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Independent Insurance Adjuster Liability to Insureds: the Majority and Minority Views

REPRINTED WITH PERMISSION FROM INSURANCE LITIGATION REPORTER

37 No. 9 Insurance Litigation Reporter NL 1

Insurance Litigation Reporter

June 26, 2015

Insurance Litigation Reporter

Independent Insurance Adjuster Liability to Insureds: the Majority and Minority Views

By Steven Plitt *

There are divergent judicial viewpoints on whether an insurance adjuster owes independent duties to policyholders/insureds and whether they can act negligently against the policyholder/insured in the adjustment of a claim. Certainly, an insurance adjuster is an agent who acts on behalf of the insurance company (an in-house or independent adjuster) or an individual who files a claim against an insurance company on behalf of an insured (a public adjuster). The quintessential function of an adjuster is investigatory. The adjuster is tasked with determining coverage, liability and assessing the economic value of a particular loss.

This article will not address the duties of public adjusters or staff adjusters. The article will focus upon independent adjusters that work for insurance companies. An independent adjuster (IA) is regulated by the practices and customs of the insurance company. Generally, the IA lacks the authority to bind the insurance company into extending coverage or making payments. 1 One court has noted that the IA's role is advisory rather than authoritative. 2 Another court has delineated 11 duties and responsibilities associated with IAs:

(1) setting and/or adjusting reserves based upon the adjuster's preliminary evaluation of the case, (2) investigating issues that relate to coverage and determining the steps necessary to complete a coverage investigation, (3) determining whether coverage should be approved or denied, with only denials of coverage subject to supervisory approval, (4) conducting investigation to determine liability, including making credibility determinations regarding interviewees, (5) consulting local traffic and negligence laws and applying those laws to the facts of the claim to determine who was at fault, (6) determining whether a claim has subrogation potential, (7) identifying underwriting risks, (8) identifying potentially fraudulent claims, (9) determining liability and apportioning fault to parties in comparative negligence cases, (10) determining the value of claims based upon many factors such as the claimant's credibility, age, gender, together with any physical injury or property damage, the reputation of the attorney representing the claimant, litigation costs, and venue, and (11) negotiating final settlement with the claimant(s). . . . 3

The majority of courts that have considered the issue have found that insurance adjusters cannot be held liable for negligence to policyholders. Thirteen jurisdictions (Alabama, Arizona, California, Florida, Mississippi, Missouri, Nevada, New York, North Carolina, Pennsylvania, South Carolina, Texas and Vermont) have found that insurance adjusters do not owe independent duties to policyholders. 4 "The majority rule on negligence of individual claim adjusters is that they do not owe a general duty of care to the insured, and therefore cannot be held liable to the insured for negligence as a matter of law." 5 There are five principal reasons why these courts have rejected an independent tort against the claim adjuster: (1) lack of contractual privity; (2) general public policy consideration; (3) imposing an independent duty would create conflicting loyalties; (4) the adjuster is controlled by the insurance company; and (5) the cost of imposing a duty outweighs the benefits.

The lack of contractual privity is a significant hurdle to the imposition of negligence claims brought by policyholders. This is so because most courts have found that the duties imposed on an insurance adjuster vary and are generally defined by the terms of the contract between the insurer and the adjuster, thus, disallowing policyholders from recovering pure economic damages in the absence of contractual privity. 6 This impediment is anchored in the well-established common law rule known as the economic loss rule. Under the economic loss rule, a plaintiff is prohibited from recovering purely economic losses in a tort action when the entitlement to such recovery flows only from a contract. 7 The economic loss doctrine "serves to maintain the boundary between contract law, which is designed to enforce parties' contractual expectations, and tort law, which is designed to protect citizens and their property by imposing a general duty of reasonable care." 8

In determining whether adjusters owe a general duty of care to insureds, courts within the majority view focus upon the duties required by contract. 9 In that regard, the relationship between the insured and the insurance company is defined and governed by the insurance policy. 10 Similarly, the duty is imposed on the insurance company as well as its exposure and extent of liability are prescribed in the insurance policy. 11 Because the insurance contract generally does not delineate or allow a separate cause of action for negligent claim handling, courts that have adopted the majority view find that there is no separate cause of action available to the insured to sue the insurance company for negligent claim handling. The insured's recourse against improper claims handling is either an action for breach of the insurance policy or a separate tort action for bad faith. 12 Both claims are made against the insurance company.

In the context of insurance adjuster negligence claims, according to the majority view, an insured cannot maintain an action for purely economic damages against a third-party adjuster with whom the insured has no privity of contract and, therefore, no contractual rights. 13

In determining whether a cognizable legal duty should exist, absent clear legislative direction, courts in the majority have focused on a variety of public policy considerations. The Court in Sanchez v.Lindsey Morden Claims Servs., Inc., 14 is the seminal case addressing the public policy considerations that exist in the context of whether an independent duty should be imposed on an insurance adjuster with whom the insured lacks privity of contract and where imposition of a duty would violate the established economic loss doctrine. 15 The Sanchez Court addressed: (1) the relationship between the insured and the adjuster and the blameworthiness of the adjuster's actions relative to its decision-making ability; (2) whether the imposition of a new duty on adjusters "would subject the adjuster to conflicting loyalties;" (3) the cost-benefit analysis of imposing a general duty of care on adjusters; (4) whether creating a new duty on adjusters would depart from existing case law regarding an insurer's liability; (5) the likelihood that the creation of a new duty would lead to judicial policy-making in a pseudo-legislative manner; and (6) whether the imposition of a new duty would be consistent with general principles of agency law. 16

The Court in Sanchez noted that the adjuster's role was essentially investigative, while the insurance company's role was authoritative. 17 The Court in Sanchez noted that "[t]he insurer, not the adjuster, has the ultimate power to grant or deny coverage," and to pay or delay payment of claims. 18 The Court in Sanchez noted that "while the insurer's potential liability is circumscribed by the policy limits, and the other conditions, limits and exclusions of the policy, the adjuster has no contract with the insured and would face liability without the chance to limit its exposure by contract." 19 Because of this the adjuster would be exposed to uncapped liability while the insurance company could limit its exposure by contract. 20 The adjuster's liability could far exceed that faced by the adjuster's principal, the insurance company. 21

The Court in Sanchez also noted that the imposition of a duty on the adjuster "would subject the adjuster to conflicting loyalties." 22 The issue of conflicting loyalties was addressed by the Arizona Court of Appeals in Meineke v. GAB Business Services 23 stated:

We conclude that the relationship between adjuster and insured is sufficiently attenuated by the insurer's control over the adjuster to be an important factor that militates against imposing a further duty on the adjuster to the insured. More important ... imposing a duty on the adjuster in these circumstances would work a fundamental change in the law. The law of agency requires a duty of absolute loyalty of the adjuster to its employer, the insurer. 24 The independent adjuster's obligation is measured by the contract between the adjuster and the insurer. The adjuster that contracts to perform a $200 investigation is not obligated to expend the same effort that might be reasonable for a fee of $2000, nor is it obligated to continue when the insurer advises it to stop. Creating a separate duty from the adjuster to the insured would thrust the adjuster into what could be an irreconcilable conflict between such duty and the adjuster's contractual duty to follow the instructions of its client, the insurer. 25

In essence, the imposition of an independent duty would place the adjuster in the position of attempting to serve two masters who may disagree as to coverage or at least the amount of the loss. 26

The Court in Sanchez noted that claims adjusters cannot represent both sides in an adversarial process such as the handling and attempting to settle an insurance claim just as lawyers cannot represent both sides in a lawsuit. 27 The Court in Meineke recognized that the adjuster could not in good faith argue as an adversary to the insurance company for the best result and highest dollar amount on behalf of the insured while at the same time dispute coverage applications and amounts of disputed damages on behalf of the insurer. 28 "An adjuster owes a duty to the insurer who engaged him," and imposing "[a] new duty to the insured would conflict with that duty, and interfere with its faithful performance." 29

A minority of jurisdictions (New Hampshire 30, Oklahoma 31 and Alaska 32) do not require privity of contract to establish a duty on an independent adjuster. The minority view focuses on foreseeability. The seminal case for the minority view is Morvay v. Hanover. 33 The Court in Morvay found that where an injury to a third-party insured is foreseeable, a duty of care attaches even in the absence of contractual privity. 34 The Court in Morvay stated:

Although the contractual relationship exists solely between the insurer and the investigators, and the investigators may give reports only to the insurer, the insured is a foreseeably affected ... party. If the investigators' report indicates a fire of incendiary nature, the insured's contract with the insurer may be unenforceable. If, on the other hand, the report indicates that the fire is not of an incendiary nature, the insured may expect the contract to be honored. Both the insured and the insurer have a stake in the outcome of the investigation. Thus, we hold that the investigators owe a duty to the insured as well as to the insurer to conduct a fair and reasonable investigation of an insurance claim and that the motion to dismiss should not have been granted. 35

Although a significant number of jurisdictions have not addressed the question of whether the insurance adjuster owes an independent duty of care to a third-party insured, the majority's analysis to support the rejection of such a duty is likely to be persuasive on other courts that may consider the issue in the future.

Footnotes

*

Steven Plitt received his LL.M. for Insurance Law, with honors, from the University of Connecticut. He is the current successor author for COUCH ON INSURANCE 3D. He is the author of Practical Tools for Handling Insurance Cases published by Thomson Reuters, as well as other books and legal publications.

1

Hodge v. AON Ins. Services, 122 Cal.Rptr.3d 364, 371 (Cal. Ct. App. 2012); see also Cheatham v. Allstate Ins. Co., 465 F.3d 578, 585 (5th Cir. 2006).

2

Id. at 371; Cheatham, 465 F.3d at 585.

3

Cheatham, 465 F.3d at 585 n.7.

4

Apkin v. Farmers Ins. Exch., 961 So.2d 865 (Ala. Civ. App. 2007); Meineke v. GAB Bus. Servs., Inc., 991 P.2d 267 (Ariz. Ct. App. 1999); Icasiano v. Allstate Ins. Co., 103 F. Supp. 2d 1187 (N.D. Cal. 2000); Sanchez v. Lindsey Morden Claims Servs., Inc., 84 Cal. Rptr. 2d 799 (Cal. Ct. App. 1999); King v. Nat'l Sec. Fire & Cas. Co., 656 So.2d 1338 (Fla. Dist. Ct. App. 1995); Bass v. Cal. Life Ins. Co., 581 So.2d 1087 (Miss. 1991); Haney v. Fire Ins. Exch., 277 S.W.3d 789 (Mo. Ct. App. 2009); Silon v. Am. Home Assurance Co., No. 2:08-cv-1798-RCJ-LRL, 2009 WL 1090700 (D. Nev. Apr. 21, 2009); Vargas v. Cal. State Auto. Ass'n Ins. Bureau, 788 F. Supp. 462 (D. Nev. 1992); Velastequi v. Exch. Ins. Co., 505 N.Y.S.2d 779 (N.Y. Civ. Ct. 1986); Koch v. Bell, Lewis & Assocs., Inc., 627 S.E.2d 636 (N.C. Ct. App. 2006); Hudock v. Donegal Mut. Ins. Co., 264 A.2d 668 (Pa. 1970); Charleston Dry Cleaners & Laundry, Inc. v. Zurich Am. Ins. Co., 586 S.E.2d 586 (S.C. 2003); Dagley v. Haag Eng'g Co., 18 S.W.2d 787 (Tex. 2000); Dear v. Scottsdale Ins. Co., 947 S.W.2d 908 (Tex. App. 1997); Hamill v. Pawtucket Mut. Ins. Co., 892 A.2d 226 (Vt. 2005).

5

Silon v. Am. Home Assurance Co., No. 2:08-cv-1798-RCJ-LRL, 2009 WL 1090700 (D. Nev. April 21, 2009) at *2.

6

Meineke, 991 P.2d at 270 (citing Miel v. State Farm, 912 P.2d 1333) (finding that when an "insurer's mishandling of a claim does not give rise to ... negligence," the remedies are bad faith and breach of contract); King v. Nat'l Sec. Fire & Cas. Co., 656 So.2d at 1339 (finding that the only remedy against an insurer is for breach of contract or bad faith, but not for negligence, and therefore no action could be maintained against insured's agents' for negligence); Valestequi v. Exch. Ins. Co., 505 N.Y.S.2d at 781 (wherein the Court noted that while "the plaintiff may have been an incidental beneficiary" of the adjuster/insurance company contract, the plaintiff did not acquire a legally enforceable right because there was no privity of contract between the plaintiff and the adjuster); Hamill v. Pawtucket Mut. Ins. Co., 892 A.2d at 230 (noting that the obligations on the adjuster are defined by scope of the contract).

7

In its simplest form, the economic loss rule precludes tort damages and limits recovery to remedies prescribed by contract law, where a contracting party has suffered monetary harm only. Eddward P. Ballinger, Jr. & Samuel A. Thumma, The History, Evolution and Implications of Arizona's Economic Loss Rule, 34 Ariz. St. L.J. 491, 492 (2002). The general theory behind the economic loss rule is to "'prevent[] the law of contract and the law of tort from dissolving one into the other.'" R. Joseph Barton, Drowning in a Sea of Contract: Application of the Economic Loss Rule to Fraud and Negligent Misrepresentation, 41 Wm. & Mary L. Rev. 1789, 1793 (2000) (citations omitted); Grant Treaster, The Confusion Continues: The New Dynamic of The Economic Loss Doctrine in Kansas, 62 U. Kan. L. Rev. 1325, 1328 (2014); Ellen S. Pryor, The Economic Loss Rule and Liability Insurance, 48 Ariz. L. Rev. 905, 906 (2006) (discussing "how the liability insurance regime fails to effectively translate, via insurance language and coverage litigation, the structure and purposes of the economic loss rule.") There is a need for boundaries between tort law and contract law, as a method of protecting the role each body of law serves. Ballinger & Thumma, supra, at 493. The need for this distinction has been said to "[rest] upon the source of the duty, the role that the parties[] play in determining their rights and responsibilities, and the time at which duties and obligations are determined." Barton, supra, at 1796. While tort law has been identified as paternalistic because as matter of policy it protects individuals from actions of others regardless of the existence of a contract, Id. 1797, contract law has been named individualistic, because a contract is assumed to be the result of arms-length bargaining, where the agreement itself allocates the risks and costs of a breach or nonperformance. Id. at 1796-97.

8

Hamill, 892 A.2d at 228-29 (citing Springfield Hydroelectric Co. v. Copp, 779 A.2d 67, 71 (2001); see also Berschauer/ Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 881 P.2d 986, 989-90 (Wash. 1994). Under tort law, parties may have a duty to protect each other from certain types of risk, because no duty to protect each other from economic risks exists, economic loss is better governed by contract law which allows for and preserves "parties' freedom to allocate economic risk by contract." Jeffrey J. Shampo, 74 Am. Jur. 2d Torts § 23 (2014). While proponents of the doctrine fear contract law "drown[ing] in a sea of tort," some critics suggest the expansion of the doctrine "threatens to drown tort in a sea of contract." R. Thomas & Sheila Sullivan, The Future of the Economic Loss Doctrine in Wisconsin, 78 MAY Wis. Law. 12, 13-14 (2005).

9

Jeffrey J. Shampo, 74 Am. Jur. 2d Torts § 24 (2014).

10

Meineke v. GAB Bus. Servs., Inc., 991 P.2d 267, 271 (Ariz. Ct. App. 1999).

11

Rawlings v. Apodaca, 726 P.2d 565, 570 (Ariz. 1986) (the duties imposed on the insurer are defined by the terms of the insurance contract).

12

Meineke, 991 P.2d at 270-71 (citing Miel v. State Farm, 912 P.2d 1333, 1340 (D. Ariz. 1996) (finding that an insurer's mishandling of a claim does not give rise to negligence and that the remedies are bad faith and breach of contract)). See also, King v. Nat'l Sec. Fire & Cas. Co., 656 So.2d 1338, 1340 (Fla. Dist. Ct. App. 1995) (finding that the only remedy against insurer is for breach of contract or bad faith, but not for negligence, and therefore no action could be maintained against insured's agents for negligence).

13

Dear v. Scottsdale Ins. Co., 947 S.W.2d 908, 917 (Tex. App. 1997) (insured may not maintain negligence claim against adjuster because adjuster's duties are contractual ones owed solely to insurer); King v. Nat'l Sec. Fire and Cas. Co., 656 So. 2d 1338, 1339 (insured may not bring simple negligence action against independent insurance adjuster); Velastequi v. Exch. Ins. Co., 505 N.Y.S.2d 779, 780 (N.Y. Civ. Ct. 1986) (adjuster's duty is to insurer and based in contract; therefore, insured may not sue adjuster for negligence in investigating claim).

14

84 Cal. Rptr. 2d 799 (Cal. Ct. App. 1999).

15

84 Cal. Rptr. 2d at 800.

16

84 Cal. Rptr. 2d at 801-03.

17

Id.; see also Hodge v. Aon Ins. Services, 122 Cal. Rptr. 3d 364, 371, 374 (Cal. Ct. App. 2012).

18

Sanchez, 84 Cal. Rptr. 2d at 801-02.

19

Id. at 802.

20

Id.

21

Id.

22

Id.

23

991 P.2d 267, 270-71 (Ariz. Ct. App. 1999) (citing Lombardo v. Albu, 4 P.3d 395 (Ariz. Ct. App. 1999).

24

See Restatement (Second) of Agency ("Restatement") § 387 (1958).

25

Meineke v. GAB Bus. Servs., 991 P.2d 267, 270-71 (Ariz. Ct. App. 1999) (citations omitted).

26

See Koch v. Bell, Lewis & Associates, Inc., 627 S.E.2d 636, 638-39 (2006) (holding that to impose a duty on the adjuster to the insured "would subject the adjuster to conflicting loyalties") (citations omitted); Akpan v. Farmers Ins. Exch., Inc., 961 So. 2d 865 (2007) (citing Meineke, 991 P.2d at 270-71); see also King v. Nat'l Sec. Fire and Cas. Co., 656 So. 2d 1338, 1339 (Fla. Dist. Ct. App. 1995); Velastequi v. Exch. Ins. Co., 505 N.Y.S.2d 779, 781-82 (N.Y. Civ. Ct. 1986) ("[A] duty directly assumed for the benefit of a particular person or entity does not extend to third parties who were not intended beneficiaries of the subject undertaking.").

27

Sanchez, 84 Cal. Rptr. 2d at 802.

28

Meineke, 991 P.2d at 270-71.

29

Sanchez, 84 Cal. Rptr. 2d at 802.

30

See Morvay v. Hanover Ins. Cos., 506 A.2d 333 (N.H. 1986) (finding that an adjuster owes a duty of care to insureds despite not being in privity of contract with the insured).

31

See Brown v. State Farm Fire & Cas. Co., 58 P.3d 217 (Okla. Civ. App. 2002) (finding that independent adjusters owe a general duty of care to insureds).

32

Continental Ins. Co. v. Bayless & Roberts, Inc., 608 P.2d 281, 287-88 (Alaska 1980) (finding independent adjuster firm owed duty to insured).

33

506 A.2d 333 (N.H. 1986).

34

Id. at 334-35.

35

Id. at 335.

End of Document

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