Vermont Supreme Court Holds Independent Adjusters Have No Direct Duty to Homeowners/Insured, but Insurer may be Liable for an Independent Adjuster's "Bad Faith" Adjustment
February, 2006
The Supreme Court of Vermont recently held that an independent adjuster, engaged by an insurer, cannot be held liable to the insured for economic losses stemming from an allegedly negligent claims investigation. Hamill v. Pawtucket Mutual. Ins. Co., No. 2005-025, 2005 WL 3556694 (Vt. Dec. 30, 2005). However, the insurer that hires the independent adjuster can be sued for negligence or bad faith based upon the independent adjuster’s conduct
Plaintiff returned home from a business trip to find that there was a power outage at his home; as a result, the water pipes in his house froze and burst, causing water damage to his house. Plaintiff immediately reported the claim to his homeowner’s insurer, Pawtucket Mutual Insurance Company (“Pawtucket”), which in turn, contracted out the initial adjustment to the independent adjustment agency of Smith & Carson (“Smith”). Smith assigned the case to its employee, David Andrulat (“Andrulat”).
Andrulat inspected and assessed the damage to Plaintiff’s home, and made an offer to Plaintiff of $5,000.00, which Plaintiff rejected. Plaintiff rejected the offer because he had obtained his own estimates for repair which valued the loss between $150,000.00 and $200,000.00. After the $5,000.00 offer was rejected, Adrulat failed to follow-up with Plaintiff for several weeks, further delaying the start of the repair work of the home.
Plaintiff initially filed suit against Pawtucket alleging breach of contract, negligence, bad faith and punitive damages. Plaintiff also filed suit against Andrulat for gross negligence and punitive damages. Two years later, Plaintiff filed a second suit against Smith and Richard Dineley (“Dineley”), Andrulat’s supervisor, which alleged negligence and bad faith arising out of their failure to supervise, failure to investigate and failure to process Plaintiff’s claim.
Eventually, the claims against Pawtucket were settled and the remaining claims against Smith, Dineley and Andrulat were consolidated by the trial court. Defendants then moved for summary judgment. The trial court granted summary judgment in favor of Defendants. In issuing its ruling, the trial court held that Plaintiff could not maintain a claim against the adjusters because there was no duty on the part of the adjuster or his company which ran to Plaintiff. Id. at ¶4. The trial court also noted that there was no privity of contract between the parties, prohibiting Plaintiff from bringing a claim for economic loss against Defendants. Id. at ¶4. Moreover, the trial court found that, if there were a factual basis for a claim of bad faith, it should be included in Plaintiff’s claim against Pawtucket. Id. at ¶4. Plaintiff appealed the trial court’s ruling.
The Supreme Court of Vermont affirmed the trial court’s ruling. On appeal, Plaintiff argued that because the loss was not properly adjusted by Andrulat, the necessary repairs could not be made to his house, and therefore, his house developed a mold problem that made it uninhabitable. In support, Plaintiff alleged that Andrulat owed a duty to Plaintiff to adjust the loss properly by making a reasonable inspection and fairly assessing the damages. Id. at ¶5. Plaintiff further alleged that Andrulat breached that duty and Plaintiff’s damages were a foreseeable result (i.e. the mold problem) of this breach. Id. at ¶5.
The Court rejected Plaintiff’s argument based upon the economic loss doctrine, which sets forth that a party can recover economic losses under contract law but not tort law. The court reasoned that Vermont law recognizes no duty to exercise reasonable care to avoid economic loss unless the tortfeasor has also caused physical harm. Id. at ¶7. Rejecting Plaintiff’s argument that the mold damage was a physical harm, the Court concurred with the trial court’s finding that, since there was no physical harm, Plaintiff’s damages were mostly categorized as purely economic losses, generally recoverable under contract law but not tort law. Id. at ¶7. The Court concluded that its refusal to find a legal duty was also consistent with the majority view that independent adjusters engaged by insurers are not liable to insureds for economic losses stemming from allegedly negligent claims investigations. See, e.g., Meineke v. GAB Bus. Servs., Inc., 991 P.2d 267, 270-71, ¶¶15-19 (Ariz.Ct.App. 1999); Sanchez v. Lindsey Moreden Claims Servs., Inc., 72 Cal.App. 4th, 250-251 (Cal.Ct.App. 1999); King v. Nat’l Security Fire & Cas. Co., 656 So.2d 1338, 1339 (Fla.Dist.Ct.App. 1995); Charleston Dry Cleaners, Inc. v. Zurich American Insurance Co., 586 S.E.2d 588-89 (S.C. 2003).
However, the Court did not leave the insured without recourse. The Court noted that the relationship between the insured and the insurer is governed by the insurance policy, and that relationship is accompanied by a covenant of good faith and fair dealing. Id. at ¶13. By contrast, the obligations of adjusters runs to the insurer and are controlled by the contract between the adjuster and the insurer. Id. at ¶13. Hence, the Court concluded, the acts of the adjuster acting within the scope of his authority as agent for the insurer are imputed to the insurer, and the liability to the insured for the mishandling of the claim is imputable to the insurer in an action alleging breach of contract or bad faith. Id. at ¶13.
Learning Point:
The Vermont Supreme Court followed the lead of other jurisdictions in holding that independent adjusters have no direct duty to insureds. However, if an independent adjuster’s conduct constitutes “bad faith,” the insurer may be liable to the insured for that conduct. •
Back to New York CM Report of Recent Decisions (2006v1) 2006 Volume 1 Table of Contents
