What Role Does an Insurer’s “Preferred Contractor Program” Play in a Bad Faith Lawsuit?

When a homeowner reports a residential property damage claim to the insurance company, the carrier might recommend a company that can conduct the repairs. Many insurance companies have a “preferred contractor program” also sometimes referred to as a “quality vendor program.” The program typically consists of a list or database of “vendors” such as engineers, roofers, plumbers, general contractors, and electricians that the insurer recommends to policyholders. The particular relationship between the insurance company and the vendor can play a significant role in a bad faith lawsuit. I would like to begin with a Nebraska case that addresses the “how” and the “why."

The Supreme Court of Nebraska evaluated this very issue in Williams v. Allstate Indemnity Company, 699 N.W. 2d 455 (Neb. 2003). In that case, the homeowner, Esther Williams, filed a residential fire claim with her insurance company, Allstate Indemnity Company. Allstate recommended a general contractor called PDS.

PDS is a preferred provider in the Allstate qualified vendor program. Preferred providers apply with Allstate for the designation, and Allstate performs a background check of the vendor. Under the program, Allstate will recommend PDS as a contractor and PDS will warrant its work. Allstate also guarantees the work of the contractors in the program. If a preferred provider fails to perform a quality job, it is removed from the program.

The Nebraska Supreme Court’s analysis reflects that vendors like PDS work closely with the insurance company before the contract with the homeowner is executed. After the contract is signed, then the vendor usually works more closely and directly with the homeowner throughout the process of repairing the home.

From the beginning, Williams and PDS had multiple disagreements regarding the manner in which the repairs were to be done. The decision goes into great detail regarding the problems that arose between Williams and PDS. Ultimately, Williams filed suit against Allstate for bad faith and breach of contract. The district court overruled Allstate’s motion for a directed verdict on the breach of contract claim, but granted the motion on the bad faith claim. The court held that bad faith must be intentional, and that Williams did not show an absence of a reasonable basis for Allstate to deny benefits under the policy. Williams moved for a new trial, arguing that PDS was an agent of Allstate and that the trial court erred when it dismissed the bad faith cause of action.

The Nebraska Supreme Court began its analysis with the following principle:

To establish a claim for bad faith, a plaintiff must show an absence of a reasonable basis for denying the benefits of the insurance policy and the insurer’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.

The opinion enumerates the various claims asserted by Williams and the reasoning upon which the Court’s ruling was based for each. One of Williams’ allegations was as follows:

…PDS was an employee or agent of Allstate who acted in bad faith and that Allstate is liable for PDS’ actions.

At issue was whether PDS was an employee of Allstate or whether PDS was an independent contractor, in other words, whether there was a “master and servant” relationship between Allstate and PDS. The various factors evaluated by the Nebraska Supreme Court included the following: the extent of control which, by the agreement, the employer may exercise over the details of the work; the type of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision; and whether the work is part of the regular business of the employer.

In Williams, the Nebraska Supreme Court determined that Allstate did not exercise control over how PDS performed its work.

PDS is a distinct business that is not controlled by Allstate. Obviously, PDS, a building contractor, uses different skills and know-how than does Allstate, an indemnity company. Nothing in the records indicates that Allstate supplied PDS with equipment or tools. PDS was hired by Williams, not by Allstate, and was not paid directly by Allstate. Although PDS was part of Allstate’s qualified vendor program, an insured is not required to select a contractor from the program, and nothing in the record indicates that the program was intended to create an agency relationship.

Based on the analysis above, the Court ruled that there was no master and servant relationship between Allstate and PDS. Since PDS was not an employee or agent of Allstate as a matter of law,  the Court concluded that it did not need to address whether PDS’ actions were in bad faith. Accordingly, the Nebraska Supreme Court ruled that Williams failed to show that Allstate lacked a reasonable basis for its actions.

Please check in with my blog next week for another bad faith discussion.