Hamill v. Pawtucket Mutual Insurance Co.

Hamill v. Pawtucket Mutual Insurance Co. (2005-025); 179 Vt. 250; 892 A.2d 226

2005 VT 133

[Filed 30-Dec-2005]


       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.

                                 2005 VT 133
  	
                                No. 2005-025


  Samuel Hamill	                                 Supreme Court

                                                 On Appeal from
       v.	                                 Windsor Superior Court


  Pawtucket Mutual Insurance Co., 	         June Term, 2005
  David Andrulat, Smith & 
  Carson, Inc. and Richard Dineley


  Theresa S. DiMauro, J.

  Howard B. Myers of Myers Associates, PLLC, and David Cullenberg of
    Cullenberg & Tensen, PLLC, Lebanon, New Hampshire, for Plaintiff-Appellant.

  Allan R. Keyes of Ryan, Smith & Carbine, Ltd., Rutland, for
    Defendants-Appellees Andrulat, Smith & Carson, Inc. and Dineley.

  PRESENT:  Reiber, C.J., Dooley, Johnson and Skoglund, JJ., and
            Allen, C.J. (Ret.),  Specially Assigned 

        
       ¶  1.  ALLEN, C.J. (Ret.), Specially Assigned.   In this appeal, we
  consider whether an insured homeowner whose residence allegedly became
  uninhabitable due to water damage, and later mold growth, has a cause of
  action in negligence against the independent adjusters hired by the
  homeowner's insurer to investigate the insured's initial claim.  We affirm
  the superior court's summary judgment ruling that the adjuster has no
  cognizable legal duty vis-a-vis the homeowner with respect to the type of
  damages claimed here, and that the homeowner's only remedy was against his
  insurer.

       ¶  2.  The parties stipulated to the following facts.  Sometime
  between February 10 and 12, 2001, while plaintiff Samuel Hamill was away on
  a business trip, a power outage occurred at his home, causing his pipes to
  freeze and then burst, resulting in flooding within the house.  Hamill
  discovered the damage when he returned to his home on February 13, 2001. 
  That same day he reported the loss to his insurance agent, who, in turn,
  notified his insurer, defendant Pawtucket Mutual Insurance Company. 
  Pawtucket contracted out the initial adjusting of the claim to the Vermont
  office of defendant Smith & Carson, Inc. (known at that time as CSB Group,
  Inc.).  The supervisor of that office, defendant Richard Dineley, assigned
  the claim to defendant adjuster David Andrulat.  Andrulat visited Hamill's
  home on two occasions in early March 2001 to assess the damage, but Hamill
  and Pawtucket could not come to an agreement on the value of the loss.  
  Pawtucket allegedly denied Hamill's claims in November 2001 following
  further brief inspections of the home during the previous month. Hamill
  asserts that the adjusters negligently investigated his claim, thereby
  depriving him of insurance proceeds and causing him to incur expenses that
  he would not otherwise have incurred.
   
       ¶  3.  In his second amended complaint, filed in April 2002, Hamill
  included counts of breach of contract, negligence, bad faith, and punitive
  damages against Pawtucket, and counts of gross negligence and punitive
  damages against Andrulat.  Hamill alleged that he presented Andrulat with
  estimates of between $150,000 and $200,000-excluding plumbing, heating,
  electrical, roofing, and masonry costs-to repair the water damage, but
  that, based on a brief visual inspection of the premises, Andrulat rejected
  the estimates, accused Hamill of insurance fraud, and offered to settle the
  matter then and there for $5000.  Hamill also alleged that after he
  rejected the adjuster's settlement offer, Andrulat did not get back to him
  for weeks, even though Andrulat knew or should have known that the
  water-damaged premises needed to be repaired immediately to prevent the
  possibility of mold growth.  According to the complaint, as the result of
  Andrulat's failure to carefully investigate Hamill's claims, to consider
  his repair estimates, and to make an immediate and thorough inspection of
  the subject premises, mold spread through the house, making it
  uninhabitable.  The complaint alleged that if Andrulat had acted reasonably
  in inspecting the premises and assessing the damages, the interior of
  Hamill's house would have been gutted and rebuilt before the mold had begun
  to grow.

       ¶  4.  In February 2004, Hamill filed a complaint against Dineley and
  Smith & Carson, alleging that they acted negligently and in bad faith by
  failing to supervise the investigation and processing of his insurance
  claim.  He sought both compensatory and punitive damages.  Shortly
  thereafter, Hamill settled his claims against Pawtucket.  On December 9,
  2004, after the complaints were consolidated, the superior court entered
  summary judgment in favor of defendants.  The court ruled that Hamill had
  not alleged a cognizable duty on the part of the adjusters with respect to
  his negligence action, and that if the adjusters acted in bad faith,
  resulting in additional damage to Hamill's home, his remedy was to include
  such claims in his breach-of-contract action against Pawtucket.  The court
  concluded that Hamill was claiming economic losses rather than direct
  physical loss to his property, and that such losses were not compensable in
  a tort action under the economic-loss doctrine, which generally disallows
  claims of economic loss to third parties absent privity of contract.
   
       ¶  5.  On appeal, Hamill argues that an independent insurance
  adjuster should be subject to liability for physical damage to an insured's
  property resulting from the adjuster's negligent conduct.  In his view, no
  sound public policy considerations justify denying his common-law
  negligence action against defendant adjusters.  Relying primarily on Morvay
  v. Hanover Ins. Co., 506 A.2d 333, 335 (N.H. 1986), in which the New
  Hampshire Supreme Court permitted insured property owners to file a
  negligence action alleging that agents hired by an insurance company to
  investigate a claimed fire loss breached their duty to conduct a fair and
  reasonable investigation of the claim, Hamill argues that defendant
  adjusters owed him a cognizable legal duty that supports his tort action
  against them because he was a foreseeably affected third party.  According
  to Hamill, the adjusters knew or should have known that their failure to
  act properly and promptly in investigating his claim would result in
  further damage to his property.

       ¶  6.  We do not find these arguments persuasive.  Generally, whether
  there is a cognizable legal duty that supports a tort action depends on a
  variety of public policy considerations and relevant factors, only one of
  which is foreseeability.  Langle v. Kurkul, 146 Vt. 513, 519-20, 510 A.2d 1301, 1305 (1986) (citing relevant factors); see Charleston Dry Cleaners &
  Laundry, Inc. v. Zurich Amer. Ins. Co., 586 S.E.2d 586, 588 (S.C. 2003)
  ("Foreseeability of injury, in and of itself, does not give rise to a
  duty.").  Ultimately, whether a duty exists is a question of fairness that
  depends on, among other factors, the relationship of the parties, the
  nature of the risk, and the public interest at stake.  Langle, 146 Vt. at
  520, 510 A.2d  at 1305.
   
       ¶  7.  Further, because negligence law does not generally recognize
  a duty to exercise reasonable care to avoid economic loss unless the
  alleged tortfeasor's conduct has inflicted some accompanying physical harm,
  we have recognized that another significant factor in determining whether
  there is a cognizable duty that would support a tort action is whether the
  plaintiff seeks damages for only economic loss.  O'Connell v. Killington,
  Ltd., 164 Vt. 73, 77, 665 A.2d 39, 42 (1995); see Wentworth v. Crawford &
  Co., 174 Vt. 118, 126, 807 A.2d 351, 356 (2002) ("It is well established in
  Vermont that absent some accompanying physical harm, there is no duty to
  exercise reasonable care to protect another's economic interests.");
  Sanchez v. Lindsey Morden Claims Servs., Inc., 72 Cal. App. 4th 249, 252
  (Cal. Ct. App. 1999) (noting "the unreliability of foreseeability, in
  isolation, as grounds for imposing a duty, especially where the injury is
  'intangible' rather than physical").  Indeed, the economic-loss rule serves
  to maintain the boundary between contract law, which is designed to enforce
  parties' contractual expectations, and tort law, which is designed to
  protect citizens and their property by imposing a general duty of
  reasonable care.  Springfield Hydroelectric Co. v. Copp, 172 Vt. 311, 315,
  779 A.2d 67, 71 (2001); Berschauer/Phillips Constr. Co. v. Seattle Sch.
  Dist. No. 1, 881 P.2d 986, 989-90 (Wash. 1994).  In short, liability for
  purely economic loss generally requires privity between the parties. 
   
       ¶  8.  Here, notwithstanding his argument that the superior court
  should not have applied the economic-loss rule because defendants'
  negligence proximately caused additional physical damage to his property,
  we conclude that Hamill is seeking damages for only economic loss. 
  According to the parties' stipulated facts, Hamill contends that because of
  the manner in which defendants adjusted his claim, he was deprived of the
  benefit of insurance, thereby making his house uninhabitable and causing
  him to incur additional expenses.  In other words, Hamill is claiming that
  defendants' negligent inspection and adjustment resulted in his insurer
  failing to promptly provide the proceeds he expected under his insurance
  policy, which, in turn, allegedly resulted in physical damage to the
  property that was the subject of the insurance policy, thereby causing him
  to incur additional repair or replacement costs.

       ¶  9.  Thus, Hamill is seeking recovery for losses stemming from the
  failure of his expectations regarding insurance coverage.  We agree with
  the trial court that such damages are most accurately categorized as purely
  economic losses generally recoverable under contract law, but not tort law. 
  Cf. Paquette v. Deere & Co., 168 Vt. 258, 263, 719 A.2d 410, 413-14 (1998)
  (in seeking damages for the reduced value of their motor home resulting
  from its defective wiring system and related problems, plaintiffs sought to
  recover economic losses for not having received benefit of bargain to which
  they believed they were entitled); Redman v. John D. Brush & Co., 111 F.3d 1174, 1182-83 (4th Cir. 1997) (theft of coin collection from defective safe
  was economic loss caused by failure of safe to serve its intended function,
  not loss of other physical property recoverable in tort suit). (FN1) 
                                                                      
       ¶  10.  Hamill argues, however, that the superior court failed to
  give him the benefit of all favorable inferences as to whether material
  facts were in dispute-namely, whether the alleged negligence led to
  physical damage as opposed to economic loss.  See Pierce v. Riggs, 149 Vt.
  136, 139, 540 A.2d 655, 657 (1987) (because moving party has burden of
  establishing that no material facts are in dispute, facts asserted by
  opposing party that are supported by affidavits or other evidentiary
  material are regarded as true, and party opposing summary judgment is given
  benefit of reasonable doubts and inferences as to whether material facts
  are in dispute).  The basis for this contention is the court's comment that
  Hamill had not spelled out a specific chain of causation to explain how the
  adjusters' negligence caused additional physical damage.  According to
  Hamill, he plainly alleged that defendants' failure to promptly and
  properly adjust his claim was a direct and proximate cause of physical
  damage-the growth of mold in the house-but the court failed to give him the
  benefit of the doubt as to whether defendants' alleged negligence caused
  physical damage to his property.

       ¶  11.  We find no merit to this argument.  In its decision, the
  superior court expressly stated its understanding of Hamill's claim as
  follows: (1) the adjusters negligently performed their investigation; (2)
  their negligence caused a delay in Pawtucket's payment of the claim; and
  (3) the delay in payment caused a delay in repairing the water damage,
  which, in turn, led to the growth of unhealthy mold, making the home
  uninhabitable.  The court did not fail to give Hamill the benefit of the
  doubt concerning any disputed material facts.  Indeed, the court presumed
  that Hamill's home became uninhabitable because of mold growth that
  occurred as the result of the water damage and delays in addressing that
  damage.  Rather, the court ruled as a matter of law that the alleged losses
  were economic losses, not direct physical losses caused by the adjusters'
  negligence, because they stemmed from Pawtucket's delay in the payment of
  insurance proceeds.
   
       ¶  12.  The trial court's refusal to find a cognizable legal duty
  under the circumstances is consistent with the holding of the majority of
  courts 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, 72 Cal. App. 4th at
  250-51; King v. Nat'l Security Fire & Cas. Co., 656 So. 2d 1338, 1339 (Fla.
  Dist. Ct. App. 1995); Charleston Dry Cleaners, 586 S.E.2d  at 588-89.  But
  see Morvay, 506 A.2d  at 335 (finding duty); Brown v. State Farm Fire & Cas.
  Co., 2002 OK Civ. App. 107, ¶ 19, 58 P.3d 217, 223 (accord).

       ¶  13.  Generally, the reasoning behind the majority view is as
  follows.  The relationship between the insured and the insurer is defined
  and governed by the insurance policy and its accompanying implied covenant
  of good faith and fair dealing.  Meineke, 991 P.2d  at 271, ¶ 17.  Further,
  the obligations of an independent adjuster are measured by the contract
  between the adjuster and the insurer.   Id. ¶ 16.  Because the conduct of
  an adjuster acting within the scope of his or her authority as agent for
  the insurer is imputed to the insurer, the insurer is subject to liability
  for the adjuster's mishandling of claims in actions alleging breach of
  contract or bad faith.  See id. ¶¶ 17-18; Hudock v. Donegal Mut. Ins. Co.,
  264 A.2d 668, 672 (Pa. 1970); Charleston Dry Cleaners, 586 S.E.2d  at 589. 
  Hence, allowing the insured to sue the independent adjuster in tort for
  economic losses allegedly caused by mishandled claims is both unnecessary
  and contrary to the law of agency.  See Sanchez, 72 Cal. App. 4th  at 255
  (agents are generally not liable to third parties for economic losses).
   
       ¶  14.  We concur with the majority view that public policy
  considerations do not favor creating a separate duty on the part of
  independent adjusters that would subject them to common-law tort actions by
  insureds who have suffered economic loss as the result of allegedly
  mishandled claims.  As noted, insureds may seek redress for such injuries
  through breach-of-contract and bad-faith actions against their insurers. 
  See Bushey v. Allstate Ins. Co., 164 Vt. 399, 402, 670 A.2d 807, 809 (1995)
  (recognizing cause of action for bad-faith failure to pay insurance claim);
  Myers v. Ambassador Ins. Co., 146 Vt. 552, 556, 508 A.2d 689, 691 (1986)
  (recognizing that insurer is responsible for acts of its agents). 
  Therefore, in most cases, imposing tort liability on independent adjusters
  would create a redundancy unjustified by the inevitable costs that
  eventually would be passed on to insureds.  See Sanchez, 72 Cal. App. 4th 
  at 253-55. (FN2) 

       ¶  15.  Further, the insurer contractually controls the
  responsibilities of its adjuster and retains the ultimate power to deny
  coverage or pay a claim.  Id. at 253.  Subjecting adjusters to potential
  tort liability from insureds could create conflicting loyalties with
  respect to the adjusters' contractual obligations, given that insureds and
  insurers often disagree on the extent of coverage or the amount of damages. 
  Id.; Meineke, 991 P.2d  at 271, ¶ 16.
   
       ¶  16.  Moreover, to some extent, insurers can define and limit their
  risks, and set their premiums commensurate with those risks through
  conditions, limits, and exclusions in their insurance policies.  Sanchez,
  72 Cal. App. 4th  at 254.  In contrast, absent any contract with insureds,
  adjusters cannot circumscribe their potential risks and thus could face
  potentially open-ended liability.  Id. at 253-54.  This is particularly
  troublesome because of the unlikelihood that an action claiming negligent
  mishandling of a claim would be available against even the insurer.  See
  Myers, 146 Vt. at 555 n.1, 508 A.2d  at 691 n.1 (declining to consider
  whether insurer's conduct in bad-faith action is reviewed against
  negligence standard); see also Meineke, 991 P.2d  at 271, ¶¶ 17-18
  (refusing to allow negligence action against adjuster for mishandling of
  claim, considering that insured would be limited to either
  breach-of-contract or bad-faith action against insurer). 

       ¶  17.  Finally, we find unavailing Hamill's argument that Vermont
  statutory law imposes a duty of care upon independent insurance adjusters,
  and that any breach of that duty allows insureds to bring negligence claims
  against the offending adjusters.  In making this argument, Hamill relies
  upon the fact that insurance adjusters are licensed, see 8 V.S.A. §
  4793(a), that their licenses must be renewed every two years, see 8 V.S.A.
  § 4798(a), and that adjusters are listed as one of the types of "person"
  that may be subject to investigation for unfair insurance trade practices,
  see 8 V.S.A. §§ 4722(1), 4723, 4724.  According to Hamill, these statutes
  reflect a clear legislative policy to hold independent adjusters
  responsible for their conduct, in addition to any contractual obligations
  that they might have to the insurance carriers that employ them.
   
       ¶  18.  To be sure, the statutes Hamill cites reflect the
  Legislature's interest in affording some protection to the public by
  requiring adjusters to be licensed and subject to investigations regarding
  unfair insurance trade practices.  This fact does not demonstrate, however,
  a legislative intent to create a duty on the part of adjusters that would
  form the basis for an independent tort action against them.  Cf. O'Connell,
  164 Vt. at 79, 665 A.2d  at 43 (manual establishing procedures for ski
  accidents did not demonstrate assumption of duty to third parties); Laroque
  v. State Farm Ins. Co., 163 Vt. 617, 618, 660 A.2d 286, 288 (1995) (mem.)
  (insurer's manual directing employees to investigate claims in efficient
  and cooperative manner did not create duty to particular claimant to
  process claim in good faith and consistent with manual).  As we have
  recognized, "[a]lthough the Insurance Trade Practices Act, 8 V.S.A. §§
  4721-4726, provides administrative sanctions for unfair and deceptive acts
  within the insurance industry, including for unfair claim settlement
  practices, 8 V.S.A. § 4724(9), the Act does not create a private right of
  action."  Laroque, 163 Vt. at 618, 660 A.2d  at 288.

       ¶  19.    Moreover, no specific provision within the Insurance Trade
  Practices Act implies that adjusters in general, let alone independent
  adjusters in particular, owe a cognizable legal duty to insured
  policyholders.  Indeed, the Act expressly provides that an independent
  adjuster, in contrast to a public adjuster, "investigates claims and
  negotiates settlement of claims arising under policies of insurance in
  behalf of insurers . . . ."  8 V.S.A. § 4791(3) (emphasis added) (defining
  "Adjuster"); see id. § 4791(4) (defining "Public adjuster" as person who
  investigates, and negotiates settlement of, insurance claims "in behalf of
  the insured").

       ¶  20.  In light of the policy considerations discussed herein, we
  affirm the superior court's grant of summary judgment to defendant
  adjusters based on our determination that Hamill has no cause of action to
  recoup economic losses caused by defendants' alleged negligence in
  investigating Hamill's insurance claim.  See Lane v. Town of Grafton, 166
  Vt. 148, 150, 689 A.2d 455, 456 (1997) (when reviewing summary judgment
  motion, we apply same standard as trial court-summary judgment is
  appropriate when record clearly indicates that there is no genuine issue of
  material fact and moving party is entitled to judgment as matter of law).

       Affirmed.


                                       FOR THE COURT:



                                       _______________________________________
                                       Chief Justice (Ret.), Specially Assigned


------------------------------------------------------------------------------
                                  Footnotes


FN1.  Apparently, there is a split among jurisdictions as to whether the
  economic-loss doctrine even applies to contracts for services.  See Ins.
  Co. of N. Amer. v. Cease Elec. Inc., 2004 WI 139  ¶¶ 25, 52, 688 N.W.2d 462, 467, 472 (noting jurisdictional split and holding economic-loss
  doctrine inapplicable to claims for negligent provision of services).  This
  issue has not been raised either at trial or on appeal, and we decline to
  address it here.  Cf. Springfield Hydroelectric Co., 172 Vt. at 316, 779 A.2d  at 72 (declining to address merit and extent of professional-services
  exception to economic-loss rule).

FN2.  Hamill made bad-faith and breach-of-contract claims against his
  insurer, but settled those claims.  The terms of the settlement were not
  disclosed, but Hamill suggests that he was not fully compensated for his
  claimed losses because Pawtucket went into rehabilitation during the
  pendency of these proceedings.  We note, however, that Hamill has not
  produced any evidence that his settlement with Pawtucket was inadequate. 
  Further, Vermont law provides some protection against insurer insolvency. 
  See 8 V.S.A. §§ 3611-3626.  In any event, the possibility of insurance
  carrier insolvency in rare instances is not sufficient to override the
  policy grounds for not allowing insureds to challenge allegedly deficient
  settlements through tort actions against independent adjusters.