When an insurer issues a policy, it assumes a duty not only to investigate and pay claims, but to do so in good faith. There is, however, a difference between that duty and the duty of due care that arises under tort law. The difference can be hard to discern, especially since many states recognize a tort of “bad faith” that can render insurers liable for extracontractual damages. But the difference is real. As the Supreme Court of Vermont recently demonstrated, in Murphy v. Patriot Insurance Company, No. 2013-235 (Vt. Aug. 14, 2014), an insurer may not act to prevent an insured from receiving the benefit of her policy, but, on the other hand, it has no obligation generally to protect the insured from suffering harm. In applying this rule, the court also suggested that the “economic loss doctrine” can be broadly applied to tort claims against insurers.
The Toxic Inspection
In July 2007, Ms. Murphy reported to her insurer that a storm had damaged the flashing on her roof, allowing water to enter the house. The insurer sent an adjuster, Ernest Smith, who found some problems on the roof, but reported that there was no damage to the flashing around the rear chimney. He did not consider that flashing might have been torn off entirely by the storm, and he did not inspect the chimney at the front of the house. Two months later, a chimney sweep discovered additional problems, apparently caused by water infiltration near the front chimney. An independent inspector found that flashing near both chimneys had failed, allowing water to produce structural damage, rot and mold. Ms. Murphy had to replace the front chimney, at a cost of $56,000. In a subsequent breach of contract action against the insurer, the court ruled that the policy unambiguously limited damages relating to rot and mold to $10,000, and that Ms. Murphy’s coverage for the “collapse” of a building part did not apply.
Ms. Murphy then filed an amended complaint, adding a claim that the insurer had been “negligent in investigating and processing [her] claim and in retaining adjusters to investigate her claim.” Ms. Murphy alleged that Mr. Smith’s failure to discover the sources of water infiltration during his inspection was the result of a failure to exercise due care. She further alleged that these failures had caused Ms. Murphy to suffer “significant health related problems,” because they allowed mold to develop in her home.
The Superior Court granted the insurer’s motion for summary judgment on this claim, and Ms. Murphy appealed.
One of the elements of a claim for negligence in Vermont is “the existence of a legally cognizable duty owed by the defendant to the plaintiff.” Powers v. Office of Child Support, 795 A.2d 1259, 1265 (2002). In Murphy, Vermont’s Supreme Court confirmed that this element requires “a duty independent of any contractual obligations” (emphasis in original). That rule was fatal to Ms. Murphy’s claim, because
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.
Because the insurer had no duty to inspect Ms. Murphy’s roof that was “independent” of the insurance contract, it had no separate, “legally cognizable duty” to exercise due care.
Ms. Murphy suggested that this rule essentially re-states the “economic loss doctrine,” which provides that damages for purely economic harm are recoverable only in actions sounding in contract, not in tort. She argued that her “health related problems” were not “economic losses” for purposes of that doctrine.
The Supreme Court rejected that argument, as well. It cited Hamill v. Pawtucket Mut. Ins. Co., 179 Vt. 250 (2005), a similar case involving an independent adjuster, in which the plaintiff alleged that the insurer’s conduct had delayed repairs to his home and thereby exacerbated the effects of water damage. In Hamill, the Supreme Court found 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.”
The court did not have to follow Hamill in : Ms. Murphy had arguably pleaded facts establishing that the adjuster’s failure to detect certain water damage had been a direct cause of her physical exposure to dangerous mold. But its ruling was unequivocal: “Under Hamill, all the damages plaintiff seeks are economic losses.”