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By Shannon M. O'Malley and Tyler McGuire
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In Falcon v. State Farm Lloyds,[1] the Western District of Texas reminded litigants that licensed public adjusters are not immune from expert witness qualification requirements. Namely, a public adjuster’s license does not automatically qualify the public adjuster as an expert on insurance bad faith.

The Falcon Facts

In September 2011, a wildfire ravaged Bastrop County, causing the authorities to evacuate local residents. Andrew and Donna Falcon owned a home in that area of the Hill Country and were forced to leave their home. The Falcons promptly notified their insurer, State Farm, that their home may have been damaged by the wildfire. State Farm then issued the Falcons a $5,000 advance to pay for expenses to relocate during the emergency.

After the wildfire was contained, State Farm’s catastrophic claims adjuster visited the residence. The adjuster found the house still standing with only minor damage to the deck and trees in the home’s yard. State Farm’s adjuster estimated the tree damage and deck remediation costs to be $16,643. State Farm therefore deducted the prior $5,000 payment and issued a check for $11,643. State Farm thereafter issued two other checks in the amounts of $1,505 and $2,037 to cover alternative living, evacuation and cleaning expenses.

After receiving payment, the Falcons contacted State Farm and sought coverage for smoke damage to the home. The Falcons submitted an estimate from Service Master to clean the residence in the amount $8,103.75. State Farm told the Falcons that its prior payments covered this expense, and that it was the Falcons’ responsibility to pay Service Master directly. The Falcons disagreed and hired Stephen Hadhazi, a public adjuster, to assist in adjusting their claim with State Farm. Hadhazi independently investigated the damage to the Falcons’ home and determined that State Farm owed $112,766.59 to remediate the entire property.

When State Farm disputed Hadhazi’s estimate, the Falcons filed suit against State Farm on May 7, 2012. The Falcons brought six claims arising from State Farm’s alleged failure to properly investigate the home’s damage, including breach of State Farm’s duty of good faith and fair dealing (the “bad-faith claim”). To support the bad-faith claim, the Falcons identified their public adjuster, Hadhazi, as their expert witness on bad faith.

State Farm’s Motion to Strike the Public Adjuster as a Bad-Faith Expert

State Farm moved to strike Hadhazi’s testimony as an expert on bad faith. First, State Farm argued that Hadhazi’s bad-faith testimony was based “on nothing more than the fact that Hadhazi’s estimate differed from State Farm’s.”[2] Second, Hadhazi did not review State Farm’s claim file, Service Master’s estimate for remediation, or any fact witness depositions from State Farm agents and the Falcons. Third, State Farm claimed that Hadhazi was not an expert on bad faith because Hadhazi could not even “properly define what constitutes good or bad faith."[3]

Although the court acknowledged that public adjuster licensing qualifies an individual to assess and adjust damages or values for structural or personal property, the court refused to find the license was definitive evidence regarding Hadhazi’s bad-faith expertise. Instead, the court exercised its authority as a “gatekeeper” by analyzing Hadhazi’s expertise to proffer opinions concerning State Farm’s bad-faith liability. Specifically, the court assessed whether Hadhazi’s testimony was: (1) sufficiently reliable and relevant to the issue before the jury, and (2) helpful for the trier of fact to understand the evidence or to determine a fact in issue.[4]

Hadhazi’s testimony was not reliable because there was no independent analysis of all facts available to State Farm to determine if the insurer’s actions were reasonable. Being an expert on bad faith requires more than knowledge of the industry or the existence of a coverage dispute. Hadhazi’s report was filled with conclusory and vague language with no factual or legal basis.

Hadhazi never: (1) spoke with anyone at State Farm, (2) reviewed State Farm’s claim file, (3) examined any depositions, or (4) reviewed Service Master’s cleaning estimate. Without any knowledge of these items, Hadhazi had no basis to evaluate any facts known to State Farm and argue that the insurer acted in bad faith by improperly ignoring those facts.

In addition to being unreliable, Hadhazi’s testimony was “irrelevant and not helpful.”[5] Citing to Hadhazi’s deposition testimony, the court noted that Hadhazi’s failure to “coherently define good or bad faith is troubling.”[6] In fact, Hadhazi attempted to elaborate on the concept of bad faith by reading the term’s definition from the Texas Insurance Code. The court reasoned that this limited understanding prohibited Hadhazi from qualifying as an expert on bad faith because the jury “is just as competent to read a statutory definition as Hadhazi is.”[7]

The crux of Falcon is that an individual’s certification as a public adjuster does not automatically qualify the public adjuster as an expert on an insurer’s bad faith. If the public adjuster cannot explain what constitutes bad faith, or has no familiarity with the insurer’s claim file, the public adjuster cannot testify that an insurer acted in bad faith. While licensed public adjusters are qualified to assess damages and values of structural and personal property, the criteria to testify as an expert on bad faith is an independent analysis.

What Makes a Bad-Faith Expert in Texas?

Falcon’s rationale is harmonious with requirements for bad-faith and expert testimony in general under Texas law. A bad-faith claim does not arise merely because the parties have a bona fide dispute concerning the insurer’s liability or the amount of loss.[8] To successfully bring a bad-faith claim, the insured must show that the insurer, under the facts available to the insurer at the time of action: (1) had no reasonable basis for denying payment of policy benefits, and (2) knew or should have known that there was no reasonable basis for denying payment.[9]

Arguably, these elements do not require an expert’s analysis to explain to a jury. Regardless, under the Texas Rules of Evidence, any expert testimony must be helpful to the jury regarding a relevant issue, based upon sufficient facts or data, and incorporated from reliable principles and methods.[10]

Consequently, simply providing a conflicting estimate or report does not qualify a person as an expert on bad faith. This is because all bad-faith allegations hinge on the reasonableness of the insurer’s conduct, not the presence of a coverage dispute.[11]

Based on the Falcon court’s analysis, a public adjuster cannot assess an insurer’s reasonableness without knowledge of the insurer’s investigation, including whether the insurer performed too few tests or drew conclusions from insufficient information, and an understanding of the insurer’s duty of good faith and fair dealing that extends beyond simply reading the Texas Insurance Code. Without a credible basis indicating that an insurer did not conduct an adequate or objective claim investigation, a public adjuster cannot testify as an expert on bad faith. Any testimony that the public adjuster could offer on bad faith would be based on insufficient facts or data and not helpful to the jury.[12]

Of course, Falcon’s holding does not imply that public adjusters may not offer expert testimony on bad faith under any circumstance. Rather, for any individual seeking to testify as an expert on bad faith, the witness must have the ability to articulate what good or bad faith looks like.

In addition to having expert knowledge concerning the insurance industry and expectations, a bad-faith expert witness must be knowledgeable about an insurer’s specific investigation in order to testify as to whether the insurer acted unreasonably and in bad faith. These requirements align with the U.S. Supreme Court’s view that trial court judges must act as “gatekeepers,” ensuring that expert testimony is helpful for the trier of fact on relevant issues.[13] If unable to comply with these requirements, the gatekeeper must keep a licensed public adjuster off the stand.

—By Shannon O'Malley and Tyler McGuire, Zelle Hofmann Voelbel & Mason LLP

Shannon O'Malley is a partner in Zelle Hofmann's Dallas office. Tyler McGuire is a summer law clerk in the Dallas office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Falcon v. State Farm Lloyds, 1:12-CV-491-DAE, 2014 WL 2711849 (W.D. Tex. June 16, 2014).

[2] Id. at *24.

[3] Id.

[4] Falcon, 2014 WL 2711849 at *5.

[5] Id. at *25.

[6] Id.

[7] Id.

[8] Allstate Texas Lloyds v. Mason, 123 S.W.3d 690, 704 (Tex. App. — Fort Worth 2003, no pet.)

[9] Lyons v. Millers Cas. Ins. Co. of Texas, 866 S.W.2d 597, 599 (Tex. 1993).

[10] Tex. R. Evid. 702.

[11] Universe Life Ins. Co. v. Giles, 950 S.W.2d 48, 55 (Tex. 1997).

[12] See e.g. Daubert v. Merrell Dow Pharmaceuticals Inc., 509 U.S. 579, 590 (1993) (stating that expert testimony that does not relate to an issue in the case is excludable because it is not relevant or helpful).

[13] Kumho Tire Co. Ltd v. Carmichael, 526 U.S. 137 (1999).