A federal court ruled adjusters cannot override policy exclusions with on-site promises, even when homeowners make costly repairs based on those coverage assurances.
The February 12 decision from the Fifth Circuit Court of Appeals tackles a scenario familiar to many claims professionals: what happens when an adjuster's statements in the field appear to conflict with what the policy actually says.
The trouble started in May 2022 when Shirley and Ronald Cooper returned to their Madison, Mississippi home after choir practice to find raw sewage flowing up through their shower and tub drains, flooding two bedrooms, three bathrooms, the kitchen, laundry room, pantry, hallways and garage. They called a plumber, hired a restoration company, and phoned State Farm to file a claim.
The Coopers' homeowners policy covered physical loss to their property but excluded damage from water or sewage from outside the residence premises plumbing system that enters through sewers or drains. They had also purchased a Back-Up of Sewer or Drain endorsement that would pay for off-premises sewage damage, but only up to five percent of their dwelling coverage.
On May 9, State Farm sent field adjuster Adam Dilley to investigate. What happened during his walkthrough became the crux of the lawsuit. Everyone agreed Dilley told the Coopers a certain closet would not need replacement but that the kitchen's custom cabinets had to come out.
The Coopers and their contractor said Dilley went further, walking from room to room identifying which repairs would be approved, telling them State Farm would replace their cabinets, and never mentioning coverage limitations. Shirley Cooper testified they were told several times that coverage would apply because the pipe cracked on their premises. Dilley remembered things differently, describing his comments as just pointing out what was damaged and what probably should not stay in the house.
The Coopers followed Dilley's instructions and made expensive repairs, including replacing custom kitchen cabinets.
Nine days after Dilley's visit, State Farm sent a plumber to inspect the system. He concluded the sewage came from the city's main sewer line, not from the Coopers' property. State Farm paid under the limited backup endorsement. But another adjuster, Brian Lindsay, later called to say the policy would provide full coverage because a burst pipe was on their property. Hours later, Lindsay reversed course, saying coverage would not be approved. A formal denial letter followed.
The Coopers sued, arguing Dilley had apparent authority to make coverage decisions and that State Farm should be estopped from denying coverage after they relied on his statements. State Farm countered that the policy exclusion was unambiguous and the sewage came from outside the residence premises.
In a split decision, the Fifth Circuit sided with State Farm. The majority focused on a key principle under Mississippi law: policyholders cannot reasonably rely on agent statements that contradict clear policy language. The court noted insureds have a duty to read their policies and are charged with knowledge of the contents, whether they actually read them or not.
Even if Dilley told them coverage applied because a pipe cracked on their premises, the court said that misstated what the exclusion required. The exclusion turned on the source of the sewage, not the location of the pipe failure. Under Mississippi law, those statements could not modify an unambiguous insurance contract.
One judge dissented, arguing the Coopers should have been allowed to present their case to a jury. The dissent focused on timing: State Farm sent Dilley to make coverage decisions on May 9 but did not investigate the sewage source until May 18. Since it is the insurer's burden to prove an exclusion applies, the dissent argued Dilley could not have carried that burden when he did not know the sewage source. The dissent also noted that Dilley had apparent authority, having been formally assigned by State Farm and sent to the home after reviewing the policy.
For insurers, the ruling provides protection when field adjusters make statements during initial investigations that later turn out to be incorrect. As long as policy exclusions are clear, verbal assurances will not override them.
But the vigorous dissent highlights the risks, particularly around timing and what adjusters know when making coverage representations. The case serves as a reminder of the delicate position adjusters occupy: they need to assess damage and guide insureds through claims, but must be careful about definitive coverage statements before completing investigations. State Farm's mixed signals, with one adjuster approving repairs and another reversing coverage decisions hours apart, did not help its case in the court of public opinion, even if it prevailed legally.
