The April 21, 2014 edition of the Los Angeles Daily Journal featured Robert McKennon’s article entitled: “New Liability for claim adjusters the right move.” In it, Mr. McKennon discusses a new case which exposes insurance adjustors to negligent misrepresentation and intentional infliction of emotional distress claims by policyholders. The article is posted below with the permission of the Daily Journal.
New liability for claims adjusters the right move
After filing an insurance claim, it is not uncommon for an insured to receive unfair treatment from the claims adjuster assigned by the insurer. For example, a claims adjuster may misrepresent the value of a claim or misstate policy coverage. An insured can, of course, bring claims for breach of contract and insurance bad faith against the insurer for such improper actions; however, it is well-established that under California law, insureds cannot sue the claims adjuster for breach of contract or insurance bad faith. See Sanchez v. Lindsey Morden Claims Services Inc., 72 Cal. App. 4th 249 (1999).
But can an insured sue a claims adjuster for negligent misrepresentation or intentional infliction of emotional distress? The state Court of Appeals, in Bock v. Hansen, 2014 DJDAR 4280 (Apr. 2, 2014), held that they can. Bock is the first case to extend liability for certain claims handling actions to adjusters.
Michael and Lorie Bock purchased a homeowner’s policy from Travelers Property and Casualty Insurance Co., which covered physical loss to their home and the cost of debris removal. After a tree limb collapsed onto the Bocks’ home and caused substantial property damage, the Bocks reported the incident to Travelers, which assigned Hansen, a claims adjuster to handle the claim. The Bocks allege that the adjuster spent no more than 15 minutes at the scene, altered the scene to downplay the severity of the damage, and falsely informed the Bocks they were not covered for debris removal.
Subsequently, the Bocks discovered and reported additional damage to their chimney. Travelers sent Hansen again, despite the Bocks’ protests. Hansen again told the Bocks their policy did not cover “cleanup,” and the Bocks, relying on this representation, began cleaning the debris themselves. Later that day, Travelers sent Vertex Construction Services, a company without a valid contractor’s license, which assessed the damage and issued a false report understating the extent of the damage. Based on Vertex and the adjuster’s estimates, Travelers issued a check in an amount barely enough to cover the costs of tree removal, let alone to cover the damage caused, and denied coverage for the chimney damage. The Bocks submitted additional information, including a licensed contractor’s review and response to the Vertex report, for a reconsideration of their claim, but Travelers never responded.
Subsequently, the Bocks filed a complaint against Travelers, the adjuster and Vertex for, among other claims, breach of contract, bad faith, negligent misrepresentation and intentional infliction of emotional distress. The trial court sustained demurrers to these actions without leave to amend. The Bocks appealed.
The Court of Appeal reversed and upheld the negligent misrepresentation claim and granted the Bocks leave to amend their IIED claim. The court noted that insurers were in a “special relationship” with insureds, “akin to a fiduciary relationship,” and therefore owed insureds a duty to perform their responsibilities in good faith. Because Travelers was in a special relationship with the Bocks, Hansen, its employee, owed certain legal duties to the Bocks as well.
Courts focus on two circumstances in finding negligent representation liability: (1) where providing false information poses a risk of, and results in, physical harm to a person or property and (2) where the information is conveyed in a commercial setting for a business purpose. Here, the court found both circumstances applied — Mrs. Bock was physically harmed while cleaning up broken glass around the tree limb, and Hansen misrepresented Travelers’ scope of coverage for a business purpose.
The court also explained an agent or employee is always liable for his or her own torts, even when acting within the scope of his or her agency or employment: “Hansen also argues that he cannot be liable as an agent because he was acting in the course and scope of his employment. The complete answer is found in the terse statement of the rule in Witkin: ‘An agent or employee is always liable for his or her own torts, whether the principal is liable or not, and in spite of the fact that the agent acts in accordance with the principal’s directions. Similarly, an agent who commits an independent tort, such as fraud, remains liable despite the fact that the principal, by ratification, also becomes liable.’” (Emphasis added).
The court distinguished cases involving an insurance agent rather than a claims adjuster, and dismissed the argument that reliance on any misrepresentation was unjustified because the policy itself stated otherwise. Indeed, California courts do not allow a duty-to-read-the-insurance-policy defense when agents make representations to insureds about policy coverage. The court explained that insurance policies are complicated legal contracts and “[a]bsent some notice or warning, an insured should be able to rely on an agent’s representations of coverage without independently verifying the accuracy of those representations by examining the relevant policy provisions.”
Additionally, the court rejected the argument that the Bocks were on notice as to coverage since the Bocks began cleaning up prior to receiving an estimate based on Hansen’s misrepresentation, and sustained damages despite the minimal amount paid by Travelers.
Finally, the court ruled that insureds may assert IIED claims against claims adjusters, but found that the Bocks did not adequately plead the claim. The Bocks alleged that Hansen engaged in outrageous conduct by, among other things, ignoring evidence of coverage, altering the accident scene to deny coverage, creating a false report regarding damage to the Bocks’ property, and denying the claim for chimney repair when Hansen knew it was the Bocks’ primary source of heat. Ultimately, the court was not persuaded that these allegations constituted extreme and outrageous conduct as a matter of law. However, because the Bocks identified a litany of other allegations they could assert in an amended complaint that constituted outrageous conduct and caused them severe emotional distress, the court permitted the Bocks to amend their claim to support an IIED claim.
Bock is a well-reasoned, policyholder-friendly decision that expands liability to claims adjusters, such that adjusters may be liable for negligent misrepresentation and IIED. Based on the holding, there is no reason to believe that intentional misrepresentation claims cannot also be asserted in the proper circumstances. Claims adjusters are often the face of the insurer. They are expected to know the policy terms and coverages and to apply them in good faith to a given set of facts to determine coverage. When claims adjusters misrepresent policy terms or assert facts that they know, or should know, are false and when they know or believe that the insureds will rely on them to their detriment, it is not unreasonable to hold them accountable. It will be up to policyholders’ attorneys to determine if suing adjusters adds any value to their case. In most cases it will not, but it may in some situations, be just the right remedy and it may even mean the difference between litigating in state court vs. federal court as naming a local claims adjuster could act to defeat diversity jurisdiction in federal court.