laws.

What the Insurance Company Should Do

When an insurance company receives a demand from a third-party public adjusting firm claiming to represent a mortgage company, the insurance company should:

1. Verify whether the mortgage company is actually an insured.In most cases involving a standard homeowner's policy, the answer is no.
2. Decline to treat the third-party firm as a public adjuster. If the mortgage company is not an insured, the firm cannot legally act as a public adjuster. The insurance company can and should inform the firm that it will not recognize their authority to act in that capacity.
3. Protect the insured's private information. The insurance company should not share the complete claim file with unauthorized third parties. Doing so could violate federal and state privacy laws and could constitute a breach of the insurance contract.
4. Honor the mortgage company's legitimate rights. Continue to include the mortgage company as a payee on dwelling checks, share dwelling-related estimates and invoices with the mortgage company or its legally authorized representative, and otherwise honor the mortgage clause.
5. Consult legal counsel. When faced with aggressive demands from a third party claiming to act as a public adjuster for a non-insured, the insurance company should seek legal guidance.

What the Insured's Public Adjuster Should Do

If you are a public adjuster and discover that another public adjusting firm is trying to insert itself into your client's claim on behalf of the mortgage company, here is the recommended approach:

1. Review the policy.Determine whether the policy contains a lender's loss payable endorsement or mortgage clause, and carefully analyze the mortgage company's actual rights under that clause.
2. Determine whether the mortgage company is an insured.In most standard homeowner's claims, the mortgage company is a loss payee, not an insured. If there is no force-placed policy in play, the mortgage company cannot hire a public adjuster.
3. Notify the insurance company.Send a written communication explaining that the mortgage company is not an insured, that the third-party firm cannot legally act as a public adjuster, and that the insured's private information should not be shared with unauthorized parties. Cite the relevant provisions of the Insurance Code.
4. Notify the other public adjusting firm directly. Inform them clearly that their client (the mortgage company) is not an insured under the policy and that they cannot legally act as a public adjuster in this capacity. Cite California Insurance Code Section 15007.
5. Cooperate with the mortgage company's legitimate interests.Make clear that you have no objection to the mortgage company being included as a payee on dwelling checks, receiving copies of dwelling estimates and payment records, or otherwise exercising its rights under the mortgage clause. The goal is not to obstruct the lender's legitimate interests, but to prevent unauthorized access to the insured's private claim information.
6. Consult an attorney if necessary.If the situation escalates, seek legal counsel regarding privacy violations, potential complaints to the California Department of Insurance, and the insured's rights.

The Confrontation

In the real case, this is exactly what happened. The insured's public adjuster called the other firm to tell them they were acting outside the scope of their license. This led to an escalating exchange, with the other firm's principal insisting that the public adjuster “get educated” on who is an insured under a fire insurance policy.

The insured's public adjuster responded by citing the exact language of California Insurance Code Section 15007, which defines a public adjuster as someone who acts on behalf of “an insured.” The mortgage company, while having important contractual rights under the mortgage clause, is not an insured. The public adjuster made this point clearly: “The mortgage company is not an insured. You cannot represent them.”

The insured's public adjuster then prepared a comprehensive written analysis of every provision of the mortgage clause, explaining each one in plain English and its relevance (or lack of relevance) to the claim. This document was sent to the insurance company, along with a formal request that the insurer carefully consider its communications with the other firm and refrain from sharing the insured's private information.

Can the Mortgage Company Hire a Consultant?

This is a nuanced question. While the mortgage company cannot hire a public adjuster to act as a public adjuster (because the mortgage company is not an insured), the mortgage company is not prohibited from hiring professionals to advise it on matters related to its financial interest.

A mortgage company could potentially:

• Hire a general consultant to review repair estimates and ensure the property is being restored to its pre-loss condition
• Retain an attorney to represent its interests
• Hire an inspector to verify that repairs are being completed
• Engage a loss consultant to review whether claim payments are adequate to protect its collateral

The key distinction is that none of these activities would involve acting as a public adjuster. A person with a public adjuster's license who is hired by a mortgage company to provide consulting services is not acting as a public adjuster — they are acting as a consultant. They should not present their public adjuster credentials, should not use a Public Adjuster Contract, and should not demand the claim file as though they were representing an insured.

Whether a licensed public adjuster can ethically serve as a “consultant” to a non-insured on an insurance claim without running afoul of licensing laws is debatable. Some would argue this is a distinction without a difference — that anyone who is compensated for helping a party negotiate or settle an insurance claim is engaging in public adjusting, regardless of the label. Others would argue that legitimate consulting work (such as reviewing repair estimates) does not cross the line into public adjusting.

Lessons Learned

This situation illustrates several important principles for homeowners, public adjusters, mortgage companies, and insurance companies:

For homeowners:Your insurance claim file contains deeply personal information. You have privacy rights under both federal and state law. If a third party is trying to access your claim information beyond what the mortgage clause authorizes, you should speak up — or have your representative do so on your behalf.

For public adjusters:Know the mortgage clause inside and out. Understand where the mortgage company's rights end and the insured's privacy rights begin. Be prepared to push back firmly but professionally when another firm tries to exceed its authority. Document everything in writing.

For mortgage companies:You have legitimate interests in the insurance claim, and those interests are protected by the mortgage clause. But your rights have boundaries. You are not an insured (unless you have a force-placed policy), and you should not attempt to access the complete claim file or hire a public adjuster to act as your public adjuster on a homeowner's policy where you are merely a loss payee.

For insurance companies:You are the gatekeeper of the insured's private information. When a third party demands the claim file, you have a legal obligation to protect the insured's privacy. Honor the mortgage clause. Include the mortgage company on dwelling checks. Share dwelling-related documentation. But do not turn over personal property inventories, additional living expense records, credit card statements, or other private information to unauthorized parties.

Applicable Laws and Regulations

• California Insurance Code Section 15007— Definition of Public Insurance Adjuster (requires representation of an insured)
• California Insurance Code Section 15027— Requirements for Public Adjuster Contracts
• California Insurance Code Section 791.13— Insurance Information and Privacy Protection Act (restrictions on disclosure of personal information by insurers)
• Gramm-Leach-Bliley Act (15 U.S.C. Sections 6801–6809)— Federal financial privacy protections
• California Financial Information Privacy Act (Cal. Fin. Code Section 4050 et seq.)— California-specific financial privacy protections
• California Consumer Privacy Act / California Privacy Rights Act (Cal. Civ. Code Section 1798.100 et seq.)— Broad consumer privacy rights
• Standard Homeowner's Insurance Policy Mortgage Clause— Contractual provisions defining mortgagee rights

Written by a California Licensed Public Adjuster with firsthand experience handling the conflict described in this article.