Rejection Of Adjuster Negligence Claims Affirmed
REPRINTED WITH PERMISSION FROM WESTLAW JOURNAL
11 No. 12 Westlaw Journal Insurance Bad Faith 2
Westlaw Journal Insurance Bad Faith
October 14, 2015
REJECTION OF ADJUSTER NEGLIGENCE CLAIMS AFFIRMED
By Steven Plitt, Esq., Kunz Plitt Hyland & Demlong aa1
Copyright © 2015 Thomson Reuters .
Steven Plitt of Kunz Plitt Hyland & Demlong discusses a recent 7th U.S. Circuit Court of Appeals’ decision on the duty claims adjusters owe insurance companies and insureds.
The majority of courts that have considered whether claim adjusters owe a duty of care to insureds have rejected the duty. 1 “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.” 2
The courts comprising the majority have identified five principal reasons for rejecting an independent tort:
• Lack of contractual privity.
• General public policy considerations.
• Imposing an independent duty would create conflicting loyalties.
• The insurance company controls the adjuster.
• The cost of imposing a duty outweighs the benefits.
A few jurisdictions do not require privity of contract to establish a duty on an independent adjuster. 3 The minority view focuses on foreseeability and not contract privity, saying that because adjusters must be licensed to perform their duties, they are under a general duty of care to act reasonably. 4
Recently, the 7th U. S. Circuit Court of Appeals in Lodholtz v. York Risk Services Group 5 found that, under Indiana law as predicted by a review of Indiana Court of Appeals decisions, claim adjusters did not owe a legal duty to insureds. The facts before the court are not particularly relevant because the duty issue was decided as a matter of law.
The court began its analysis by recognizing that the Indiana Supreme Court had not addressed the precise issue of whether claim adjusters owed a duty to the insured. Several Indiana Court of Appeals decisions 6 did, however, reach that result. Based on those decisions, the 7th Circuit predicted that the Indiana Supreme Court would not impose a duty.
An insurance adjuster is the agent of the insurer and so has no direct relationship with the insured. 7 This principle had been adopted not only by the Indiana Court of Appeals 8 but also by the majority of American jurisdictions 9 and comports with general principles of Indiana agency law under which an agent is not liable for the actions taken on behalf of the principal. 10
Plaintiff-appellant Robert Lodholtz argued against the agency issue by asserting that an agent who commits a tortious act is liable along with the principal under Indiana law. 11 The 7th Circuit found that Lodholtz was ignoring the distinction that the Indiana Supreme Court had made between acts that would be tortious despite a contractual relationship and those acts that were tortious only because of the contractual relationship. 12
*2 The court found that under Indiana law an agent was not liable for the harm that befell a third party as a result of failure to perform under the contract. 13 The court applied Indiana agency law because any legal duty attached to an insurance claim flowed from the parties’ contractual obligations. 14 Because the insurance adjuster had no contractual relationship with Lodholtz, agency principles foreclosed the imposition of a duty.
Next, Lodholtz pointed out that the insured was a reasonably foreseeable victim injured by a reasonably foreseeable harm. 15 Lodholtz argued it should have been reasonably foreseeable to any claims adjuster that the insured was relying on the claims adjuster to coordinate the insured’s defense in a third-party action and that the entry of a default judgment was a foreseeable consequence of failing to answer the complaint on behalf of the insured. 16
The independent adjuster responded that, because it was the agent of the insurance company, the insurance company was the only foreseeable victim of the claim adjuster’s negligence. While the appeals court acknowledged that, as a practical matter, it was foreseeable the negligence of a claim adjuster might harm the insured, it ruled that factor alone could not be relied upon to impose a legal duty. 17
Finally, Lodholtz argued that public policy supported the imposition of a duty. 18 In response, the appeals court noted that it was the prerogative of the Indiana courts to fashion state common law according to the public policy of Indiana and that Lodholtz’s argument ignored that, in Indiana, torts alleged in the context of an insurance contract were not run-of-the-mill torts. 19
The Indiana courts had imposed a duty on insurers because of their unique relationship with the insured through the insurance contract. 20 The adjuster, however, was not a party to that contract. Consequently, courts had held that the adjuster’s liability was premised on its contract with the insurance company and was thus limited to the insurance company.
Without an insurance contract, the policy rationales for imposing a duty on a claim adjuster ceased to exist. 21 Moreover, the court found that Lodholtz ignored the fact that the relationship between the parties implicated agency principles. Since the claim adjuster was an agent of the insurance company, that relationship provided a strong public policy rationale for the Indiana Supreme Court to refuse to recognize the duty Lodholtz sought. 22
|1||Alabama: Akpan v. Farmers Ins. Exch., 961 So. 2d 865 (Ala. Ct. App. 2007); Arizona: Meineke v. GAB Bus. Servs., 991 P.2d 267 (Ariz. Ct. App. 1999); California: Sanchez v. Lindsey Morden Claims Servs., 84 Cal. Rptr. 2d 799 (Cal. Ct. App., 2d Dist. 1999); Florida: King v. Nat’l Sec. Fire & Cas. Co., 656 So. 2d 1338 (Fla. 4th Dist. Ct. App. 1995); Mississippi: Bass v. Cal. Life Ins. Co., 581 So. 2d 1087 (Miss. 1991); Missouri: Haney v. Fire Ins. Exch., 277 S.W.3d 789 (Mo. Ct. App. 2009); Nevada: Vargas v. Cal. State Auto. Ass’n Inter-Ins. Bureau, 788 F. Supp. 462 (D. Nev. 1992); New York: Velastequi v. Exch. Ins. Co., 505 N.Y.S.2d 779 (N.Y. Civ. Ct., Kings Cnty. 1986); North Carolina: Koch v. Bell, Lewis & Assocs., 627 S.E.2d 636 (N.C. Ct. App. 2006); Pennsylvania: Hudock v. Donegal Mut. Ins. Co., 264 A.2d 668 (Pa. 1970); South Carolina: Charleston Dry Cleaners & Laundry v. Zurich Am. Ins. Co., 586 S.E.2d 586 (S.C. 2003); Texas: Dagley v. Haag Eng’g Co., 18 S.W.3d 787 (Tex. 2000); Vermont: Hamill v. Pawtucket Mut. Ins. Co., 892 A.2d 226 (Vt. 2005).|
|2||Silon v. Am. Home Ins. Co., No. 2:08-cv-1798-RCJ-LRL, 2009 WL 1090700 (D. Nev. Apr. 21, 2009), at *2.|
|3||New Hampshire: Morvay v. Hanover Ins. Cos., 506 A.2d 333 (N.H. 1986); Oklahoma: Brown v. State Farm Fire & Cas. Co., 58 P.3d 217 (Okla. Ct. App. 2002); Alaska: Cont’l Ins. Co. v. Bayless & Roberts Inc., 608 P.2d 281 (Alaska 1980).|
|4||Morvay, 506 A.2d at 334.|
|5||No. 14-2571, 2015 WL 542815 (7th Cir. Feb. 11, 2015), interpreting Indiana law.|
|6||See, e.g., Troxell v. Am. States Ins. Co., 596 N.E.2d 921, 925 n.1 (Ind. Ct. App. 1992), citing with approval Velastequi, 505 N.Y.S.2d at 782 (holding that he adjuster’s duty was solely to the insurer and not the insured); Meridian Sec. Ins. Co. v. Hoffman Adjustment Co., 933 N.E.2d 7 (Ind. Ct. App. 2010).|
|7||Lodholtz, 2015 WL 542815 at *4.|
|8||See, e.g., Troxell v. Am. States Ins. Co., 596 N.E.2d 921, 925 n.1 (Ind. Ct. App. 1992).|
|9||Lodholtz at *5, citing Shree Hari Hotels v. Soc’ Ins. Co., No. 1:11-cv-01324-JMS-DKL, 2013 WL 1500455 at *3 (S.D. Ind. Apr. 11, 2013) (concluding that, in Troxell, the Indiana court adopted the majority approach).|
|10||Id., citing, e.g., Greg Allen Constr. Co. v. Estelle, 798 N.E.2d 171, 174 (Ind. 2003) (finding that a “[a]gent who intentionally or negligently fails to perform duties to its principal is not thereby liable to a person whose economic interest are thereby harmed,” and “[a]n agent is not liable for harm to a person other than his principal because of his failure adequately to perform his duties to his principal, unless physical harm results from reliance upon performance of the duty by the agent”); McAdams v. Dorothy Edwards Realtors, 604 N.E.2d 607, 612 (Ind. 1992) (holding that real estate broker was agent of seller and therefore not liable to buyer under agency principles, and noting that the wrong was therefore perpetuated by the principal).|
|11||Id. at *5.|
|12||Id., citing Greg Allen Constr., 798 N.E.2d at 173-75 (“[T]he proper formulation of the reason Allen is not liable here is that his negligence consisted solely of his actions within the scope of his authority in negligently carrying out a contractual obligation of the corporation as his employer. Nothing he did, and therefore nothing the corporation did, constituted an independent tort if there were no contract.”).|
|13||Id. at *5, citing c.f. Brown v. Owen Lithographic Serv., 384 N.E.2d 1132, 1135 (Ind. Ct. App. 1979) (agent is not liable if the principal is disclosed at the time of contracting).|
|14||Id., citing Meridian Sec., 933 N.E.2d at 12; Meineke, 991 P.2d at 271.|
|15||Id. at *6, citing Webb v. Jarvis, 575 N.E.2d 992, 997 (Ind. 1991).|
|17||Id. at *7.|
|18||Id., citing Key v. Hamilton, 963 N.E.2d 573, 583-84 (Ind. Ct. App. 2012). where the court held that a driver who waived another driver through an intersection, after engaging in a thorough examination of traffic in order to ensure another driver’s safety, had a duty to third parties that may be harmed as a result. The Indiana court in that case held that public policy demanded that the court hold individuals responsible for the results of their behavior because “allowing an individual to escape liability for damage he causes would fly in the face of the normal expectations of our civil society.”|
|19||Id. at *7.|
|20||Id., citing Erie Ins. Co. v. Hickman ex rel. Smith, 622 N.E.2d 515, 518-19 (Ind. 1993).|
|21||Id. at *7.|
|aa1||Steven Plitt is the current successor author of “Couch on Insurance 3d.” He is a founding partner of the coverage boutique law firm Kunz Plitt Hyland & Demlong in Phoenix, where he serves as chairman of the insurance practice group and maintains a national practice. He frequently testifies as an expert witness in insurance-related cases on subjects including bad faith, coverage issues, insurance agent errors and omissions, and legal malpractice. He can be reached at [email protected].|
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