2014 VT 96


Murphy v. Patriot Insurance
Company (2013-235)
 
2014 VT 96
 
[Filed 14-Aug-2014]
 
NOTICE:  This opinion is
subject to motions for reargument under V.R.A.P. 40 as well as formal revision
before publication in the Vermont Reports.  Readers are requested to
notify the Reporter of Decisions by email at: JUD.Reporter@state.vt.us or by
mail at: Vermont Supreme Court, 109 State Street, Montpelier, Vermont
05609-0801, of any errors in order that corrections may be made before this
opinion goes to press.
 
 

2014 VT 96

 

No. 2013-235

 

Helena G. Murphy


Supreme Court


 


 


 


On Appeal from


     v.


Superior Court, Caledonia Unit,


 


Civil Division


 


 


Patriot Insurance Company


December Term, 2013


 


 


 


 


Howard
  E. Van Benthuysen and M. Kathleen Manley, JJ.
  (partial summary judgments)
Mary Miles Teachout,
  J. (final judgment)


 

Todd C. Steadman of Davis Steadman & Ford LLC, White River
Junction, for 
  Plaintiff-Appellant.
 
 
Jeffrey S. Marlin of Primmer
Piper Eggleston & Cramer PC, Montpelier, for Defendant-Appellee.
 
 
PRESENT:  Reiber, C.J.,
Dooley, Skoglund, Robinson and Crawford, JJ.
 
 
¶ 1.           DOOLEY,
J.     Plaintiff Helena Murphy appeals from a superior court
judgment in favor of defendant, Patriot Insurance Company, her homeowner’s
insurer.  She contends that: (1) Patriot was estopped from denying
coverage for the removal and replacement of a chimney on her home; and (2) the
trial court erred in dismissing claims for negligence and bad faith.  We
affirm. 

¶ 2.           Except
where otherwise noted, the material facts are undisputed and may be summarized
as follows.  In late July 2007, plaintiff reported to Patriot that a
recent storm had caused damage to the flashing on her roof, allowing water to
enter the house.  Patriot engaged a claims adjuster to investigate the
claim, who went to the property four days after the report.  Plaintiff and
the adjuster walked around the house inspecting the damage.  The adjuster
observed damage to the garage and ceiling of an enclosed porch and dampness in
the finished portion of the basement.  He went up on the roof, but
observed “no exterior damage due to wind,” and no damage to the flashing on the
roof around the rear chimney[1]
or holes in the roof.  The adjuster acknowledged that he did not consider
that flashing might have been torn off during the storm, nor did he inspect the
front chimney.  In his claims report, the adjuster acknowledged that the
insured showed him certain damage from the storm, including heavy rain that had
purportedly “flooded the driveway and infiltrated the foundation causing water
damage to [the] contents . . . of the basement.”    
¶ 3.           In
August 2007, Patriot paid plaintiff a total of $3,553.05[2] for wind and water damage to her
home.  The following month, plaintiff filed an additional claim with
Patriot after a worker discovered damage from rot resulting from water
infiltration near the front chimney.  The adjuster returned to inspect the
property, and Patriot initially paid plaintiff an additional $845 on this
claim, after deducting a $500 deductible, in September 2007.  In his
report from the return visit, the adjuster concluded that the rot was caused at
the same time in July 2007 as the damage for which Patriot had already paid
plaintiff.  Patriot initially disagreed with this conclusion based, in
part, on the fact that plaintiff had not discovered a ceiling stain until
September 2007.  Nevertheless, in November 2007, Patriot refunded
plaintiff the $500 deductible from the second payment and paid plaintiff an
additional $10,000—the policy limit for damage from mold or rot—based in part
on the report of an independent building inspector in October 2007.      
¶ 4.           In
that report, the inspector concluded that the cause of the damage was failed
flashing near the chimneys that had allowed water to enter and produce structural
damage, rot, and mold.  The inspector also concluded that the water
penetration was a long term problem that pre-existed the July 2007 storm. 
The inspector recommended demolition of a portion of the roof to determine the
extent of structural damage and the possible replacement of the front chimney.
 Plaintiff provided a copy of the report to Patriot’s claims adjuster, who
had planned—in response—to have an engineer inspect the front chimney, but
plaintiff had it removed before the inspection could occur.  
¶ 5.           Patriot
paid plaintiff an additional $1889.41 in connection with a subsequent claim in
October 2008, and continued to negotiate with plaintiff over a repair estimate
in excess of $56,000 which plaintiff maintained was necessary to remediate the
substantial remaining rot and mold in the home.  In November 2009, Patriot
paid plaintiff an additional $15,865.44, for a total—the court found—of
$32,653.40 in payments, including cashed and uncashed checks. 
¶ 6.           In
June 2008, while the parties remained in discussion, plaintiff filed a
complaint for breach of contract.  In August 2009, Patriot moved for
partial summary judgment on the scope of coverage for remediation of the mold
and rot and replacement of the chimney.  In a November 2009 decision, the
trial court ruled that the homeowner’s policy clearly and unambiguously limited
damages relating to the fungi or rot to $10,000, and that the provision
providing coverage for the “collapse” of a building or part of a building did
not apply to the chimney—which plaintiff had intentionally removed—but the
court expressly did not consider whether other policy provisions might
apply.  Neither of the issues addressed in the 2009 decision are part of
this appeal.
¶ 7.           Plaintiff
subsequently filed an amended complaint adding claims against Patriot for
negligence “in inspecting and processing [the] claim and in retaining adjusters
to investigate her claim,” and “bad faith” in denying the claims with “no
reasonable basis.”  Patriot moved for partial summary judgment on the
additional claims, asserting that its relationship with plaintiff was strictly
contractual in nature and that it owed no independent tort duty to plaintiff
sounding in negligence; Patriot also argued that there was no basis to conclude
that it had acted unreasonably in its handling of plaintiff’s claims in
violation of the covenant of good faith and fair dealing.  Plaintiff
opposed the motion.   
¶ 8.           In
June 2012, the trial court issued a written decision granting Patriot’s
motion.  The court agreed that plaintiff had failed to “present[]
a basis upon [which] to establish that [Patriot] owed a clear, non-contractual
duty to her,” and further found on the facts alleged that Patriot “had a
reasonable, if debatable, basis to deny [p]laintiff’s
claims under the policy.”  Accordingly, the court granted summary judgment
for Patriot on both claims.  The parties later stipulated to the entry of
judgment for Patriot on the remaining breach-of-contract count, and the court
issued a final judgment in favor of Patriot in May 2013.  This appeal
followed.
¶ 9.           Plaintiff
first contends that Patriot was “estopped from denying coverage for the removal
and replacement” of the chimney.  She relies on her own affidavit stating
that Patriot’s adjuster told her that he would accept her inspector’s report
that the chimney had shifted and advised her “to get the needed work performed
to the chimney.”  The affidavit was not submitted to the trial court, however,
and therefore cannot be considered on appeal, nor was the estoppel claim raised
below or addressed by the trial court.  Accordingly, the argument was not
properly preserved for review on appeal, and we decline to address it. 
See Follo v. Florindo,
2009 VT 11, ¶ 14, 185 Vt. 390, 970 A.2d 1230 (“In general, issues not raised at
trial are unpreserved, and this Court will not review them on appeal.”); Hoover
v. Hoover, 171 Vt. 256, 258, 764 A.2d 1192, 1193 (2000) (“On appeal, we
cannot consider facts not in the record.”).
¶ 10.       Plaintiff also
contends the trial court erred in dismissing the negligence count, which
alleged that Patriot had an independent tort duty to handle her claim in a
reasonable manner and violated that duty by negligently “inspecting and
processing [her] claim,” with the result that she suffered additional property
damage and health problems associated with mold.  As noted, the trial
court rejected the claim, concluding that plaintiff had failed “to establish
that [Patriot] owed a clear, non-contractual duty to her” on the facts
alleged.  We agree. 
¶ 11.       As the court and
parties here recognized, we addressed a similar issue in Hamill v. Pawtucket
Mutual Insurance Company, where the plaintiff-insured also alleged that a
claims adjuster hired by his insurer “negligently investigated his claim” by
failing to make a “thorough inspection,” rejecting after only a “brief visual
inspection” the plaintiff’s repair estimates for water damage, and delaying his
response for several weeks, with the result that “mold spread through the
house, making it uninhabitable.”  2005 VT 133, ¶¶ 2-3,
179 Vt. 250, 892 A.2d 226.  Plaintiff settled with the insurer, and
the trial court later granted summary judgment for the adjuster, concluding
that the plaintiff had failed to establish a “cognizable duty on the part of
the adjuster[] with respect to [the] negligence
action.”  Id. ¶ 4.  
¶ 12.       We affirmed,
observing that the trial court’s “refusal to find a cognizable legal duty” was
consistent with the holding of a “majority of courts,” id. ¶12, whose
reasoning was partly as follows: “The relationship between the insured and the
insurer is defined and governed by the insurance policy and its accompanying
implied covenant of good faith and fair dealing.”  Id.
¶ 13.  As agent for the insurer, the adjuster’s conduct is “imputed
to the insurer, [which] is subject to liability for the adjuster’s mishandling
of claims in actions alleging breach of contract or bad faith.”  Id. 
Thus, subjecting adjusters to additional and potentially open-ended tort
liability would be “contrary to the law of agency,” id., and
disproportionate to their ability to control “their potential risks.”  Id. ¶ 16.  This was “troublesome,” we explained,
because of the “unlikelihood that an action claiming negligent mishandling of a
claim would be available against even the insurer.”  Id. (emphasis added); see also id. ¶ 14 (“[I]nsureds may seek redress for
such injuries through breach-of-contract and bad-faith actions against their
insurers”).
¶ 13.       Our rejection of
an independent tort duty on the part of the insurer’s agent in Hamill
was thus predicated in part on a recognition that the relationship between
insurer and insured is fundamentally contractual, “defined and governed” by the
coverage provisions in the insurance policy and the covenant of good faith and
fair dealing implied therein.  Id. ¶ 13.
 We have held on numerous occasions that a negligence claim can exist only
if “there is a duty independent of any contractual obligations.”  Springfield
Hydroelectric Co. v. Copp, 172 Vt. 311, 316, 779
A.2d 67, 71-2 (2001) (quotation omitted); see also Wentworth v. Crawford
& Co., 174 Vt. 118, 126-27, 807 A.2d 351, 357 (2002) (“[O]ur caselaw prohibits a claimant from seeking damages for
contractual losses through tort law.”).  Indeed, we recognized the
existence of a first-party bad faith action against an insurer in part because
no alternative independent remedy was available.  See Bushey
v. Allstate Ins. Co., 164 Vt. 399, 402, 670 A.2d 807, 809 (1995) (extending
“bad faith” cause of action to first-party claims by insureds).  The bad
faith remedy would generally be superfluous if mere negligence in handling a
claim would be sufficient for liability.
¶ 14.       We note that most
other courts have limited actions by insureds against their insurers to breach
of contract or the implied covenant of good faith and fair dealing and have  disallowed actions for negligence based upon an
independent duty of care.  See, e.g., Kervin v. S. Guar. Ins. Co., 667 So.
2d 704, 706 (Ala. 1995) (noting that the Court had “consistently refused to
recognize a cause of action for the negligent handling of insurance claims”); Miel v. State Farm Mut.
Auto. Ins. Co., 912 P.2d 1333, 1340 (Ariz. Ct. App. 1995) (holding that
insurer’s duty to its insured was “defined by the terms of the policy and the
implied covenant” and that insured could not sue insurer “for a separate and
independent claim of negligence in the way it handled the claim”); Adelman
v. Associated Int’l Ins. Co., 108 Cal. Rptr. 2d
788, 790 (Cal. Ct. App. 2001) (observing that an insured can recover against
insurer “for the improper handling of a claim only upon a showing that the
insurer acted in bad faith; . . . such a showing requires something more than
simple negligence”); DeLaune v. Liberty Mut. Ins. Co., 314 So. 2d 601, 603 (Fla. Dist. Ct. App.
1975) (holding that, in action against insurer for failure to settle, “a cause
of action based solely on negligence which does not rise to the level of bad
faith does not lie”); Justice v. State Farm Lloyds Ins. Co., 246 S.W.3d
762, 765 (Tex. Ct. App. 2008) (rejecting claim by insured for alleged
“negligent claim handling” on ground that state “recognizes no negligence duty”
by insurer); see also 14 Couch on Insurance § 198:6, at 198-13 (3d ed. 2014)
(noting that generally “negligence alone will not suffice” to show that insurer
breached duty); D. Wall, Litigation and Prevention of Insurer Bad Faith § 9:9
(3d ed. 2014) (observing that “[m]ost courts” which
allow tort damages for “a first-party insurer’s failure to pay claims have
rejected negligence as a basis of  the insurer’s liability”).
¶ 15.       Plaintiff argues
here that the reasoning of Hamill and the cases that follow it should
not apply because they are based on the policy that economic losses are not
available in tort actions.  It is accurate that much of the reasoning of Hamill
is based on the economic loss rule, although the rationale could have been
stated more broadly as we have done here.  However, the plaintiff in Hamill
made exactly the same argument as plaintiff in this case makes on essentially
the same facts.  The plaintiff in Hamill argued that because of the
adjuster’s delay in responding to the claim, mold grew and spread and caused
damage to the plaintiff’s property that was not economic loss.  The trial
court in Hamill held that “the alleged losses were economic losses, not
direct physical losses caused by the adjuster[’s] negligence, because they
stemmed from [the insurer’s] delay in the payment of insurance proceeds,” and
we affirmed that ruling.  2005 VT 133, ¶ 11.
 Under Hamill, all the damages plaintiff seeks are economic losses.
 
¶ 16.       We concur in the
general view that, as in this case, the insurance policy and the implied
covenant of good faith and fair dealing defined plaintiff’s expectations for
coverage and recovery in the event that benefits were wrongfully denied. 
Plaintiff does not advance, nor do we discern, any compelling policy or other basis
for imposition of an independent, extra-contractual negligence duty in these
circumstances.  See id. ¶ 6 (noting that
existence of legal duty depends on variety of policy and equitable
considerations).  Accordingly, we affirm the trial court’s
dismissal of the negligence count.  
¶ 17.       The question
remains whether the court was also correct in dismissing plaintiff’s claim for
“bad faith,” the general shorthand for breach of the covenant of good faith and
fair dealing which the law implies in every insurance policy.  See Bushey, 164 Vt. at 402, 670 A.2d
at 809 (extending “bad faith” cause of action to first-party claims by
insureds).  As we have observed, such a claim requires “more than
negligence on the part of the insurer.”  Booska v. Hubbard Ins.
Agency, Inc., 160 Vt. 305, 312, 627 A.2d 333, 336 (1993).  To
establish bad faith, the plaintiff must show that: “(1) the insurance company
had no reasonable basis to deny benefits of the policy, and (2) the company
knew or recklessly disregarded the fact that no reasonable basis existed for
denying the claim.”  Bushey, 164 Vt. at
402, 670 A.2d at 809; accord Peerless Ins. Co. v. Frederick, 2004 VT
126, ¶ 13, 177 Vt. 441, 869 A.2d 112.  Where a claim is “fairly
debatable,” the insurer is not guilty of bad faith even if it is ultimately
determined to have been mistaken.  Bushey,
164 Vt. at 402, 670 A.2d at 809; see Chateau Chamberay
Homeowners Ass’n v. Assoc. Int’l Ins. Co., 108
Cal. Rptr. 2d 776, 784 (Cal. Ct. App. 2001)  (“The mistaken [or erroneous] withholding of policy
benefits, if reasonable or if based on a legitimate dispute as to the insurer’s
liability . . . does not expose the insurer to bad faith.”); Bellville v.
Farm Bureau Mut. Ins. Co., 702 N.W.2d 468, 473 (Iowa
2005) (“The fact that the insurer’s position is ultimately found to lack merit
is not sufficient by itself to establish . . . a bad faith claim.”).
¶ 18.       Measured against
our bad faith standard, we find no basis to disturb the trial court’s
ruling.  Plaintiff alleged that Patriot “knew that it had no reasonable
basis to deny plaintiff’s claims and its conduct constitutes reckless disregard
of the fact that such was the case,” and advanced a number of specific
theories in support of the claim in opposing Patriot’s motion for summary
judgment.  Although the trial court concluded that none supported a
finding of bad faith, plaintiff has renewed only two of the arguments on
appeal.[3] 

¶ 19.       First, plaintiff
cites the fact that Patriot’s claims adjuster submitted a report purportedly
denying coverage because surface water had flooded the driveway and
“infiltrated the foundation”—an excluded risk—but later stated in deposition
that he did not believe that water was coming from the driveway. 
Plaintiff argues that the inconsistency between the adjuster’s report and his
actual findings demonstrates that he did not act in good faith.[4]  
¶ 20.       We find no merit
to this argument.  The claims adjuster’s report stated: “The insured
showed us the following damage that we advised were excluded by the policy … 2.
Due to the heavy rain, water overflowed the road, flooded the driveway and
infiltrated the foundation causing water damage to contents in the (sic) of the
basement including an area rug in the basement bedroom.”  It then went on
to items that were covered by the policy including “water damage to the
basement bedroom.”  It noted that it had excluded “water damage to
contents” and went on to find there was coverage for damage to a ceiling of an
enclosed porch and repairs would include “dry wall, paint and wallpaper in the
bedroom” and “sheathing and trim in the enclosed porch.”  The report went
on to calculate the compensable loss in detail, concluding it was $3,428. 
Patriot paid that amount less a deductible.  Apparently, the only part of
plaintiff’s initial claim that was uncompensated was for personal property.
¶ 21.       Plaintiff’s
complaint stated that: “Smith [the claims adjuster] came to inspect the
property for storm damage and reports that the water came in through the garage
from ground water coming down the driveway.”[5]  Plaintiff’s property inspector, who
developed his report based on an inspection and information provided by
plaintiff, addressed the issue of the source of the water damage:
 
It was reported that an opinion was expressed that the source of water in the
basement and the subsequent damages was caused by flooding conditions from the
driveway and road.  It was reported that this opinion was formed from the
homeowner’s uninformed statements and was not independently confirmed. 
This opinion was used to deny the claim for damages.
 
¶ 22.       The main point of
the adjuster’s report, with respect to water coming in from the driveway, was
that any damage from that water was not covered by the insurance policy. 
With respect to the claim that water was entering from the roof, the adjuster
went on the roof, examined around the rear chimney and determined that there
was no hole in the roof in which water could enter.  In his report, he
stated that an “inspection of the roof and chimney revealed no exterior damage
due to wind,” a covered risk, and his deposition testimony confirmed that
coverage was denied because “[t]here was no break in the roof.” 
   
¶ 23.       We view the
argument over the adjuster’s initial report as largely irrelevant to the
underlying controversy.  It is a considerable exaggeration to find an
inconsistency between the adjuster’s report and his deposition testimony. 
The report on water entry through the foundation is phrased in terms of the
claim by the homeowner rather than based on a finding by the adjuster.  As
the trial court found based on undisputed evidence, plaintiff admitted “no hole
could be seen unless the metal portion of the roof was removed” and “[p]laintiff stated that water infiltration was not due to a
hole in the roof but a problem with the chimney flashing that was revealed only
when the roof was later opened up.”   
¶ 24.       At best,
plaintiff might claim that the adjuster’s failure to find that the true cause
of the water infiltration was through the front chimney.  Such a claim
would fall well short of the knowing or reckless conduct required for a finding
of bad faith.  See, e.g., Chateau Chamberay
Homeowners, 108 Cal. Rptr. 2d at 787 (“Sloppy or
negligent claims handling does not rise to the level of bad faith.”); Erie
Ins. Co. v. Hickman, 622 N.E.2d 515, 520 (Ind. 1993) (observing that “the
lack of diligent investigation alone is not sufficient to support an award” for
bad faith); Sampson v. Am. Standard Ins. Co., 582 N.W.2d 146, 152 (Iowa
1998) (“In a first-party bad faith claim, an imperfect investigation, standing
alone, is not sufficient cause for recovery if the insurer in fact has an
objectively reasonable basis for denying the claim.” (quotation
omitted)); see generally 14 Couch on Insurance § 207:25 (noting that proof of
an “imperfect investigation” is not sufficient basis for bad-faith
recovery).  
¶ 25.       Plaintiff also
asserts that a finding of bad faith was supportable on the basis of Patriot’s
disagreement with its adjuster’s conclusion that water damage reported in
September 2007 was related to the July 2007 storm.  Plaintiff contends
that it was unreasonable for Patriot to base its conclusion solely on the
appearance of a water stain on the ceiling which was not discovered until that
September.  Plaintiff relies on the affidavit of an independent inspector
stating that it is not uncommon for visible signs of water damage to not appear
for several months after the infiltration.  The sole effect of Patriot’s
action was to require a second deductible for payments made in connection with
the water damage reported in September.  Patriot, however, decided to
waive the payment of a second $500 deductible for the September claim despite
its conclusion that the claims were unrelated, and plaintiff has not identified
any other tangible harm resulting from the alleged bad faith in this regard.
 Again, we view Patriot’s conduct as irrelevant to the underlying
controversy and not as grounds to find bad faith.
Affirmed. 

 


 


FOR THE COURT:


 


 


 


 


 


 


 


 


 


 


 


Associate
  Justice

 





[1]
 As the story unfolds, the real cause of plaintiff’s water infiltration is
long-term deterioration around both the rear and front chimney, and the
adjuster closely looked only at the rear chimney at the time of his original
inspection.  Apparently, he looked where he did because some of the water
damage was occurring right under the rear chimney.  In any event, the
record is often confusing because it often fails to distinguish between the
chimneys.  There is no indication that the adjuster intentionally ignored
plaintiff’s identification of her problem by looking at only the rear
chimney.  Nor has plaintiff made a claim on appeal that the adjuster acted
in bad faith by looking only at the rear chimney in the first visit.
 


[2]
 This came in two payments.  The first of $2,928 was exactly that
recommended by the adjuster in his initial report minus a deductible. The
second, of $625, was a supplementary payment.  


[3]
 Plaintiff has not pursued on appeal any claim that Patriot breached its
contractual obligation under the insurance contract by denying coverage. 
Thus, plaintiff is in the illogical position of claiming that Patriot “had no
reasonable basis to deny plaintiff’s claims” while foregoing any challenge on
the merits to any basis for Patriot’s coverage decisions.
 


[4]
 Neither party has addressed whether the good or bad faith of the
adjuster, who was not an employee of defendant, can be imputed to Patriot for
purposes of a bad faith claim.  We held in Hamill that “insureds
may seek redress for such injuries through . . . bad-faith actions against
their insurers.”  2005 VT 133, ¶ 14.  We
assume from that statement that Patriot would be liable for damages caused by
the bad faith of the adjuster even though Patriot did not act in bad faith
independently of the adjuster.


[5]
 In his deposition, the claims adjuster recounted his first visit to
plaintiff’s house: “we were talking about where that water had come from. 
And [plaintiff] told me it was from the road, that it
was from water coming down the driveway as a result of the failure of the town
to take care of the driveway.”  Plaintiff, in her deposition, stated that
the claims adjuster first suggested that the water came in through the
foundation. 



