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Can Utah Insurance Adjusters be Sued for Misrepresentation in Connection with a Denied Claim?

Contact: Richard A. Vazquez

Introduction

In disputed first-party insurance claims, a policyholder will often sue not only its insurer but that insurer’s independent adjuster who inspected a loss. Such claims will often be based in negligence, breach of the implied covenant of good faith and fair dealing, and upon negligent and fraudulent misrepresentation.

Jurisdictions are split as to whether claimants can maintain such causes of action. Some jurisdictions conclude that since the independent adjuster’s acts are imputed to the insurer, only the insurer may be sued in connection with the adjuster’s acts taken within the course and scope of the claim adjustment. Other jurisdictions, however, have held that independent torts and other claims may be asserted against adjusters individually.

If presented with negligent or fraudulent misrepresentation claims against an independent adjuster in Utah, a defense lawyer may want to consider moving to dismiss the action at the outset because of Utah appellate courts’ pronouncement that there is no position of reliance or trust between a first-party insurer and its policyholder in the context of a disputed first-party insurance claim. Because the policyholder has no position of reliance or trust with either its first-party insurer or, presumably, its independent adjuster: 1) the policyholder can not reasonably rely on any adversarial representation made by that adjuster; and 2) The adjuster can not legally intend to induce such reliance.

A Pathway for Possibly Rule 12 Dismissal of Negligent and Fraudulent Misrepresentation Claims Asserted Against Independent Adjusters

To survive dismissal of a claim for fraudulent misrepresentation a policyholder must plead facts showing “(1) that a representation was made [by the independent adjuster]…(5) for the purpose of inducing [] to act upon it and (6) that [the policyholder], acting reasonably and in ignorance of its falsity, (7) did in fact rely upon it….” State v. Apotex Corp., 2012 UT 36 ¶ 58, 282 P.3d 66 (quoting Armed Forces Ins. Exch. v. Harrison, 2003 UT 14, ¶ 16, 70 P.3d 35.)(emphasis added).

To survive dismissal of a negligent misrepresentation claim, the policyholder must plead facts that show the independent adjuster “(3) carelessly or negligently ma[de] a false representation concerning [material facts], (4) expecting [policyholder] to rely and act thereon, and (5) [policyholder] reasonably d[id] so…” DeBry v. Valley Mortgage Co., 835 P.2d 1000, 1008 (Utah Ct. App. 1992) (quoting Jardine v. Brunswick Corp., 18 Utah 2d 378, 381, 423 P.2d 659, 662 (Utah 1967) (emphasis added.); See also Osmond v. Litton Loan Servicing, LLC, No. 1:10-CV-11, 2011 WL 1988403, at *3 (D. Utah May 20, 2011) (“A claim for negligent misrepresentation requires the plaintiff to have acted reasonably on a misrepresentation and suffer loss as a result.”) (dismissing misrepresentation claim under Fed. R. Civ. P. 12(b)(6) because plaintiff alleged no fact showing action taken in reliance on alleged misrepresentation.)

A property insurance contract such as the one a property insurer has with its policyholder is an example of “first-party” insurance. In other words, it is simply a contract to pay money for a covered loss. If a property loss is covered, The insurer pays in accordance with the terms of its policy. If the loss isn’t covered, it doesn’t pay. This is different from “third-party” insurance, where an insurer agrees to defend, settle, and indemnify the policyholder when that policyholder is sued by a third party. See, e.g., Beck v. Farmers Ins. Exch., 701 P.2d 795, 799 n. 2 (Utah 1985) (“We use the term “first-party” to refer to an insurance agreement where the insurer agrees to pay claims submitted to it by the insured for losses suffered by the insured. The present case involves such a first-party situation. In contrast, a “third-party” situation is one where the insurer contracts to defend the insured against claims made by third parties against the insured and to pay any resulting liability, up to the specified dollar limit.”)

There is a relationship of trust and reliance between a liability insurer and a policyholder in a third-party context, because the policyholder is relying on the insurer to defend third-party claims competently and/or settle those claims within the policy limits. Failure to do so can expose the policyholder to a judgment in excess of the policy limits, and put her personal assets at risk. See Beck, 701 P.2d at 799 (“In a third-party situation, the insurer controls the disposition of claims against its insured, who relinquishes any right to negotiate on his own behalf. An insurer’s failure to act in good faith exposes its insured to a judgment and personal liability in excess of the policy limits. In essence, the contract itself creates a fiduciary relationship because of the trust and reliance placed in the insurer by its insured.”)

There is no such position of trust or reliance in the first-party insurance claim context between a policyholder and its first-party property insurer. “In the first-party situation…the reasons for finding a fiduciary relationship and imposing a corresponding duty are absent. No relationship of trust and reliance is created by the contract; it simply obligates the insurer to pay claims submitted by the insured in accordance with the contract.” Id. at 800 (emphasis added). Going further, the Utah Supreme Court in Lyon characterized the first-party insurer/policyholder relationship as outright adversarial. See Lyon, 480 P.2d at 745 (overruled on other grounds by Beck, 701 P.2d at 798 n. 1)

An argument can be made that an independent adjuster hired by a property insurer to inspect and adjust a property loss is automatically branded as an “adversary” to the policyholder, with whom there existed no relationship of trust or reliance.  As such, the policyholder cannot plead a viable cause of action for either fraudulent misrepresentation or negligent misrepresentation against an independent adjuster because 1) the policyholder cannot plead or allege facts showing as a matter of law that the adjuster expected the policyholder to rely on his/her representations; and 2) The policyholder could not have reasonably relied on any representations by the independent adjuster as a matter of law.

This article does not constitute legal advice.

Should you have any questions about this topic or need legal representation please contact Richard A. Vazquez.

Richard A. Vazquez