Independent or 3rd Party Insurance Adjusters: Joinder, Removal, Individual Liability & Bad Faith

An important question that typically arises when dealing with an insurance claim is whether or not an independent or third party adjuster hired by the insurance company to adjust a loss can be found individually liable for claims made by the insured. In short, the answer is yes, an independent or third party adjuster can be found individually liable for violating certain common law or statutory duties to the insured.

In actions against their insurers, insureds often name the claims adjuster individually, along with the insurer, to prevent removing the case to federal court through diversity jurisdiction when the adjuster is a resident of the same state as the insured and the insurer is foreign-based.  In response, the defendants often seek removal, asserting that the independent adjuster is improperly joined because he or she has no privity of contract with the insured and thus may not be held individually liable. However, because the scope of an individual adjuster’s liability has grown, the courts are becoming more hesitant in accepting the fraudulent joinder defense as compared to the past.

In assessing the liability of an individual adjuster, the court’s analysis typically begins by determining whether or not the individual meets the definition of a “person” who “engages in the business of insurance” under the Texas Insurance Code. The Code defines a “person” who engages in the business of insurance as “any individual, corporation, association, partnership, reciprocal or interinsurance exchange, Lloyds plan, fraternal benefit society, or other legal entity . . . including an agent, broker, adjuster or life and health insurance counselor.”1 With adjusters specifically enumerated, adjusters may in fact be held individually liable pursuant to the express language of the Texas Insurance Code, but in practice, liability is not always found.

In Natividad v. Alexsis Inc., the Texas Supreme Court held an insurer can seek removal based on a lack of privity of contract between the independent adjuster and the plaintiff if the plaintiff does not claim more than a breach of good faith and fair dealing.2 The Court stated that, “we have always recognized . . . in an insurance context, the duty of good faith and fair dealing arises only when there is a contract giving rise to a ‘special relationship.’”3 This comment was made after analyzing whether or not agents of insurance carriers can be found potentially liable to the insureds under the common law duty of good faith and fair dealing alone.

The Texas Supreme Court ultimately held the common law duty of good faith and fair dealing is a non-delegable duty of the insurance carrier.4 Furthermore, since independent adjusters are not parties to the insurance contract, no special relationship exists between the adjuster and the insured.5 Without that special relationship, the agents or adjusters performing claims handling services are thus insulated from the insured’s claims because the duty remains with the carrier. However, as previously stated, several decisions have subsequently extended the reach of the insured’s claims as applied to other common law and statutory duty violations against independent adjusters, thus defeating the fraudulent joinder defense and keeping the adjuster properly joined.

For example, in Gasch, the 5th Circuit Court of Appeals held that an adjuster may be found liable to an insured for violating the Texas Deceptive Trade Practices Act and the Texas Insurance Code.6 Likewise, the Texas Supreme Court has also held that any “person” engaged in the business of insurance, such as an adjuster, is prohibited from engaging in deceptive trade practices in the insurance business and that by engaging in unfair or deceptive practices, the person can be found individually liable to the insured.7 In this regard, any “person” engaged in the business of insurance can be found liable under statutes prohibiting unfair settlement practices, misrepresentations and discrimination.8 Furthermore, chapter 541 of the Insurance Code (formerly known as article 21.21) established that those engaged in the “business of insurance” such as the servicing of policies, which is what adjusters do, can be held liable by participating in any unfair insurance prohibitions.

In summary, adjusters are deemed to be “persons” engaged in the “business of insurance” as defined in the Texas Insurance Code and are thus able to be properly and individually joined to a claim by an insured for violations as noted above. Although independent adjusters are not in privity of contract with the insured and thus generally owe no common law duties of good faith and fair dealing, they are still potentially liable to an insured for violations of common law and statutory provisions found in the Texas Insurance Code. As a result, an adjuster may still rely on the fraudulent joinder defense when only a breach of the duty of good faith and fair dealing is alleged, but will be found properly joined where more claims are asserted. Nevertheless, even though the courts recognize adjusters as potential “persons” who can be individually liable, the better course of action for insurance adjusters is to report the facts, damages and relevant insurance policy provisions to the insurer thereby allowing the insurer to make the determination of whether the subject loss is covered under their insurance policy and the claim/case specific set of facts. As long as the adjuster conducts a reasonable investigation and does not commit deceptive and/or unfair practices, he or she may avoid liability for an insurance violation.9

1 Tex. Ins. Code Ann. § 541.002(2) (emphasis added).

2 See Natividad v. Alexsis Inc., 875 S.W.2d 695, 701 (Tex. 1994).

3 698.

4 Id.

5 701.

6 Gasch v. Hartford Acc. & Indem. Co., 491 F.3d 278, 283 (5th Cir. 2007) (holding that the adjuster was properly joined due to potential violations under the DTPA and the Texas Insurance Code).

7 Liberty Mut. Ins. Co. v. Garrison Contractors, Inc.,966 S.W.2d 482, 484 (Tex.1998).

8 Tex. Ins. Code Ann. §§ 541.002(2), 541.151, 544.051(6), 544.052.

9 Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 55 (Tex. 1997) (holding that in order for a plaintiff to show that the adjuster participated in deceptive or unfair practices, he must show that liability was reasonably clear or that the adjuster failed to reasonably investigate the claim).