Evaluating the Relationship Between Independent Insurance Adjusters and Insureds: the Case Against Imposing an Independent Duty of Care

• Publication year: 2022

48 Creighton L. Rev. 245. EVALUATING THE RELATIONSHIP BETWEEN INDEPENDENT INSURANCE ADJUSTERS AND INSUREDS: THE CASE AGAINST IMPOSING AN INDEPENDENT DUTY OF CARE

EVALUATING THE RELATIONSHIP BETWEEN INDEPENDENT INSURANCE ADJUSTERS AND INSUREDS: THE CASE AGAINST IMPOSING AN INDEPENDENT DUTY OF CARE

STEVEN PLITT AND RYAN SANDSTROM(fn*)

I. INTRODUCTION

Recently, insurance adjusters have come into the crosshairs of claimants who argue that insurance adjusters should owe independent duties to policyholders/insureds and should be held liable to policyholders/insureds for negligence, as well as negligent misrepresentation. The new spotlight on independent adjuster liability has been driven by several outcome goals: (1) creating a separate cause of action for plaintiffs to survive summary judgment(fn1) or enhance verdict value; (2) creating a secondary source of recovery;(fn2) and (3) defeating federal jurisdiction to lock in a friendly state court's venue.(fn3) Courts are currently struggling with the question of whether there should be an independent tort for adjuster negligence (as opposed to a cause of action for bad faith brought against insurers for the same type of misconduct) and, if so, what the scope of the tort should be.(fn4)

Standards regarding claim adjuster conduct have been delineated both statutorily and, more generally, through the common law. Statutorily, most states have enacted the National Association of Insurance Commissioners ("NAIC")(fn5) Model Unfair Claims Settlement Practices Act ("UCSPA"). The Model UCSPA has been adopted in some form by forty-three states.(fn6) The Model UCSPA is designed to prevent insurers from disputing claims on pretext or to force claimants to litigate valid claims to judgment in the hope of wearing them down to accept a settlement for less than the value of the loss. The Model Act authorizes a state's insurance commissioner to enforce its provisions through investigation and sanctions, if warranted. The Model UCSPA also outlines the activities that constitute unfair claims practices. "These include (1) misrepresentation of insurance policy provisions, (2) failing to adopt and implement reasonable standards for the prompt investigation of claims, (3) failing to acknowledge or to act reasonably promptly when claims are presented, and (4) refusing to pay claims without an investigation."(fn7)

Apart from administrative remedies available against insurers for violating provisions of the Act,(fn8) the courts retain jurisdiction to impose civil damages or other remedies against insurers in appropriate common law actions, based on such traditional theories as fraud and infliction of emotional distress. "Punitive damages may be available in actions not arising from contract, where fraud, oppression, or malice is proved."(fn9) In addition, prejudgment interest may be awarded where an insurer has attempted to avoid a prompt, fair settlement.(fn10) A claim brought for violation of a state's UCSPA, where allowed by statute or case law, is called a "statutory bad faith claim." This is different from common law bad faith.

The NAIC did not intend the Model Act to include a private right of action.(fn11) Some state legislatures have enacted within the UCSPA a statutory private cause of action within the Act itself.(fn12) Some courts have implied by law a private right of action from the state's UCSPA.(fn13) The UCSPA provides general guidance as to the enumerated tasking of activities for claim adjusters. There is a split, however, as to what the consequences for a violation of those standards are.

Regarding the common law, courts have created the tort of insurance bad faith to regulate insurance company conduct, which indirectly regulates insurance claim adjuster conduct. Various common law standards for bad faith have been utilized by the courts throughout the United States. The two principal standards are commonly referred to as the intentional misconduct standard(fn14) and the negligence standard.(fn15) Beyond these two standards, courts throughout the country have adopted various standards to determine the existence of insurance company bad faith.(fn16) While the UCSPA provides basic standards regarding specific adjuster conduct, common law concepts of bad faith tend to be variable and are decided on a case-by-case, fact-by-fact basis.

In those jurisdictions adopting the intentional misconduct standard, mere negligence is insufficient to establish bad faith misconduct. While establishing a successful bad faith claim minimally requires proving that an insurance carrier acted unreasonably in denying coverage or in its refusal to pay, many jurisdictions require the plaintiff to also prove the carrier knew or should have known it was actingunreasonably, including: Arizona,(fn17) Colorado,(fn18) Indiana,(fn19) Iowa,(fn20) Kentucky,(fn21) Pennsylvania,(fn22) South Dakota,(fn23) Texas,(fn24) Wisconsin,(fn25) and Wyoming.(fn26) The presence of scienter, motivating insurance company/claim adjuster decisions, is required.

This Article addresses the divergent viewpoints of whether an insurance adjuster owes independent duties to policyholders/insureds and whether they can act negligently against the policyholder/insured in the adjustment of the policyholder's/insured's claim. Further, this Article addresses recent case law regarding the expansion of such potential duties owed by adjusters, to include torts such as negligent misrepresentation. Lastly, this Article analyzes whether adjusters can be held liable for the intentional tort of aiding and abetting the insurer, while acting in the course and scope of his employment or agency as an adjuster.

II. CLAIM ADJUSTERS AND THE CLAIM ADJUSTMENT PROCESS

An insurance adjuster is an agent who acts on behalf of an insurance company or individual filing a claim against an insurance company.(fn27) The quintessential function of an adjuster is investigatory.(fn28) An insurance adjuster is tasked with determining coverage, liability, and assessing the economic value of the stated loss.(fn29) Individuals engaging in the profession of adjusting are subject to various licensing and continuing education requirements, which are dependent on the adjuster's employment classification and state of residency.(fn30)

An adjuster's classification is contingent on the contractual nature of their employment. Adjusters generally fall within one of two categories: (1) public adjuster; or (2) staff/independent adjuster.(fn31) Those employed and contracted by the insurance company are typically known as staff and independent adjusters, while those contracted by the policyholder or third party fall into the category of a public adjuster.(fn32) This Article only focuses on staff and independent adjusters working for insurance companies.(fn33)

Staff and independent adjusters are regulated by the practices and customs of the insurer. They generally lack the authority to bind the insurer into extending coverage or making payments.(fn34) In a sense the staff and independent adjuster's role is advisory rather than authoritative.(fn35) The court in Cheatham(fn36) delineated eleven duties and responsibilities associated with staff and independent adjusters:

(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). . . .(fn37)

Licensing and continuing education requirements for staff and independent adjusters have served a public policy function by certifying the individual adjuster's competency in making coverage and financial evaluations that impact the individual consumer.(fn38) Many states grant licensing reciprocity to adjusters who are licensed in their home state and are in good standing.(fn39) Other states allow adjusters to bypass licensing requirements only if they are contracted employees of a licensed insurer and will require public adjusters to obtain a license prior to adjusting in the state.(fn40)

Independent and staff adjusters have recently come under scrutiny by claimants and courts because of their use of evaluation software like Colossus,(fn41) Ingenix,(fn42) and CCC Portals(fn43) in formulating settlement values.(fn44) The use of this software has sparked controversy with critics asserting that the use of evaluation software disposes of the adjuster's input(fn45) and results in unfair claims practices(fn46) and settlement values.(fn47) Irrespective...