FEDERAL JUDGE HOLDS ATTORNEY WHO ENGAGES IN CLAIM HANDLING CAN BE SUED UNDER INSURANCE CODE

Last Thursday, a federal magistrate judge in Houston declined to dismiss a Texas law firm from a bad faith lawsuit.  In DODD v. CHUBB NATIONAL INSURANCE COMPANY, No. 4:21-CV-03671, 2022 WL 1185175 (S.D. Tex. Apr. 21, 2022), Chubb retained a law firm to assist with its evaluation of an underinsured motorist claim.  Dodd sued Chubb and the law firm for Insurance Code violations.  Chubb argued the law firm was improperly joined because it was not a “engaged in the business of insurance” and because attorneys are exempt from being classified as adjusters subject to the Insurance Code. 

Chubb and the law firm presented affidavits describing the role the attorneys played in the pre-suit claim handling, but the affidavits were disputed and objected to.  Although authorized to pierce the pleadings and conduct a summary-judgment type analysis, the hotly disputed affidavits   did not establish the kind of “discrete and undisputed facts” that would allow that analysis.

The court went on to conclude the insured’s pleadings facially established a claim that the law firm had issued letters misrepresenting the policy terms by quoting from a different policy form that contained terms which were not actually a part of Dodd’s policy. The pleadings alleged the law firm had investigated and evaluated Dodd’s claim, reviewed his medical records, and misstated the policy terms to him.  Accepted all well-pleaded allegations as true under the required federal standard, the court concluded this was at least a potentially viable claim, noting that possession of a law license does not categorically exempt conduct that would otherwise fall in the purview of “engaging in the business of insurance.”

The magistrate judge simply could not say with certainty that Dodd had no reasonable possibility of recovering against the law firm, and felt duty-bound to recommend the case be remanded to state court.

Editor’s note: The opinion made clear Magistrate Judge Edison’s views on the actual merits of the Insurance Code claims against the law firm or their chance of success, which he plainly thought were low. But not so low that he felt able to dismiss the law firm as an improperly joined defendant. This holding thus presents a cautionary tale for attorneys who assist their insurer clients with pre-suit claim handling. Without taking care to ensure you avoid accidentally becoming a claim handler, you could be the non-diverse defendant in your client’s next bad faith suit.  The moral of the story: Provide your client with legal advice, but render unto Caesar the things that are Caesar’s, and leave the claim handling to licensed adjusters!