Addressing E&O Exposures

The embattled independent adjusting profession has never faced so much scrutiny; yet at the same time pressure builds for adjusters to deliver results while making do with less. This can lead to professional liability claims.

Fortunately, the industry can train adjusters to employ practices to reduce the risk. Adjusters and their errors and omissions (E&O) insurers should also be aware of effective strategies to defend such claims.

The Adjuster as Professional Representative

In most instances, the independent adjuster owes a duty to the insurer who employs him or her as agent, not to the insured. Some legal authorities have held that the adjuster owes no duty of care to the insured. An insured aggrieved by an adjuster’s decision might have recourse against the insurer in vicarious liability, but not against the adjuster: Abbasi v. The Portage La Prairie Mutual Insurance Company, 2003 ABQB 760 (Alta. Q.B.).

The ethical lines glow brighter when the insurer countermands the adjuster’s recommendations. It is perfectly acceptable for an insurer to go against an adjuster’s recommendation, and for the adjuster to follow those instructions – if the instructions themselves are defensible. What if the insurer were to apply pressure on an adjuster to cut down the payment or to find ways of denying coverage, without sufficient justification?

The CIAA’s Code of Ethics for Insurance Adjusters provides: “Policyholders and claimants are entitled to receive courteous, fair and objective treatment at all times.” Does this voluntary code create a duty of care to the insured? A professional agent is expected to act ethically, but the actual duty to the insured is owed by the insurer.

The Supreme Court of Canada implicitly described the independence of the insurance adjuster from the insurer’s client by upholding the conduct of the adjuster while maintaining the judgment against the insurer in Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595:

“The problem here is that Pilot embarked on a ‘train of thought’ as early as February 25, 1994 … that led to the arson trial, with nothing to go on except the fact that its policyholder had money problems … The ‘train of thought’ mentioned in the letter to Pilot from [adjuster] Derek Francis kept going long after the requirements of due diligence or prudent practice had been exhausted. There is a difference between due diligence and wilful tunnel vision.”

The obligation of “courteous, fair and objective treatment” to the insured should not translate into a direct duty of care, provided the adjuster acts within the bounds of employment by the insurer.

The principle that independent adjusters owe no duty of care to insureds can erode if an adjuster creates an expectation of loyalty. In Wigmore v. Canadian Surety Company (1994 CarswellSask 247), the insured testified the adjuster “was our agent” and that “he was trying hard to get money for us.” The adjuster said he was independent of the insurer and “therefore someone they [the Wigmores] could look to for advice and assistance.” By misunderstanding his role, the adjuster imposed a duty on himself. Wigmore is a cautionary tale.

The following practices may help to avoid unnecessary E&O claims.

Clarify insureds’ expectations. The popular “you’re in good hands” marketing by insurance companies means insureds expect insurers to look after them after a loss. The emotional vulnerability in the aftermath of a loss can cause the insured to transfer the “good hands” expectation to the adjuster. If a dispute over coverage or quantum surfaces, the insured might then expect an adjuster to advocate on his or her behalf. This is the time to set out the ground rules.

Objectively document all interactions with insureds contemporaneously. Avoid saying anything in your notes you could later live to regret. “Without Prejudice “is a term that will not protect you. The insurer must evaluate a claim fairly and open-mindedly, despite any suspicions during the course of the investigation: General Accident Assurance Company v. Chrusz, 1999 CanLII 7320 (ON CA).

Scrutinize instructions from insurer carefully. If you receive instructions that require you or the insurer to breach a contractual duty to the policyholder or otherwise act unethically, you must advise the insurer, in writing, to reconsider the instructions. If the instructions are not withdrawn, you may have to withdraw from handling the claim.

Strategies for Defending E&O Claims

If a claim dispute arises, the key is to understand the critical “who the adjuster is” and “what the adjuster does” issues. The following strategies illustrate approaches to potential adjuster E&O claims.

Strategy #1: Setting the Record Straight Regarding the Adjuster’s Role

Members of the general public may lack knowledge of an independent adjuster’s role. Some believe insurance adjusters are like ombudsmen and represent the insured to the insurer. On the skeptical side, some view the adjuster’s role as getting the insurer out of paying a claim. Neither is fair. As a professional whose loyalty rests with the insurer, the adjuster neither extends nor curtails the insurer’s contractual obligation to pay.

Parties often focus solely on the events and transactions at the time the claim took a bad turn. In an action brought by an insured against an adjuster (as part of a claim against an insurer), it is also important to comb through all of the communications between adjuster and insured.

Strategy #2: Causation and Damages

The soft underbelly of many claims for professional liability is causation. It’s not easy to prove that an error or omission caused actual harm. If the insurer has not paid, there has not yet been an adverse and final outcome.

Insurers rarely come after adjusters for an excessive payment to an insured. The critical path of a claim simply causes any litigating energy to dissipate. You will, however, see insurers bring claims against adjusters more often if the insurers themselves are sued. If the insured was undercompensated, the court will determine the “right” amount and order the insurer to pay the difference between what it paid and owed. Within the mechanism of this dispute, there are no damages related to the handling of the claim – the causation element against the adjuster is missing.

Strategy #3: Breach of Standard of Care v. Error of Judgment

Consequential loss does not necessarily mean the adjuster is liable for the loss, any more than standing next to a disaster caused it to happen. Errors in judgment tend to be not actionable. Take the instance where consequential harm arises from a perceived attempt to save money on a property loss. The adjuster can retain an engineer to examine a building (i.e. structural soundness) and make recommendations. Errors made by the engineer do not become errors of the adjuster.

If one were to employ a paint-by-numbers approach, the insured’s counsel might launch a suit against the adjuster. However, a well-documented report outlining the decision to employ the engineer, combined with instructions from the insurer, will help adjuster fend off an E&O claim lacking in merit.

Strategy #4: Avoiding the Limitations Squeeze

There is a widely held misconception that delivering supporting documents for a damage claim will suspend statutes of limitation. Limitation periods stop running when one commences legal proceedings, or in limited circumstances by agreements, mediations or waivers. Sending a pile of receipts or a loss schedule will not do this. Failure to understand how statutes of limitation operate can lead to trouble.

For example, close to the expiry of a limitation period under a fire insurance policy, the insured submits receipts and invoices. The insured asks the adjuster, “Do I need to see a lawyer or start legal proceedings?” The adjuster says no, and advises the insure
d the insurer will pay, subject to the adequacy of the documents. The limitation period expires, and the insurer declines liability because no statement of claim was filed in court in time. The insured interprets the adjuster’s answer to the question as a waiver of the limitation period. The insurer says it never authorized the adjuster to do so. The adjuster is squeezed in the middle.

There are three ways to avoid the squeeze:

1. advise the other side (in writing) to start a legal proceeding if they intend to continue the claim beyond the limitation period;

2. if common sense dictates that legal proceedings be avoided, get instructions from the insurer to waive or suspend the operation of the limitation period while the claim is being settled;

3. if the claim is not settled, notify the insured or claimant that the limitation period will start from the point where it was suspended.

R. Lee Akazaki, C.S., Partner at Gilbertson Davis Emerson LLP, Board Member of Canadian Defence Lawyers (CDL), Past-President of the Ontario Bar Association, is a lawyer practicing in commercial litigation, insurance law and professional ethics and responsibility. CDL is the only national organization representing the interests of civil defence lawyers. It offers broad opportunities to unite the defence bar over common issues, as well as providing accredited continuing legal education.