California Court of Appeal Holds Adjusters May Be Sued For Negligent Misrepresentations Made Within the Course and Scope of Their Employment
By William D. Burger, Jr. and Negar Azarfar
On April 2, 2014, the California Court of Appeal held in Bock v. Hansen, 225 Cal. App. 4th 215 (2014) that an insurance adjuster may be held liable to an insured under a negligent misrepresentation theory. If followed, this published decision, which departs from how prior courts have addressed negligence-based claims against claims representatives, could have significant implications for insurance coverage matters throughout the state.
Bock involved a claim under a first-party homeowner’s policy resulting from a tree limb that fell and damaged the insureds’ home and car. The insureds sued their carrier under several causes of action, and also sued the adjuster appointed by the insurer for negligent misrepresentation and intentional infliction of emotional distress based on the adjuster’s alleged misstatements regarding the scope of coverage provided by the policy and his allegedly demeaning comments to the insureds during site inspections. The adjuster filed a demurrer as to the negligent misrepresentation and intentional infliction of emotional distress causes of action based on the position that those claims may not be asserted against an insurance adjuster for actions performed in the course and scope of his employment. The trial court granted the demurrer without leave to amend and the adjuster appealed.
With regard to the cause of action for intentional infliction of emotional distress, the Bock court held that a claim could theoretically be asserted against an adjuster but that the pleading in the case before it failed to allege the “outrageous” conduct required to support such a claim. While this ruling was consistent with previous California case law on the issue, the court’s holding with regard to the negligent misrepresentation claim was a significant departure from prior precedent.
With regard to the negligent misrepresentation claim, the Bock court relied heavily on a line of cases, including Doctors' Co. v. Sup. Ct., 49 Cal. 3d 39 (1989) and Younan v. Equifax, Inc., 111 Cal. App. 3d 498 (1980), in which California courts state that the agents and employees of insurance carriers can be held independently liable for their actions so long as they owe an independent duty to the insured and were acting for their “‘individual advantage’ and not solely on behalf of the principal.” Doctors', 49 Cal. 3d at 47 (quoting Wise v. Southern Pacific Co., 223 Cal. App. 2d 50, 72 (1963)). The court then ruled that adjusters do indeed owe a direct duty to insureds and, therefore, can be held individually liable in tort to those insureds under the reasoning of Doctors' and Younan.
The holding of Bock is susceptible to criticism for at least four reasons. First, in applying the holdings from Doctors' and Younan, the Bock court appears to have read out the requirement that the agent or employee was acting to achieve an individual advantage. In fact, the Bock court does not even attempt to explain why the adjuster personally benefited by acting in the way alleged by the insureds.
Second, the Bock court’s determination that an insurance adjuster owes an individual duty to the insured is questionable. In reaching that conclusion, the court relied on Vu v. Prudential Property & Cas. Ins. Co., 26 Cal. 4th 1142 (2001), a case in which the California Supreme Court ruled that an insurance company owes a “special,” albeit not a fiduciary, duty to insureds. According to Vu, this “special” relationship results from the “unequal bargaining power” that exists between the carrier and the insured in the negotiation of the policy’s terms. But while the carrier itself in certain circumstances may be in a superior bargaining position to the insured, it does not follow that the adjuster – an individual employee whose job does not become relevant to the insured until well after any policy negotiations have ceased – also possesses such an advantage over the insured.
Third, the Bock court points to seemingly inconsequential distinctions in an effort to distinguish Sanchez v. Lindsey Morden Claims Services, Inc. , 72 Cal. App. 4th 249 (1999) – an earlier California Court of Appeal decision holding adjusters cannot be sued for negligence based on their adjustment of claims. In Sanchez, the court held that an independent adjuster had no duty to an insured and, therefore, no cause of action for negligence could be asserted directly against the adjuster. The Bock court distinguished Sanchez on the basis that the cause of action at issue in that matter was negligence and not negligent misrepresentation. While the court correctly noted that negligence and negligent misrepresentation are independent causes of action with distinct elements, it did little to explain why these discrepancies were relevant to the analysis.
Finally, the Bock court does not even attempt to distinguish two federal cases which each hold that, under California law, an adjuster cannot be held liable for negligent misrepresentation for acts taken in the course and scope of the adjuster’s employment. Icasiano v. Allstate Ins. Co., 103 F. Supp. 2d 1187 (N.D. Cal. 2000); Moreno v. Allstate Ins. Co., 2002 U.S. Dist. LEXIS 22073 (E.D. Cal. Sept. 9, 2002). In discussing those two cases, the court simply stated, without analysis, that it found them “unpersuasive.” Bock, 225 Cal. App. 4th at 230.
The result in Bock may have been influenced by the extent and depth of the adjuster’s alleged misrepresentations and demeaning conduct, which the court stated “can best be described as appalling.” Bock, 225 Cal. App. 4th at 219. Review from the California Supreme Court and depublication have also been sought by counsel for the adjuster. Nevertheless, if followed, Bock could be problematic for adjusters and their employers for at least three reasons. First, being named individually in a lawsuit creates obvious issues for adjusters, including the potential for the assessment of individual liability and potential non-legal ramifications such as being denied credit based on pending litigation or an adverse judgment. Second, the addition of individual defendants is likely to increase the costs associated with defending coverage litigation. Third, and perhaps most significantly, the addition of insurance adjusters as defendants would often destroy diversity of citizenship, therefore eliminating the opportunity to remove insurance coverage disputes to federal court under 28 U.S.C. § 1441, et seq. While such a strategy existed prior to Bock with regard to intentional torts such as intentional infliction of emotional distress and deceit, those causes of action generally required insureds to show outrageous conduct or to satisfy the heightened pleading requirements associated with fraud-based causes of action. Under Bock, insureds may seek to employ this strategy whenever they can colorably allege that an adjuster made a “misrepresentation” in adjusting the claim.
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