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Insurance adjusters are people knowledgeable in insurance retained by an insurer for the purpose of assisting the insured in proving a loss to the insurer. A person who expresses to the insured the fidelity and good faith of the insurer. The adjuster is not expected nor required to be perfect. In Murphy v. Patriot Ins. Co. — A.3d —-, 2014 Vt. LEXIS 101 (Vt.), 2014 VT 96 (Supreme Court of Vermont, 8/14/14), [enhanced version available to lexis.com subscribers], the Supreme Court was asked to hold an insurer and its adjuster liable for bad faith tort damages because the adjuster failed to recognize all the losses incurred. The trial court entered judgment in favor of Patriot Insurance Company (Patriot), her homeowner’s insurer.
In late July 2007, plaintiff reported to Patriot that a recent storm had caused damage to the flashing on her roof, allowing water to enter the house. Patriot engaged a claims adjuster to investigate the claim, who went to the property four days after the report. Plaintiff and the adjuster walked around the house inspecting the damage. The adjuster observed damage to the garage and ceiling of an enclosed porch and dampness in the finished portion of the basement. He went up on the roof, but observed “no exterior damage due to wind,” and no damage to the flashing on the roof around the rear chimney or holes in the roof. In his claims report, the adjuster acknowledged that the insured showed him certain damage from the storm, including heavy rain that had purportedly “flooded the driveway and infiltrated the foundation causing water damage to [the] contents … of the basement.” The real cause of plaintiff’s water infiltration is long-term deterioration around both the rear and front chimney, and the adjuster closely looked only at the rear chimney at the time of his original inspection. There is no indication that the adjuster intentionally ignored plaintiff’s identification of her problem by looking at only the rear chimney.
After the initial claim payment Patriot, at the request of the insured, sent the adjuster back to deal with additional damages and agreed to pay more, including the $10,000 limit for damages due to mold. Even though the adjuster noted more than one incident that required an additional deductible the insurer refunded the $500 deductible to the insured.
An inspectors later report concluded that the cause of the damage was failed flashing near the chimneys that had allowed water to enter and produce structural damage, rot, and mold. The inspector also concluded that the water penetration was a long term problem that pre-existed the July 2007 storm. The inspector recommended demolition of a portion of the roof to determine the extent of structural damage and the possible replacement of the front chimney. Plaintiff provided a copy of the report to Patriot’s claims adjuster, who had planned—in response—to have an engineer inspect the front chimney, but plaintiff had it removed before the inspection could occur.
Patriot paid plaintiff for a subsequent claim and continued to negotiate with plaintiff over a repair estimate in excess of $56,000 which plaintiff maintained was necessary to remediate the substantial remaining rot and mold in the home. As part of the negotiation Patriot paid plaintiff an additional $15,865.44, for a total—the court found—of $32,653.40 in payments, including cashed and uncashed checks.
While the parties remained in discussion, plaintiff – adding insult to injury – filed a complaint for breach of contract. Patriot moved for partial summary judgment on the scope of coverage for remediation of the mold and rot and replacement of the chimney. In a November 2009 decision, the trial court ruled that the homeowner’s policy clearly and unambiguously limited damages relating to the fungi or rot to $10,000.
Plaintiff subsequently filed an amended complaint adding claims against Patriot for negligence “in inspecting and processing [the] claim and in retaining adjusters to investigate her claim,” and “bad faith” in denying the claims with “no reasonable basis.” The trial court later issued a written decision granting Patriot’s motion. The court agreed that plaintiff had failed to “present[ ] a basis upon [which] to establish that [Patriot] owed a clear, non-contractual duty to her,” and further found on the facts alleged that Patriot “had a reasonable, if debatable, basis to deny [p]laintiff’s claims under the policy.” Accordingly, the court granted summary judgment for Patriot on both claims.
As agent for the insurer, the adjuster’s conduct is imputed to the insurer, which is subject to liability for the adjuster’s mishandling of claims in actions alleging breach of contract or bad faith. Therefore, subjecting adjusters to additional and potentially open-ended tort liability would be contrary to the law of agency, and disproportionate to their ability to control their potential risks.
The Supreme Court of Vermont’s rejection of an independent tort duty on the part of the insurer’s adjuster was predicated in part on a recognition that the relationship between insurer and insured is fundamentally contractual, defined and governed by the coverage provisions in the insurance policy and the covenant of good faith and fair dealing implied in every insurance policy. Recognizing that it had in the past held on numerous occasions that a negligence claim can exist only if there is a duty independent of any contractual obligations the Supreme Court concluded that Vermont case law prohibits a claimant from seeking damages for contractual losses through tort law. Indeed, it recognized the existence of a first-party bad faith action against an insurer in part because no alternative independent remedy was available.
Issuing a statement that should be obvious but that is often not honored, the Supreme Court stated that “the bad faith remedy would generally be superfluous if mere negligence in handling a claim would be sufficient for liability.”
Noting that most other courts have limited actions by insureds against their insurers to breach of contract or the implied covenant of good faith and fair dealing and have disallowed actions for negligence based upon an independent duty of care citing to cases from Alabama Arizona, California, Florida, and Texas. The insurance policy and the implied covenant of good faith and fair dealing defined plaintiff’s expectations for coverage and recovery in the event that benefits were wrongfully denied. Plaintiff did not advance, nor could the Supreme Court find, any compelling policy or other basis for imposition of an independent, extra-contractual negligence duty.
The question remains whether the court was also correct in dismissing plaintiff’s claim for “bad faith,” the general shorthand for breach of the covenant of good faith and fair dealing which the law implies in every insurance policy. To establish bad faith, the plaintiff must show that:
Where a claim is “fairly debatable,” the insurer is not guilty of bad faith even if it is ultimately determined to have been mistaken. The mistaken or erroneous withholding of policy benefits, if reasonable or if based on a legitimate dispute as to the insurer’s liability does not expose the insurer to bad faith.
Measured against the state’s bad faith standard the Supreme Court could find no basis to disturb the trial court’s ruling. At best, plaintiff might claim that the adjuster’s failure to find that the true cause of the water infiltration was through the front chimney. Such a claim would fall well short of the knowing or reckless conduct required for a finding of bad faith. Sloppy or negligent claims handling does not rise to the level of bad faith. In a first-party bad faith claim, an imperfect investigation, standing alone, is not sufficient cause for recovery if the insurer in fact has an objectively reasonable basis for denying the claim.
Patriot bent over backwards to resolve the claim with the insured. It paid the claim it observed as reported by the insured. When it was explained that there was further damage it paid more. Even though the loss was long term and maintenance related predating the loss notice, it continued to pay and even paid the full limit of its mold and fungi cover and continued to negotiate with the insured in an attempt to resolve the claim only to be sued, proving that the insurer’s good faith claims handling was not enough to avoid a suit for bad faith.
The Supreme Court of Vermont, faced with such unfair conduct by the insured, and the attempt to make the alleged negligence of the adjuster into a tort, was wrongful. The tort of bad faith was created to provide a remedy where none existed and was designed to be available only for limited purposes, not every disagreement between an insured and insured. It also made clear that if an adjuster acts in bad faith he or she is not personally responsible but only the insurer. To hold the adjuster liable he or she must commit an independent tort outside the obligation to investigate and adjust the claim.
By Barry Zalma, Attorney and Consultant
Reprinted with Permission from Zalma on Insurance, (c) 2014, Barry Zalma.
Barry Zalma, Esq., CFE, is a California attorney who limits his practice to consultation regarding insurance coverage, insurance claims handling, insurance bad faith and fraud and acting as a mediator or arbitrator on insurance disputes. Mr. Zalma serves as a consultant and expert almost equally for insurers and policyholders. He founded Zalma Insurance Consultants in 2001 and serves as its only consultant. He recently published the e-books, "Zalma on Rescission in California - 2013"; "Random Thoughts on Insurance" containing posts from this blog; "Zalma on Insurance;" "Murder and Insurance Don't Mix;" “Heads I Win, Tails You Lose — 2011,” “Zalma on Diminution in Value Damages,” “Arson for Profit” and “Zalma on California Claims Regulations,” and others that are available at Zalma Books.
Mr. Zalma can be contacted at Barry Zalma or firstname.lastname@example.org, and you can access his free "Zalma on Insurance Fraud" newsletter at Zalma’s Insurance Fraud Letter.
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