Hamill v. Pawtucket Mut. Ins. Co.

• Decision Date: 30 December 2005
• Docket Number: No. 05-025.,05-025.
• Citation: 2005 VT 133,892 A.2d 226
• Court: Vermont Supreme Court
• Parties: Samuel HAMILL v. PAWTUCKET MUTUAL INSURANCE CO., David Andrulat, Smith & Carson, Inc. and Richard Dineley.

Page 226

892 A.2d 226

2005 VT 133

Samuel HAMILL v. PAWTUCKET MUTUAL INSURANCE CO., David Andrulat, Smith & Carson, Inc. and Richard Dineley.

No. 05-025.

Supreme Court of Vermont.

December 30, 2005.

Howard B. Myers of Myers Associates, PLLC, and David Cullenberg of Cullenberg & Tensen, PLLC, Lebanon, New Hampshire, for Plaintiff-Appellant.

Allan R. Keyes of Ryan, Smith & Carbine, Ltd., Rutland, for Defendants-Appellees Andrulat, Smith & Carson, Inc. and Dineley.

Present: REIBER, C.J., DOOLEY, JOHNSON and SKOGLUND, JJ., and ALLEN, C.J. (Ret.), Specially Assigned.

ALLEN, C.J. (Ret.), Specially Assigned.

¶ 1. In this appeal, we consider whether an insured homeowner whose residence allegedly became uninhabitable due to water damage, and later mold growth, has a cause of action in negligence against the independent adjusters hired by the homeowner's insurer to investigate the insured's initial claim. We affirm the superior court's summary judgment ruling that the adjuster has no cognizable legal duty vis-a-vis the homeowner with respect to the type of damages claimed here, and that the homeowner's only remedy was against his insurer.

¶ 2. The parties stipulated to the following facts. Sometime between February 10 and 12, 2001, while plaintiff Samuel Hamill was away on a business trip, a power outage occurred at his home, causing his pipes to freeze and then burst, resulting in flooding within the house. Hamill discovered the damage when he returned to his home on February 13, 2001. That same day he reported the loss to his insurance agent, who, in turn, notified his insurer, defendant Pawtucket Mutual Insurance Company. Pawtucket contracted out the initial adjusting of the claim to the Vermont office of defendant Smith & Carson, Inc. (known at that time as CSB Group, Inc.). The supervisor of that office, defendant Richard Dineley, assigned the claim to defendant adjuster David Andrulat. Andrulat visited Hamill's home on two occasions in early March 2001 to assess the damage, but Hamill and Pawtucket could not come to an agreement on the value of the loss. Pawtucket allegedly denied Hamill's claims in November 2001 following further brief inspections of the home during the previous month. Hamill asserts that the adjusters negligently investigated his claim, thereby depriving him of insurance proceeds and causing him to incur expenses that he would not otherwise have incurred.

¶ 3. In his second amended complaint, filed in April 2002, Hamill included counts of breach of contract, negligence, bad faith, and punitive damages against Pawtucket, and counts of gross negligence and punitive damages against Andrulat. Hamill alleged that he presented Andrulat with estimates of between $150,000 and $200,000—excluding plumbing, heating, electrical, roofing, and masonry costs—to repair the water damage, but that, based on a brief visual inspection of the premises, Andrulat rejected the estimates, accused Hamill of insurance fraud, and offered to settle the matter then and there for $5000. Hamill also alleged that after he rejected the adjuster's settlement offer, Andrulat did not get back to him for weeks, even though Andrulat knew or should have known that the water-damaged premises needed to be repaired immediately to prevent the possibility of mold growth. According to the complaint, as the result of Andrulat's failure to carefully investigate Hamill's claims, to consider his repair estimates, and to make an immediate and thorough inspection of the subject premises, mold spread through the house, making it uninhabitable. The complaint alleged that if Andrulat had acted reasonably in inspecting the premises and assessing the damages, the interior of Hamill's house would have been gutted and rebuilt before the mold had begun to grow.

¶ 4. In February 2004, Hamill filed a complaint against Dineley and Smith & Carson, alleging that they acted negligently and in bad faith by failing to supervise the investigation and processing of his insurance claim. He sought both compensatory and punitive damages. Shortly thereafter, Hamill settled his claims against Pawtucket. On December 9, 2004, after the complaints were consolidated, the superior court entered summary judgment in favor of defendants. The court ruled that Hamill had not alleged a cognizable duty on the part of the adjusters with respect to his negligence action, and that if the adjusters acted in bad faith, resulting in additional damage to Hamill's home, his remedy was to include such claims in his breach-of-contract action against Pawtucket. The court concluded that Hamill was claiming economic losses rather than direct physical loss to his property, and that such losses were not compensable in a tort action under the economic-loss doctrine, which generally disallows claims of economic loss to third parties absent privity of contract.

¶ 5. On appeal, Hamill argues that an independent insurance adjuster should be subject to liability for physical damage to an insured's property resulting from the adjuster's negligent conduct. In his view, no sound public policy considerations justify denying his common-law negligence action against defendant adjusters. Relying primarily on Morvay v. Hanover Insurance Cos., 127 N.H. 723, 506 A.2d 333, 335 (1986), in which the New Hampshire Supreme Court permitted insured property owners to file a negligence action alleging that agents hired by an insurance company to investigate a claimed fire loss breached their duty to conduct a fair and reasonable investigation of the claim, Hamill argues that defendant adjusters owed him a cognizable legal duty that supports his tort action against them because he was a foreseeably affected third party. According to Hamill, the adjusters knew or should have known that their failure to act properly and promptly in investigating his claim would result in further damage to his property.

¶ 6. We do not find these arguments persuasive. Generally, whether there is a cognizable legal duty that supports a tort action depends on a variety of public policy considerations and relevant factors, only one of which is foreseeability. Langle v. Kurkul, 146 Vt. 513, 519-20, 510 A.2d 1301, 1305 (1986) (citing relevant factors); see Charleston Dry Cleaners & Laundry, Inc. v. Zurich Amer. Ins. Co., 355 S.C. 614, 586 S.E.2d 586, 588 (2003) ("Foreseeability of injury, in and of itself, does not give rise to a duty."). Ultimately, whether a duty exists is a question of fairness that depends on, among other factors, the relationship of the parties, the nature of the risk, and the public interest at stake. Langle, 146 Vt. at 520, 510 A.2d at 1305.

¶ 7. Further, because negligence law does not generally recognize a duty to exercise reasonable care to avoid economic loss unless the alleged tortfeasor's conduct has inflicted some accompanying physical harm, we have recognized that another significant factor in determining whether there is a cognizable duty that would support a tort action is whether the plaintiff seeks damages for only economic loss. O'Connell v. Killington, Ltd., 164 Vt. 73, 77, 665 A.2d 39, 42 (1995); see Wentworth v. Crawford & Co., 174 Vt. 118, 126, 807 A.2d 351, 356 (2002) ("It is well established in Vermont that absent some accompanying physical harm, there is no duty to exercise reasonable care to protect another's economic interests."); Sanchez v. Lindsey Morden Claims Servs., Inc., 72 Cal.App.4th 249, 84 Cal.Rptr.2d 799, 801 (1999) (noting "the unreliability of foreseeability, in isolation, as a grounds for imposing a duty, especially where the injury is `intangible' rather than physical"). Indeed, the economic-loss rule serves to maintain the boundary between contract law, which is designed to enforce parties' contractual expectations, and tort law, which is designed to protect citizens and their property by imposing a general duty of reasonable care. Springfield Hydroelectric Co. v. Copp, 172 Vt. 311, 315, 779 A.2d 67, 71 (2001); Berschauer/Phillips Constr. Co. v. Seattle Sch. Dist. No. 1, 124 Wash.2d 816, 881 P.2d 986, 989-90 (1994). In short, liability for purely economic loss generally requires privity between the parties.

¶ 8. Here, notwithstanding his argument that the superior court should not have applied the economic-loss rule because defendants' negligence proximately caused additional physical damage to his property, we conclude that Hamill is seeking damages for only economic loss. According to the parties' stipulated facts, Hamill contends that because of the manner in which defendants adjusted his claim he was deprived of the benefit of insurance, thereby making his house uninhabitable and causing him to incur additional expenses. In other words, Hamill is claiming that defendants' negligent inspection and adjustment resulted in his insurer failing to promptly provide the proceeds he expected under his insurance policy, which, in turn, allegedly resulted in physical damage to the property that was the subject of the insurance policy, thereby causing him to incur additional repair or replacement costs.

¶ 9. Thus, Hamill is seeking recovery for losses stemming from the failure of his expectations regarding insurance coverage. We agree with the trial court that such damages are most accurately categorized as purely economic losses generally recoverable under contract law, but not tort law. Cf. Paquette v. Deere & Co., 168 Vt. 258, 263, 719 A.2d 410, 413-14 (1998) (in seeking damages for the reduced value of their motor home resulting from its defective wiring system and related problems, plaintiffs sought to recover economic losses for not having received benefit of bargain to which they believed they were entitled); Redman v. John D. Brush & Co., 111 F.3d 1174, 1182-83 (4th Cir. 1997) (theft of coin collection from defective safe was economic loss caused by failure of safe to serve its intended function, not loss of other physical property recoverable in tort suit).¹

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