Complex Insurance Coverage Reporter – December 2018

Insureds Suing Individual Adjusters – What Will Change If The Washington Supreme Court Decides That Adjusters May Be Sued For Bad Faith?

By: Anthony L. Miscioscia and Timothy A. Carroll

In Keodalah v. Allstate Insurance Company, the Washington Supreme Court is set to determine whether individual insurance adjusters (as distinguished from the insurers for which they work) may be sued for bad faith and violations of Washington’s Consumer Protection Act and the Insurance Fair Conduct Act (CPA/IFCA). While this case is of obvious concern to individual adjusters who, if the ruling on appeal is affirmed, likely will be named with more frequency in bad faith actions, the outcome may not alter current bad faith litigation very much. Even if the Washington Supreme Court affirms the Court of Appeals’ decision in Keodalah that adjusters may be sued for bad faith, the target defendant will likely remain the insurance company itself, not the individual adjusters. But, an affirmance in Keodalah may encourage insureds’ counsel to sue adjusters personally (if permitted) as a basis for trying to corner individual adjusters into defending their claims handling actions as company policy, rather than individual acts – as another means of turning up the heat on insurance companies in bad faith actions.

A review of three Washington cases decided since Keodalah, and cases decided elsewhere, suggest that plaintiffs who join adjusters in bad faith suits against insurance companies do so not because they are seeking another deep pocket, as the insurance carrier and/or its Errors and Omissions (E&O) policy typically provide sufficient financial resources to pay the insured’s alleged bad faith damages. Rather, individual adjusters are sued because joining an adjuster often keeps the suit in state court. Staying in state court, and conversely keeping out of federal court, appears to have a potential benefit to insureds. The Lex Machina (a Lexis company) 2018 Insurance Litigation Report published in November 2018 summarizing their review of 93,000 federal district court coverage cases between 2009 and 2017 found that insurers won a lot more cases than they lost. In cases involving bad faith claims in particular, approximately 90% found no bad faith on the part of the insurer (with about 75% resolved by summary judgment) – although, at trial, bad faith findings appear to have been close to evenly split, with insurers winning slightly more.[1]

To the extent that insurance companies may prefer litigating bad faith claims in federal court, an affirmance in Keodalah likely will result in carriers having to litigate bad faith claims more often in Washington state court. But, aside from the potential change in venue, questions remain about what else, if anything, will change if the Washington Supreme Court affirms the Keodalah decision – aside from having individual adjusters named as a direct party defendant and perhaps incentivizing individual adjusters to explain their claims handling as company policy/direction as opposed to individual actions. However, as adjusters are acting on behalf of their insurers anyway in handling claims, the companies, not the individual adjusters, should remain the target defendants.

The Keodalah Decision Under Review

In Keodalah, an insured sued his insurer and the insurer’s employee – an adjuster assigned to handle the insured’s claim – for bad faith and violations of the CPA/IFCA arising out of a claim the insured made for underinsured motorist (UIM) coverage. The insured, who was operating his truck, and a motorcyclist collided after the insured stopped at a stop sign to cross the street. The collision killed the motorcyclist, who was uninsured, and injured the insured who, as a result, submitted a claim for the $25,000 limit of his UIM coverage.

The Seattle Police Department determined that the motorcyclist was traveling at least 70 mph in a 30 mph zone. Also, the insurer’s investigation revealed that “the motorcyclist had been traveling faster than the speed limit, had proceeded between cars in both lanes, and had ‘cheated’ at the intersection.” Further, the insurer’s accident reconstructionist concluded that the insured stopped at the stop sign, the motorcyclist was traveling at least 60 mph, and “the motorcyclist’s ‘excessive speed’ caused the collision.” After this investigation, Allstate offered $1,600 to settle the insured’s policy-limits claim. The insured rejected the offer and sued the insurer, asserting a UIM claim.

At trial on the UIM claim, the jury determined that the motorcyclist was 100% at fault and awarded the insured over $100,000 in damages. Following the award, the insured filed a second lawsuit against the insurer and, this time, its adjuster, seeking damages for bad faith and CPA/IFCA violations. The trial court dismissed the insured’s claims against the adjuster, leading to the appeal about whether an adjuster may be liable for bad faith and CPA/IFCA violations under Washington law.

On the issue of bad faith, the Washington Court of Appeals held that Washington’s Insurance Code, RCW 48.01.010 et seq., “imposes a duty of good faith on corporate and individual insurance adjusters alike,” and thus individual adjusters can be held liable for bad faith damages. In so holding, the Court of Appeals examined an Insurance Code section titled “Public Interest,” which provides that:

The business of insurance is one affected by the public interest, requiring that all persons be actuated by good faith, abstain from deception, and practice honesty and equity in all insurance matters. Upon the insurer, the insured, their providers, and their representatives rests the duty of preserving inviolate the integrity of insurance.

RCW 48.01.030. The Court of Appeals concluded that, because the adjuster in Keodalah was “engaged in the business of insurance” and “was acting as [the insurer’s] representative,” the adjuster “had the duty to act in good faith” and “she can be sued for breaching this duty.” The Court rejected the adjuster’s arguments that this section of the Insurance Code only applies to insurers, and that the adjuster cannot be liable because she was acting within the scope of her employment with the insurer.

Split of Authority

Elsewhere around the country, there is a split of authority on the issue of whether insurance adjusters may be sued for bad faith. The variance of state statutes governing the insurance industry and providing consumer protections could be one reason for the split. Not every state codifies a duty of good faith in handling claims, so this too could explain the different outcomes. Whatever the reasons for the split, however, Washington will not be alone in recognizing a bad faith claim against adjusters if the Washington Supreme Court affirms the Court of Appeals’ decision in Keodalah.

Courts in Montana, Texas, Mississippi and Kentucky, for example, have long recognized claims against adjusters for bad faith and violations of statutes governing claim-handling practices.[2] In contrast, numerous other courts – including in Oklahoma, Indiana, Hawaii, Alabama, Tennessee, New Mexico, West Virginia, California, New York and Pennsylvania – have held that adjusters generally cannot be liable for bad faith.[3]

In still other jurisdictions, the issue arguably remains an open question. In New Jersey, for example, there are no published cases sharing facts similar to those in Keodalah. However, New Jersey courts have observed that “[b]oth the agent of the insurer and the insurer owe fiduciary duties to the insured, which includes the duty of good faith and fair dealing in the performance and enforcement the insurance contract.”[4] To date, no New Jersey court has recognized a Keodalah-style bad faith claim against an individual adjuster under New Jersey law.[5]

Cases Decided in Washington Since Keodalah

Since the Court of Appeals in Keodalah recognized a bad faith claim against adjusters, three federal district courts in Washington have already applied the decision in finding that adjusters have a duty of good faith and can be held liable for acting in bad faith. Kolova v. Allstate Ins. Co., 2018 U.S. Dist. LEXIS 185931, at *3-4 (W.D. Wash. Oct. 30, 2018); Mort v. Allstate Indem. Co., 2018 U.S. Dist. LEXIS 153999, at *4-5 (W.D. Wash. Sep. 10, 2018); Tidwell v. Gov’t Emples. Ins. Co., 2018 U.S. Dist. LEXIS 91211, at *1-2 (W.D. Wash. May 31, 2018).

In all of these subsequent decisions, the courts examined whether the plaintiffs’ joinder of an adjuster on a bad faith claim was done with an eye toward destroying the diversity of citizenship between the plaintiffs (who were Washington citizens) and the insurance companies (which were not Washington citizens). The adjusters in all of the cases were (like the plaintiffs) Washington citizens, whose joinder in the complaints required the federal courts to remand the bad faith suits back to state court.

These three cases decided since Keodalah are not unusual. In fact, the context in those cases – whether the plaintiff’s joinder of the adjuster destroyed diversity of citizenship – appears to be the most common context in which courts across the country have examined whether adjusters may be sued for bad faith. For example, courts in several other jurisdictions – including Kansas, Nebraska, South Carolina, Ohio and Arizona – have observed that because the law in those states was not clear on whether an adjuster may be sued for bad faith, remand to state court was appropriate.[6]

What, If Anything, Will Change?

If the Washington Supreme Court affirms the Court of Appeals’ decision in Keodalah, finding that individual adjusters may be sued for bad faith, questions remain about how the new claim will actually impact bad faith litigation going forward. If the three federal district court cases decided since Keodalah provide any guidance, it appears that insurance companies and their adjusters will be forced to litigate bad faith claims in state court (assuming joinder of an adjuster would destroy diversity of citizenship). Aside from the issues of jurisdiction and venue, however, there is little evidence that anything significant in bad faith litigation will change.

No adjuster, of course, will be pleased to be named as a defendant in a bad faith lawsuit. But even if a jury finds an adjuster liable for violating her duty of good faith and awards damages, and a court enters a judgment against the adjuster, what is the likelihood that the adjuster will ultimately be forced to pay the judgment anyway out of their own personal assets? Even in Keodalah, the Washington Court of Appeals found a duty of good faith, in part, because the adjuster was acting as the insurance company’s “representative” at all relevant times. An adjuster acting as a company’s “representative” implicates vicarious liability principles, as well as likely allows the adjuster to be indemnified under the insurer’s E&O policy. Plaintiffs advancing bad faith claims against adjusters will seek to recover any judgment against a vicariously liable insurance company and its E&O policy, since it is more likely that the company and policy, not the adjuster, have the resources to fund a bad faith judgment.

To the extent that complete recourse can be had between the plaintiff and the insurance company without naming the individual adjuster as a defendant, one wonders about a plaintiff’s motive in suing the adjuster individually – as the most likely motive remains one of destroying federal diversity jurisdiction. Courts, in fact, have taken notice of an insured’s suspect motive for naming an adjuster individually. In Huffman v. Am. Family Mut. Ins. Co., 2011 U.S. Dist. LEXIS 26591 (D. Ariz. 2011), a federal district court in Arizona questioned the plaintiff’s motive for seeking to amend her complaint to name the adjuster on a bad faith claim, after the plaintiff’s bad faith lawsuit against the insurance company was removed to federal court on grounds that the parties were diverse in citizenship. “Plaintiff’s motive [for suing the adjuster] is suspect,” the court in Huffman stated, finding that, among other things, “[c]omplete relief can be afforded among the existing parties,” rendering the plaintiff’s joinder of the adjuster futile.

In Keodalah, the Washington Supreme Court will have the final say on whether insurance adjusters may face bad faith liability in Washington. But even if the Supreme Court affirms the Court of Appeals’ recognition of a new bad faith claim against adjusters, existing cases in Washington and elsewhere suggest that the main difference in how bad faith litigation will be conducted in Washington state going forward is that the claims will be litigated in state, versus, federal court – as diversity may be destroyed more often. Aside from that, assuming that the insurer is financially solvent or at least has sufficient E&O insurance to cover any bad faith exposure, insureds likely are not really going to benefit from suing individual adjusters.

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[1] For a more detailed summary of the Lex Machina report, see Randy Maniloff’s December 2018 edition of Coverage Opinions, Vol. 7, Iss. 9.

[2] See, e.g., Leaphart v. Nat’l Union Fire Ins. Co. of Pittsburgh, 2016 U.S. Dist. LEXIS 2059, at *5-6 (D. Mont. Jan. 7, 2016) (citations omitted) (“Montana courts have recognized that claims under § 33-18-201 can be brought against claim adjusters, not just insurers. . . . Claims against individuals require, however, that the defendant commit the unfair trade practice “with such frequency as to indicate a general business practice.”); Waste Mgmt. v. AIG Specialty Ins. Co., 2017 U.S. Dist. LEXIS 126880, at *9 (S.D. Tex. Aug. 9, 2017) (citations omitted) (“Claims based on violations of the Texas Insurance Code Section 541.060 are actionable against an adjuster.”) (numerous citations omitted); Crosthwait Planting Co. v. Snipes, 2018 U.S. Dist. LEXIS 159021, at *5-6 (N.D. Miss. Sep. 18, 2018) (quoting Gallagher Bassett Servs., Inc. v. Jeffcoat, 887 So. 2d 777, 784 (Miss. 2004)) (“[A]n insurance adjuster, agent or other similar entity . . . may be held independently liable for its work on a claim if and only if its acts amount to any one of the following familiar types of conduct: gross negligence, malice, or reckless disregard for the rights of the insured.”); Hambelton v. State Farm Fire & Cas. Co., 2018 U.S. Dist. LEXIS 110042, at *6-8 (E.D. Ky. July 2, 2018) (citing Howard v. Allstate Ins. Co., 2014 U.S. Dist. LEXIS 156895, at *16-17 (E.D. Ky. Nov. 5, 2014) (“Since insurance adjusters are agents of insurance companies who are routinely involved in these activities, they are arguably ‘in the business of insurance’ and potentially liable for bad faith claims.”).

[3] See, e.g., MM Prop. Holdings, LLC v. Cont’l Cas. Co., 2017 U.S. Dist. LEXIS 177653, at *4 (W.D. Okla. Oct. 26, 2017) (“The Oklahoma Supreme Court in Trinity Baptist Church v. Brotherhood Mutual Insurance Services, LLC, 341 P.3d 75 (Okla. 2014), held that an adjustor cannot be held liable for bad faith.”); Lodholtz v. York Risk Servs. Grp., Inc., 778 F.3d 635 (7th Cir. 2015) (holding that under Indiana law, an insurance adjuster owes no legal duty to an insured); Hawaiian Isle Adventures v. N. Am. Capacity Ins. Co., 2009 U.S. Dist. LEXIS 10536 (D. Haw. Feb. 10, 2009) (holding that, under Hawaii law, an insurance adjuster was not a party to the insurance contract, was not subject to an implied duty of good faith and fair dealing, and therefore could not be liable for bad faith); Stone v. State Auto. Mut. Ins. Co., 2017 U.S. Dist. LEXIS 21737, at *4 (N.D. Ala. Feb. 15, 2017) (“[B]ecause there is no assertion in the amended complaint that [the adjusters] were parties to the contract between [the insured] and State Auto, the proposed breach of contract and bad faith claims against [the adjusters] are futile.”); Gilbert v. Nationwide Ins. Cos., 2009 U.S. Dist. LEXIS 4409, at *6-7 (W.D. Tenn. Jan. 22, 2009) (“There is sufficient evidence that Plaintiffs do not have a cause of action against [the claims adjuster] under Tennessee[‘s] [bad faith statute and the Tennessee Consumer Protection Act. . . .”); Sims v. First Am. Prop. & Cas. Ins. Co., 2017 U.S. Dist. LEXIS 9767, at *10-11 (D.N.M. Jan. 20, 2017) (citing Paiz v. State Farm Fire and Cas. Co., 880 P.2d 300, 309 (N.M. 1994)) (“In the absence of a contractual relationship between [the insured] and [the VP of Claims and Claim Representative], there can be no implied covenant of good faith and fair dealing and thus no action for bad faith against either of them.”); O’Brien v. Allstate Ins. Co., 2010 U.S. Dist. LEXIS 134573, at *11 (N.D.W. Va. Dec. 20, 2010) (citing Grubbs v. Westfield Ins. Co., 430 F. Supp. 2d 563, 569 (N.D.W. Va. 2006)) (“[U]nder West Virginia law, a common law bad faith cause of action does not exist against insurance adjusters because adjusters are not parties to the insurance contract.”); 1st Am. Warehouse Mortg. v. Topa Ins. Co., 2014 Cal. App. Unpub. LEXIS 5497, at *9 (Aug. 4, 2014) (citing Gruenberg v. Aetna Ins. Co., 510 P.2d 1032, 1042 (Cal. 1973)) (“Where non-insurer defendants are not parties to the insurance agreement they are not, as such, subject to an implied duty of good faith and fair dealing. . . . The insurer’s agents are not parties to the insurance contract and are not subject to the implied covenant of good faith and fair dealing.”); M.V.B. Collision Inc. v. Allstate Ins. Co., 49 N.Y.S.3d 837, 848 (Dist. Ct. 2017) (citations omitted) (holding that “there are no viable negligence claims,” including those premised on bad faith, “against the insurance adjusters based upon common law or a private right of action under the Insurance Law and the Regulations”); Reto v. Liberty Mut. Ins., 2018 U.S. Dist. LEXIS 133336, at *1, 5 (E.D. Pa. Aug. 8, 2018) (concluding that “[t]plaintiffs cannot successfully assert either a contract or a bad faith claim against their insurer’s claims adjuster” because, among other reasons, “[t]he bad faith statute, § 8371, applies only to insurance companies,” and “[the adjuster] is not an insurer because she is not a party to the insurance contract”).

[4] Miglicio v. HCM Claim Mgmt. Corp., 672 A.2d 266, 270 (N.J. Super. Ct. 1995) (citing Pickett v. Lloyd’s, 621 A.2d 445 (N.J. 1993)).

[5] See Taddei v. State Farm Indem. Co., 2010 N.J. Super. Unpub. LEXIS 129, at *21-22 (N.J. Super. Ct. App. Div. Jan. 21, 2010) (Unpublished) (observing that plaintiff’s bad faith claims against two insurance company adjusters “appear[ed] to be merely claims against State Farm,” since the claims “d[id] not arise out of any individual actions” by the adjusters, “but, rather, for their participation in State Farm’s alleged policy of wrongly denying UM claims”).

[6] See, e.g., Rudzik v. Star Ins. Co., 2015 U.S. Dist. LEXIS 55277, at *14 (D. Kan. Apr. 28, 2015) (“Because Kansas courts have not specifically addressed whether an insured can recover against an independent adjuster in these circumstances, and rulings from other states give plaintiffs at least a good faith basis for arguing that Kansas law should be construed to allow such claims, there remains uncertainty in Kansas law. . . .”); Good Shepherd Assisted Living Corp. v. Great Am. Ins. Co., 2015 U.S. Dist. LEXIS 66457, at *7-8 (D. Neb. Apr. 15, 2015) (“The parties have not cited, and the court has not found any Nebraska law addressing whether an insurance adjuster can be liable on an insurance bad faith claim. . . . After reviewing the reasoning of court decisions from other forums, it is unclear whether Nebraska would permit such a claim. It might.”); Pohto v. Allstate Ins. Co., 2011 U.S. Dist. LEXIS 73460, at *7 (D.S.C. July 7, 2011) (observing that “no South Carolina court has addressed whether an insurance adjuster may be held personally liable for the bad faith or similar torts committed within the scope of the adjuster’s employment,” and therefore concluding that adjuster “could be held liable for adjusting [the insured’s] claims in bad faith in light of the aforementioned law from South Carolina and other states”); Wiseman v. Universal Underwriters Ins. Co., 412 F. Supp. 2d 801, 806 (S.D. Ohio 2005) (“There is a reasonable basis in Ohio law for concluding that Ohio courts may recognize a claim based on negligence or wanton and reckless conduct on the part of . . . the claims adjuster in this case.”); IDS Prop. Cas. Ins. Co. v. Gambrell, 913 F. Supp. 2d 748, 752-54 (D. Ariz. 2012) (observing that “judges have repeatedly concluded that the law surrounding the viability of a bad faith claim against an insurance adjuster is unsettled in Arizona,” and therefore concluding that “there is, in fact, a reasonable basis for the [insured’s] to move forward with the bad faith claim against [the adjuster]”).