No Good Deed by an Insurer Goes Unpunished

Recommendation of Contractor by Insurer not Employment of Contractor

I’ve been involved in insurance claims for more than 51 years and it is invariable that even when an insurer does everything required of it by a policy of insurance the person insured is seldom totally pleased, the person insured wants more than the policy promises, and will often sue to profit from a property loss.

In Barbara C. Lyon, Individually and as Trustee of the Donald F. and Barbara C. Lyon Revocable Living Trust v. Service Team of Professionals (Eastern Carolina), LLC d/b/a 24/restore and United Services Automobile Association v. Service Team of Professionals (Eastern Carolina), LLC d/b/a 24/store, Third Party Plaintiff, v. Coastal Restoration Service, Inc. d/b/a Servpro of Pitt/Greene & Craven/Pamlico Counties, No. Coa18-627, Court of Appeals of North Carolina (April 16, 2019) Barbara C. Lyon (“plaintiff”) was unsatisfied with a claim adjustment, sued, and then appealed from an order granting summary judgment in favor of United Services Automobile Association (“defendant USAA” or “USAA”) on all of plaintiff’s claims against USAA.


The Trust owned a house in Arapahoe that plaintiff and her family used as a second home (“the house”). Plaintiff’s husband and their daughter discovered a water leak that caused extensive water damage and mold growth in the house. Ms. Stone contacted USAA, the insurer of the property, to report the leak and resulting damage.

Plaintiff elected to participate in USAA’s Property Direct Repair Program (“PDRP”) to restore the house. When an insured participates in PDRP, USAA recommends a contractor to assist with repairs. The insured is under no obligation to hire the recommended contractor, and may hire a contractor of their own choosing instead. If the insured selects the recommended contractor, USAA reviews and approves that contractor’s estimate, and then mails a check to the contractor as the claims payment. Significantly, this check requires the insured’s endorsement to release the funds to the contractor, and the insured is not required to endorse the check until the work is completed to his or her satisfaction.

Ms. Stone contacted USAA in December 2013 and January 2014, expressing concerns with 24/Restore’s workmanship and the payments plaintiff made to 24/Restore. USAA agreed to assist with disputes related to the covered repairs. On 20 February 2014, USAA spoke with plaintiff and Ms. Stone, who told USAA they no longer wanted to work with 24/Restore. An independent adjuster inspected the house and determined 24/Restore should reimburse plaintiff $8,446.71 for work that was either incomplete or incorrect.

Ms. Stone asked Pamlico Home Builders & Supplies, Inc. (“Pamlico Home Builders”) to prepare an estimate for the repairs and upgrades to the house that 24/Restore was unable to complete to plaintiff’s satisfaction. She submitted the Pamlico Home Builders’ estimate, for $13,377.81, to USAA. However USAA told Ms. Stone that it could not proceed with Pamlico Home Builders’ estimate because it was not itemized. USAA explained it needed an itemized estimate to enable it to determine whether it owed additional funds for Pamlico Home Builders’ work. Ms. Stone never submitted an itemized version of the estimate, or the final invoice from Pamlico Home Builders, to USAA, even though she knew USAA needed this information to process the claim.

Plaintiff sued seeking from USAA damages for (1) breach of contract, (2) bad faith, (3) unfair claims settlement practices and (4) negligent hiring.

USAA moved for summary judgment on all four of plaintiff’s claims. The trial court granted summary judgment in USAA’s favor on all of plaintiff’s claims.


First, plaintiff contends USAA failed to meet its obligations under the dwelling coverage because: (1) USAA did not pay for Pamlico Home Builders’ work, (2) USAA did not compensate plaintiff for the subsequently discovered mold contamination and remediation, and (3) USAA failed to compensate for work 24/Restore erroneously labeled as an “upgrade” instead of a “repair.”

The Court of Appeals concluded that USAA did not violate the terms of the policy by failing to pay Pamlico Home Builders’ quote. Plaintiff never provided information needed. This inaction is in clear violation of the policy, which provides that USAA does not have a duty to cover a loss when a policyholder fails to comply with the material conditions to  cooperate in an investigation of a claim, prepare an inventory of damaged personal property, and  show the property and provide records and documents as long as USAA reasonably required it of the insured.

Personal Property Coverage

Plaintiff argued USAA denied plaintiff the opportunity to personally inventory, inspect, attempt to salvage, or discard the property because 24/Restore assumed possession and control of the personal property. However the policy excludes coverage for “faulty, inadequate, or defective . . . [d]esign, specifications, workmanship, repair, construction, renovation, remodeling, grading, [or] compaction[.]” Thus, because this allegation is based on 24/Restore’s actions, this argument is without merit as a matter of law.

Alternative Living Expenses

Finally Plaintiff argues that whether she is entitled to payment for alternative living expenses is a triable issue of fact because it is undisputed that USAA never tendered payment under this provision of the policy.  Although USAA’s claims logs show plaintiff inquired about this provision, plaintiff never submitted a claim for, or produced documentation to support, reimbursement for alternative living expenses. Because USAA is not required to make payments when a plaintiff fails to submit a claim for reimbursement, this argument is without merit.

Bad Faith

In order to recover punitive damages for the tort of an insurance company’s bad faith refusal to settle, the plaintiff must prove (1) a refusal to pay after recognition of a valid claim, (2) bad faith, and (3) aggravating or outrageous conduct.

Because plaintiff cannot demonstrate an issue of material fact that USAA refused to pay after recognition of a valid claim, plaintiff cannot recover punitive damages for the tort of an insurance company’s bad faith refusal to settle as a matter of law.

Unfair and Deceptive Trade Practices

Plaintiff also argues the trial court erred by granting summary judgment on her claim for unfair and deceptive trade practices. To prevail on a claim for unfair and deceptive trade practices, a claimant must demonstrate the existence of three factors: (1) an unfair or deceptive act or practice, or unfair method of competition, (2) in or affecting commerce, and (3) which proximately caused actual injury to the plaintiff or his business.

At the outset, there is no evidence that the payments made by USAA were not fair and equitable, including USAA’s failure to pay Pamlico Home Builders and costs related to the second mold remediation, as discussed supra with regard to plaintiff’s breach of contract claim.

Negligent Hiring

Plaintiff cannot proceed on this claim because USAA did not employ 24/Restore. USAA only recommended the business as a “preferred contractor.” As the work authorizations for the repairs explicitly show, the decision to hire both 24/Restore and Servpro belonged to plaintiff. Thus, USAA did not hire 24/Restore as an independent contractor or otherwise, and summary judgment was proper on this claim.

The trial court’s order granting summary judgment in USAA’s favor on all of plaintiff’s causes of action was affirmed.


Plaintiff failed to recognize that when seeking the benefits of a first party property policy the insured is obligated to prove a loss to the insurer. Failure to do so excuses the insurer from further action. USAA required production of evidence with regard to many of the claims made by the Plaintiff (a condition precedent) and she refused or just failed to comply. The suit against the insurer was spurious and impossible to sustain. USAA did what was required of it only to be punished with a suit with no basis in fact or law.

© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Time to Rescind the Tort of Bad Faith

Insurance and the Law of Unintended Consequences Paperback 

Insurance is, and always will be, a business of the utmost good faith. Time to Rescind the Tort of Bad Faith: Insurance and the Law of Unintended ConsequencesAll parties to the insurance contract agree, in good faith and fair dealing, to do nothing to deprive the other the benefits of the contract. Insurance is, and always be, nothing more than a contract.

The insurer makes a promise to the insured that if a contingent or unknown loss occurs caused by a peril or risk insured against and not excluded, to pay the insured indemnity as promised by the contract up to the limits provided.

The insured promises to truthfully disclose the risks of loss faced by the insured, property owned by the insured, the business of the insured and/or the insured’s liability exposures. The insured also promises to honestly present a claim, prove the claim, and cooperate with the insurer in its investigation. If the parties to the insurance contract deal with each other fairly and in good faith the policy remains viable, claims are paid promptly and to the satisfaction of the insurer and the insured.

Only if a true tort occurs can the insured waive the contract action and sue in tort. Breach of contract, by centuries old tradition, is not a tort and cannot and should not be considered a tort. The Tort of Bad Faith has served its purpose and is now causing more problems than it solves. It is time the courts and state legislatures rescind the tort and return to common law contract damages.


About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
This entry was posted in Zalma on Insurance. Bookmark the permalink.