Winning from the Beginning—How an Adjuster Can Avoid Liability In A Bad Faith Lawsuit

A Washington appellate court recently sent shockwaves through the insurance industry by holding that an insurance adjuster can be sued in their individual capacity in a bad faith lawsuit.  In Keodalah v. Allstate Ins. Co., (2018) 413 P.3d 1059, Division One of the appellate court declared that the applicable statute “imposes a duty of good faith on all persons engaged in the business of insurance, including individual adjusters.”[1]   Why would a plaintiff sue an adjuster when they know the insurance company is the party with deep pockets?  In one word, intimidation; the Court’s ruling gives consumers (not to mention plaintiff attorneys) the power to threaten adjusters to give in to their demands.[2]  These threats are more than just “puffing” or brutum fulmen; as any defendant will admit, being named in a lawsuit can have real consequences, including stress and financial exposure.  In fact, some lending companies require potential borrowers to disclose any pending/past lawsuits, which could affect one’s ability to apply for a mortgage, car loan, or a line of credit.[3]  Adding an adjuster to a lawsuit also increases the cost of defense, as an adjuster will likely need his/her own attorney (that will be paid for by the insurance company).[4]  Adding an adjuster to a lawsuit may also destroy diversity jurisdiction, which is likely an advantage to plaintiffs because State courts are often “plaintiff-friendly.” A 2018 insurance litigation report found that out of the 93,000 federal district bad faith cases reviewed between 2009-2017 that 90% of cases found no bad faith and 75% of those cases were dismissed on summary judgment.[5]

The Washington Supreme Court granted review in September 2018.  Thus, it remains to be seen if Washington will join the handful of States that allow adjusters to be sued in their individual capacity.  However, in light of the appellate court’s decision, an adjuster may be tempted to worry that any minor infraction will land them in the middle of a bad faith lawsuit.  However, the Keodalah Court provided some guidance on how an adjuster may avoid liability.   The following are three ways an insurance adjuster (and the insurance company) can avoid having liability imputed to individual adjusters in a bad faith lawsuit.

1. Take A Reasonable Position

The holding in Keodalah, arose out of an auto accident in which the plaintiff was injured when a motorcycle struck his truck.[6]  Plaintiff had a $25,000 UIM insurance policy through his insurance company, Allstate.[7] The police found that the motorcyclist was traveling between 70-74 m.p.h. in a 30 m.p.h. zone, and that the plaintiff was not on his cellphone at the time of the accident.[8]  Allstate’s investigation revealed several witnesses who confirmed that the motorcyclist was traveling faster than the speed limit, was weaving between cars and had “cheated” at the intersection.[9]  Allstate’s accident reconstruction firm analyzed the accident and concluded that the motorcyclist was traveling at least 60 m.p.h. (double the speed limit) and that the motorcyclist’s “excessive speed” caused the collision.[10]

Notwithstanding the overwhelming evidence proving the motorcyclist was at fault for the accident, the adjuster found that the plaintiff was 70% at fault for the accident.[11]  The Court highlighted the fact that Allstate’s adjuster had both the traffic collision report and their own expert’s report in her possession and still testified in deposition that the plaintiff ran a stop sign and had been on his cell phone.[12]  This is simply not true; either the adjuster failed to read the reports or, in the words of Justice Antonin Scalia, engaged in some “interpretive jiggery-pokery.”[13]  Simply put, no reasonable adjuster could reach the same conclusion the adjuster reached in Keodalah.  

2.  Provide Written Explanations of Any Offer that Falls Short of the Claimant’s Demand

              In response to the plaintiff’s $25,000 policy-limits demand in Keodalah, the adjuster offered a minimal $1,600 to settle the UIM claim.[14]  The appellate court pointed out that when Keodalah asked the insurance company to explain its position, it raised its offer to $5,000 without explanation.[15]  This lack of explanation is problematic.  Absent any legitimate explanation, a claimant is left to assume (and may eventually argue) that an adjuster is merely lowballing him/her.  In Keodalah, not only did the adjuster have no reasonable basis for her position, but she also failed to provide any reasonable explanation for her settlement offers.  From this, one can surmise that a well-reasoned written explanation of any settlement offer could go a long way in avoiding liability for bad faith.

3.  Move Claim Handling Staff to States That Barr Suits Against Adjusters for Bad Faith

              The decision in Keodalah could have a chilling effect on the insurance industry. Individual adjusters may think twice about working for an insurance company when they know that they could be sued in their individual capacity.  However, the holding in Keodalah is not universal.  Many States, such as California, New York, Hawaii, and Tennessee, do not recognize bad faith claims against individual adjusters.[16]  Albeit this may be a costly measure, moving adjusters to other States could save insurance companies money over the long term from having to pay additional legal fees.  An additional benefit is that it would help insurance companies maintain diversity jurisdiction, which also provides an additional advantage.

4.  Conclusion

Keodalah is a prime example of what not to do. The facts highlighted by the Court show how far the adjuster was willing to go to avoid paying out the policy.  For now, an insurance adjuster can be sued in the State of Washington for bad faith and taking a position against the clear weight of the evidence (presumedly to avoid paying policy limits) may land an adjuster exactly where he/she does not want to be.  However, taking a reasonable approach to liability and providing reasoned explanations in writing to claimants, an adjuster can likely avoid liability if they are sued in their individual capacity.

[1] Id. at 1060.

[2] Johnson, Denise, The Impact of the Keodalah Decision on Insurers, Adjusters (January 2, 2019) Claims Journal < https://www.claimsjournal.com/news/west/2019/01/02/288527.htm > [as of May 1, 2019].

[3] Ibid.

[4] Ibid.

[5] Lex Machina, Lex Machina’s First Annual Insurance Litigation Report Reveals Distinct Case Filing Trends (October 9, 2018) Lex Machina < https://lexmachina.com/media/press/lex-machina-first-annual-insurance-litigation-report/>; White and Williams LLP, Insureds Suing Individual Adjusters-What Will Change If the Washington Supreme Court Decides That Adjusters May be Sued for Bad Faith? (December 12, 108) JD Supra <https://www.jdsupra.com/legalnews/insureds-suing-individual-adjusters-13390/>

[6] Keodalah, Supra, 413 P.3d 1060.

[7] Ibid.

[8] Ibid.

[9] Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] King et al v. Burwell, Secretary of Health and Human Services, et al (2014) 576 U.S. 2500. (in his dissenting opinion on the Obamacare case, Scalia argued that the majority’s interpretation was “interpretive jiggery-pokery.”)

[14] Keodalah, Supra, 413 P.3d 1060

[15]  Ibid.

[16] White and Williams LLP, Insureds Suing Individual Adjusters-What Will Change If the Washington Supreme Court Decides That Adjusters May be Sued for Bad Faith?  Supra.