Amendment to Sinkhole Statute Clarifies Coverage Litigation

As many are aware, the Tennessee Legislature recently amended T.C.A. § 56-7-130, the statute requiring insurance carriers offering homeowner’s insurance in the state to “make available” sinkhole coverage to their insureds. The original statute was enacted in 2006, and its verbiage has created a few issues now going through the court systems. I wanted to comment further on this amendment as it relates to coverage litigation specifically.

The original statute imposed the following requirement upon homeowner property insurers in the state:

(b) Every insurer offering homeowner property insurance in this state shall make available coverage for insurable sinkhole losses on any dwelling, including contents of personal property contained in the dwelling, to the extent provided in the policy to which the sinkhole coverage attaches.

Tenn. Code Ann. § 56-7-130. Some insureds took the position that the meaning of “make available” was that insurance companies had to affirmatively offer sinkhole coverage to their insureds, while insurance companies took the position the statute simply required them to have the coverage available for purchase if desired.


Many lawsuits were filed throughout the state over this specific issue with mixed results. Some trial courts granted summary judgment to insurers and determined insurance companies were not required to affirmatively offer the coverage to their insureds. Other courts found that a fact issue existed preventing the court’s ruling on the issue. Many of these cases are still pending – awaiting a ruling. 


Not only does the new verbiage of the statute resolve the “problem” but it clarifies that sinkhole coverage is optional and available upon request by the insured. The statute now makes it clear sinkhole coverage is not mandated to be included in homeowner property insurance policies - only that such coverage be available for optional purchase on request by policyholders. Importantly, the legislative history of this amendment reveals that the legislature did not intend to change the requirements that previously existed – merely to clarify what the requirements were. 

The new statute also adds several helpful definitions such as “building stabilization or foundation repairs”, “covered building”, “homeowner property insurance”, “land stabilization”, “primary structural member”, “primary structural system”, and “structural damage” helpful in interpreting the law. According to the new statute, “sinkhole loss” is further clarified to require coverage for “structural damage” and does not include land stabilization. Without “structural damage”, as defined by the statute, any other cracking, shrinking, and/or expansion damage would not be covered even if actually caused by a sinkhole unless otherwise covered under the terms of the policy.

The old statute seemed to required insurers to take certain investigative steps upon receipt of a sinkhole claim:

(d)        Upon receipt of a claim for a sinkhole loss, an insurer shall meet the following minimum standards in investigating a claim:

It was not clear whether an insured had to actually have the sinkhole coverage before insurance companies had to follow the required investigative procedures. Now it is clear - insurers are required to follow the statute’s specific investigation standards only if the insured’s policy contained the sinkhole coverage.

Under the standards, if sinkhole coverage is provided, upon a claim for sinkhole loss, the carrier must inspect the property. If structural damage possibly caused by sinkhole activity is present, before a sinkhole claim may be denied, written certification must still be obtained from an engineer or other qualified professional that sinkhole activity did not cause the observed structural damage.

If a loss is covered and determined to be the result of sinkhole activity, the statute speaks directly to how the claim is to be paid. The carriers, through the terms of their policies, may limit recovery to the Actual Cash Value of the loss, excluding the costs for building stabilization or foundation repair, until the insured actually enters a contract for such building stabilization or foundation repair. To receive payment in excess of the aforementioned Actual Cash Value:

·       The insured must actually repair the damage in accordance with a repair plan approved by the insurer; and

·       The policyholder is required to enter into a contract for foundation and building stabilization repairs within ninety (90) days after the insurer confirms coverage for the loss.

The carrier is required to pay the amounts necessary to begin the repairs and may not require the insured to advance payment for the necessary repairs. Such repairs are required to be completed within twelve (12) months unless there is mutual agreement; the matter is in litigation, appraisal or litigation; or circumstances beyond the control of the insured.

The new law takes effect July 1, 2014. It is a substantial improvement over the previous statute as it provides much needed clarity as to the requirements of insurers in making the coverage available as well as the specific steps required in the event of a covered sinkhole loss.

Sixth Circuit Rules that Insurer Need Not Disclose its Investigation Prior to an Examination Under Oath

The Sixth Circuit Court of Appeals (federal court system) has ruled that an insurance carrier need not provide an insured with any of its investigation prior to the taking of an examination under oath.  Many times, the insureds or their counsel, will request certain documentation from the file before the examination under oath is taken.  The Sixth Circuit has addressed these questions in the recent case of Lester v. Allstate Property and Casualty Insurance Company, Case No. 13-6070 (appealed from the United States District Court for the Eastern District of Tennessee at Knoxville)(download PDF here). 


In that case, Allstate demanded an examination Under Oath, and the insured responded by stating that she and her husband would submit to the examination only if Allstate first showed them its investigative file.  The 6th Circuit held that the insurance company is not required to turn over its files prior to taking an EUO, and the insured’s refusal to submit to the Examination without having the opportunity to review the claim file materials was a breach of the policy and warranted denial of the claim.  The seminal language appears at p.2-3 of the opinion:


The point of an examination is to allow insurance companies to sort out fraudulent claims from honest ones, exorbitant claims from accurate ones.  Telling the policyholder what the investigation has already uncovered undermines that purpose, as it would allow the policyholder to tailor her answers to the facts already discovered by the company. Suppose the insurance investigator suspects arson.  And suppose his investigation uncovered a potential source of the arson or disclosed that the policyholder had moved some items out of the house shortly before the fire.  That is useful information, particularly for a policyholder suspected of fraud.  Alerted to these suspicions, the policyholder could shape her answers accordingly.



This seems to me to be the most fair and equitable resolution.  It allows the carrier to gather the most competent, impartial and truthful information. 


Is Cosmetic Roof Damage a "Direct, Physical Loss?"

I recently represented the owner of a commercial property in a hail damage claim in which the metal roof was clearly dented by hail.  Remarkably, the insurance company denied the claim on the basis that the roof was still functional.  In the process of working with the opposing lawyer to obtain payment, I ran across a FC&S Bulletin that was dead on point:

Direct Physical Loss and Cosmetic Loss

Hail stones have created dents to a copper roof. The section of roofing is located over a second story bay window. It does not appear that the hail has compromised the life span of the roof's surface or otherwise affected or decreased its useful lifespan.

Our HO policy provides coverage for direct physical loss. If the roof's integrity was not compromised by the hail stone impact, has a physical loss occurred?

We believe that some carriers view this type of damage as cosmetic and do not provide coverage for replacement of the copper roof. Does FC & S have an opinion?  


Whether or not the dents are cosmetic or affect the roof structure, they are still direct physical loss. The policy doesn’t define damage so standard practice is to go to a desk reference. Merriam Webster Online defines damage as loss or harm resulting from injury to property, person, or reputation. The roof now has dents where it didn't before; that's direct damage. The policy doesn't exclude cosmetic damage, so direct damage, even if it is cosmetic, is covered. It's the same as if vandals had painted the side of the house purple. While cosmetic, it's damage, and is covered. The principle of indemnity is to restore the insured to what they had before the loss, and this insured had a roof with no dents.

This one was fairly obvious to me - - my client had a roof without hail dents before the storm and a roof with hail dents after the storm.  But the insurance company denied the claim anyway.  I shared this article with the opposing lawyer, and the case was resolved shortly thereafter.  I encourage all adjusters, as well as lawyers practicing insurance law, to subscribe to the FC&S Bulletins.  Their industry reference materials are often a great supplement to case law.  

Punitive Damages for Failure to Pay on an Insurance Policy?

The issue of whether punitive damages are available to an insured when an insurance company wrongfully denies a claim was recently addressed by the Tennessee Court of Appeals in Riad v. Erie Insurance Exchange.  Over the years, this issue has been confused by many state and federal courts in Tennessee, but the Riad court got it right.  In a nutshell, the Court of Appeals held that punitive damages can be available in breach of contract cases (even those involving insurance policies) under certain circumstances.  Those circumstances are limited to "the most egregious cases," and an award of punitive damages is appropriate only when there is clear and convincing proof that the defendant has acted intentionally, fraudulently, maliciously, or recklessly.  Rogers v. Louisville Land Co., 367 S.W.3d 196 (Tenn. 2012).

The Riad case is an important opinion in light of the general consensus of Tennessee courts that there is no common law tort of bad faith and the legislature's action in 2011 to remove the insurance industry from the purview of the Tennessee Consumer Protection Act.  Generally, it stands for the proposition that there are other methods of recovery for extra-contractual damages outside of the 25% statutory bad faith penalty provided for at T.C.A. 56-7-105.  Although the circumstances in which punitive damages are available in insurance disputes are clearly limited, this case makes clear that they are indeed available when the circumstance are right.  And when those circumstances exist, there is no need to allege bad faith.  All that is required is a breach of contract by the insurance company that was "intentional, fraudulent, malicious, or reckless."  



Commas and Sentence Structure are Important After All

The Tennessee Court of Appeals' recent decision in Artist Building Partners v. Auto Owners Mut. Ins. Co. serves as an important reminder in coverage disputes that any ambiguities will be strictly construed against the insurance company and in favor of coverage. Tennessee courts have made clear over and over again that any language in an insurance policy is ambiguous if it is susceptible of more than one reasonable interpretation. Going even further, our courts have held that if a disputed provision has more than one plausible meaning, the meaning favorable to the insured control. The Artist Building Partners case reaffirmed these long-standing principles, and I am not at all surprised at the Court's holding.

It was particularly nice to see the Court cite back to a 1996 Tennessee Supreme Court case that noted that "an insured should not have to consult a long line of case law or law review articles and treatises to determine the coverage he or she is purchasing under an insurance policy." The issue really boils down to one of reasonableness. Is the insured's interpretation reasonable and sensible? If so, the insured will (or at least should) win every single time.

What Constitutes a True "Coverage" Issue in Appraisal?

With the proliferation of appraisal demands, the ins and outs of appraisal in Tennessee will begin to take shape through the judiciary. In Artist Building Partners v. Auto-Owners Mut. Ins. Co., the Court of Appeals recently made clear that it will not disturb the binding nature of an appraisal award.

For a little history lesson, one of the key cases controlling insurance appraisals in Tennessee is the Merrimack Mut. Fire Ins. Co. v. Batts case, in which the Court of Appeals held that a policy giving an appraisal panel the authority to determine the "amount of the loss" does not vest the appraisers with the authority to decide questions of coverage and liability. The issue of what constitutes a true coverage question has been a gray and murky area for quite some time.

In the Artist Building Partners case, one of the issues to be decided by the appraisal panel was the "period of restoration," which the appraisal panel ultimately concluded should end approximately 2 and a half years after the loss. In reviewing that decision, the Court of Appeals noted with approval that it was appropriate for the appraisal panel to take into consideration the fact that the insurer did not pay the full amount owed prior to the appraisal award in calculating the period of restoration. The Court also seemed to give significant weight to the fact that the insurer placed restrictions on the insured's ability to alter the damaged building for a period of time due to the possibility of a subrogation claim. In the end, the court upheld the policy's language that the appraisal panel's findings would be binding, and seemingly granted them broad discretion in reaching a decision without digging too deep into the bases for the panel's decision.

This case is an important one because it shows that Tennessee courts are loathe to overturn an appraisal panel's findings. The parties bargained and had a contract to allow appraisal to make a binding decision, and courts will generally shy away from invalidating an award just because one of the parties is unhappy. In my opinion, the Court got it right here. There were no true "coverage" issues and the parties had essentially agreed to let the appraisal end the dispute.

Was Middle School Grammar Study a Waste of Time? Court of Appeals Finds 12 Month Business Income Limitation for Period of Restoration to be Ambiguous - Despite Expert Proof as to Sentence Diagramming

Long title, I know, but hopefully it sparked your interest, or perhaps dredged up painful memories of drawing those sentence diagram structures on wide ruled paper, wondering if you would ever use that skill in “real life.”  Well, see how you think it worked in the case of Artist Building Partners v. Auto-Owners Mutual Insurance Company, No.M2012-00915-COA-RM-CV (Tenn. Ct. App. Nov. 21, 2013) (Download here). This was an insurance case where the issue under consideration was the construction of a Business Income and Extra Expense limitation, which provided in part as follows:

            [w]e will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration and necessary Extra Expense you incur during the ‘period of restoration’ that occurs within 12 consecutive months after the date of the direct physical loss of or damage to property at the described premises, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss. 


The question presented was whether the 12 month limitation contained in the above policy provision applied both to the business income coverage and the extra expense coverage, or only to the extra expense coverage. Despite efforts by the insurer to argue that the 12 month limitation applied to both coverages (including the proffering of an expert witness from Vanderbilt University who had prepared a diagram of the sentence at issue and rendered an opinion as to its meaning), both the trial court and the Court of Appeals found that the language was, at the very least, ambiguous, since it was susceptible to more than one reasonable interpretation.


The Court of Appeals acknowledged the contrary opinion of the “learned professor” but opined that “an insured should not have to resort to retaining an ‘expert in sentence diagraming’ in order to properly interpret his or her insurance policy.” Because the policy language was susceptible of this reasonable interpretation from the standpoint of the insured, the 12 month limitation did not apply to the business income claim.  


I’ll bet most of us were thankful that we stopped diagraming sentences in high school – but maybe we need to get those grammar books back out! 

Man-Made Earth Movement Excluded by Earth Movement Exclusion


One of my partners won a Court of Appeals decision earlier this week wherein the court construed an earth movement exclusion in a factual scenario not previously presented. The case is Hearn v. Erie Insurance Exchange, No. M2012-00698-COA-R3-CV. Download a copy here


The language at issue in the policy provided that the company would not pay for loss directly or indirectly resulting from “earth movement due to natural or manmade events….” The Court of Appeals found no ambiguity in the language of this exclusion, and held that blasting damage, including damage because of vibration coursing through the ground, was manmade earth movement within the meaning of the exclusion. The Court concluded, as a matter of law, that cracks in the plaintiff’s home which were caused by shockwaves or vibrations triggered by blasting were excluded under the policy. 


This decision was somewhat dependent upon the language used in the exclusion, so check your policy language as you assess the impact of this case.

Is Prejudice Required to Avoid Recovery for Failure to Submit to an Examination Under Oath?

 Back in 2009, Parks wrote about the Spears v. TFMIC case and correctly cited it for the proposition that an insured must submit to an examination under oath upon request, and that a failure to do so can bar recovery on an insurance claim.  Notably absent from the Spears opinion was any requirement of prejudice in order to avoid payment.  However, the Spears opinion is muddied a bit by a prior decision from the Sixth Circuit Court of Appeals in Talley v. State Farm Fire & Cas. Co., 223 F.3d 323 (6th Cir. 2000), in which the court held that an insurance company must prove prejudice in order to preclude recovery.

So what's the rule?  Must an insurance company show prejudice to avoid payment of a claim on the basis of a refusal to submit to an EUO?  In 2012, we almost got an answer to that very question in Farmers Mutual v. Atkins, 2012 Tenn. App. LEXIS 184 (Tenn. Ct. App. 2012).  In that case, Judge Stafford noted the potential conflict between Spears and Talley, and seemed primed to rule on this murky issue.  But unfortunately the ruling wasn't meant to be.  In short, the trial court apparently just noted the divergence of opinion on the issue and then granted an interlocutory appeal without ever ruling at all.  Thus, the matter was not ripe for consideration by the Court of Appeals and was remanded.  

This particular topic isn't particularly exciting, but nonetheless should be considered by both insurers and insureds when claims are denied for failure to submit to an EUO.  Depending on how this issue is ultimately decided, an insured's failure to show up just might not put the proverbial "nail in the coffin" of the insured.

Another Take on the U.S. Bank Case


Far from being “ho hum” as my colleague writes, the case of U. S. Bank, N.A. as servicer for the Tennessee Housing Development Agency v. Tennessee Farmers Mutual Insurance Company, No. W2012-00053-COA-R3-CV, filed November 29, 2012, the did establish some important points of law - but from the insurer's perspective, in limiting bad faith and TCPA recovery.  The Court of Appeals was presented with appellate review of a trial court finding imposing bad faith and Consumer Protection Act damages upon Tennessee Farmers Mutual Insurance Company for failing to pay a mortgagee. The case actually arose from a Supreme Court ruling in U. S. Bank, N.A. v Tennessee Farmers Mutual Insurance Company, 277 S.W. 3d 381 (Tenn. 2009), where the Tennessee Supreme Court held that the mere institution of foreclosure proceedings did not constitute and increase in hazard sufficient to allow an insurance company to avoid payment of a mortgagee under a standard mortgage clause. Upon remand, the trial court was presented with the issues of whether the interpretation advanced by Tennessee Farmers constituted bad faith and the violation of the Tennessee Consumer Protection Act. The trial court entered judgment under both bases, awarding the bank a judgment for the amount due on the mortgage plus accrued interest, but also attorney’s fees and costs based upon a finding that Tennessee Farmers’ interpretation of the policy amounted to bad faith and an unfair act or practice under the Tennessee Consumer Protection Act. The Court of Appeals reversed. 

From a defense perspective, the significance of this holding lies in the fact that the issue was one of first impression, and the Court of Appeals noted as follows:


              We respectfully disagree with the trial court’s conclusion that Tennessee Farmers’ interpretation of the policy throughout the litigation amounted to bad faith and an unfair act or practice under the TCPA. As noted by the Supreme Court, the issue of whether, under a standard mortgage clause in a fire insurance policy, the Bank’s commencement of foreclosure proceedings amounted to an increase in hazard requiring notification to Tennessee Farmers involved ‘a matter of first impression.’…The Supreme Court further noted that ‘no Tennessee case has squarely addressed the precise issue presented….’ Moreover, prior to the Supreme Court’s opinion, this Court agreed with Tennessee Farmers’ interpretation of the policy. Clearly, reasonable minds disagreed over the precise issue which the trial court claimed to be well-settled. In fact, had the Supreme Court agreed with the position taken by this Court, there would be no basis for the trial court’s reasoning that Tennessee Farmers’ interpretation was unreasonable and inconsistent with well-settled law. 


Three cheers for the Court of Appeals! On an issue of first impression, even where law exists on both sides of the issue from other jurisdictions, it seems to this writer that a judgment of bad faith or violation of the Consumer Protection Act should not be warranted. This case may be appealed even further, and we will see if the Supreme Court takes further action, but for now, it seems that justice has been done. 


But, Brandon contends that the Court of Appeals implicitly recognized a common law bad faith cause of action. I disagree. Brandon noted that it seemed a “rather odd opinion for such a big issue.” Indeed, creating or recognizing a cause of action which has not been recognized in Tennessee law would seem to be more noteworthy. But here’s why I do not think the Court of Appeals implicitly sanctioned the cause of action.  First, the Court of Appeals did not really address it. Second, what they did address were the facts which formed the basis of the trial court’s findings on BOTH a bad faith action and the TCPA. 


The Court of Appeals simply confirmed that, under neither theory, the same set of facts did not create liability. The cause of action for common law bad faith failure to pay has never been entrenched in Tennessee law, as evidenced by the fact that the trial court did not cite to any Tennessee case law supporting such cause of action. It would have been nice had the Court of Appeals indicated such a cause of action did not exist, but to make the leap that, under these facts, the Court of Appeals impliedly authorized such action seems, to use Brandon’s phrase in good natured banter, “rather odd.”