Insurance Adjusters Face Personal Liability For Statutory Bad Faith In Texas

Insurance adjusters may find themselves as defendants in more insurance bad faith litigation after the Fifth Circuit Court of Appeals decision in Gasch v. Hartford Acc. & Indem. Co., 491 F.3d 278 (5th Cir. 2007), which held that federal courts had no diversity jurisdiction over an insurance bad faith action against an out-of-state insurer and an in-state adjuster because the adjuster was "a person in the business of insurance" and so could be liable under Texas Insurance Code art. 21.21 (now Sec. 541).  Federal diversity jurisdiction is destroyed when one defendant is a citizen of the same state as the plaintiff.  Therefore, although the lower court had dismissed the bad faith claims against both defendants as groundless, which the Fifth Circuit doesn't contest, the case was remanded to the lower court so it could dismiss the action, after which it would continue in state court.  This is not good news for adjusters.

In 1994, the Texas Supreme Court appeared to exonerate adjusters from bad-faith liability in Natividad v. Alexsis, Inc., 875 S.W.2d 695 (Tex. 1994), holding that adjusters under contract with insurers could not be held liable for common law bad faith because they were not parties to the contract between he insured and insurer.  However, since that time policyholders have gained more success pursuing both insurers and adjusters for mishandling claims under Texas' consumer protection statute in Art. 21.21 of the Insurance Code.  Under the statute, a party need not be in contractual privity with the insured to be liable.  It is enough if the party is engaged in "the business of insurance," which the Insurance Code explicitly defines to include investigating or adjusting claims (Sec. 101.501).

The Gasch court refused to apply the reasoning the the Natividad case and found that an adjuster can be liable for unfair claims settlement practices under Art. 21.21.  Because plaintiffs usually prefer to bring insurance lawsuits in state court, we can expect more lawsuits joining in-state defendants, especially local adjusters, to prevent insurers from removing state court actions to federal court.