Tennessee Insurance Litigation Blog

Tennessee Insurance Litigation Blog

Legal insights on insurance litigation in the State of Tennessee

The Policyholder’s Perspective from
Brandon McWherter
of Gilbert Russell McWherter Scott Bobbitt PLC
J. Brandon McWherter is a partner at Gilbert Russell McWherter Scott Bobbitt PLC, which has four Tennessee offices in Memphis, Jackson, Nashville, and Chattanooga. Read More
The Insurance Company’s Perspective from
Parks T. Chastain
of Brewer, Krause, Brooks, Chastain & Burrow, PLLC
Parks T. Chastain, a member in the Nashville, Tennessee law firm of Brewer, Krause, Brooks, Chastain & Burrow, PLLC, focuses on the representation of insurers. Read More

Farm Bureau’s “Take It or Leave It Offer” Determined to be Unfair Claims Practice

In Brooks v. Tenn. Farmers Mut. Ins. Co., 2014 Tenn. App. LEXIS 776 (Tenn. Ct. App. Nov. 26, 2014), an insured’s home was damaged by a tornado and an independent adjuster hired by the insurance company offered the homeowner $56,788 to resolve the claim. The homeowner disagreed with the estimate and refused to settle the claim for that amount.  Rather than paying what it admitted it owed, the insurance company gave the insured a check (which apparently contained release language above the space for the endorsement) for the amount of its estimate and suggested that the insured “take it or leave it.”  After considering the proof, the Court of Appeals held that the insurance company’s behavior was unfair and deceptive, justifying double damages under the Tennessee Consumer Protection Act (note that this was a case that arose prior to the change in the law that protects insurance companies from lawsuits for violations of the TCPA).  Specifically, the court held that the “take it or leave it” statement was coercive and intended to mislead, that the disclaimer language on the check was a false statement, that it was coercive to make a smaller estimate on the house without a full examination of the damage, and that the insurance company had notice other issues not included within the estimate.

This case strikes close to home because it is a fairly common practice for insurance carriers to place release language on their checks, and many times insureds are duped into accepting the checks. Sometimes the insureds are just desperate to get some money to start repairs and other times they just don’t bother reading the fine print. Either way, I’ve always cringed when I see such a tactic because it flies in the face of an insured’s right to file a supplemental claim and an insurance company’s obligation to always pay what they owe without any requirement of a release.  The Brooks case should stop the practice in Tennessee, and those carriers that continue to engage in such unfair practices could subject themselves to extra-contractual damages for bad faith and/or punitive damages.

By the way, reading this case reminded me of Tennessee citizens’ loss of their rights under the Tennessee Consumer Protection Act in insurance disputes.  Next time you talk to your state senator or representative, ask them how it makes sense that all businesses except insurance companies are prohibited from engaging in unfair or deceptive practices?  What is it about insurance companies that makes them immune from a law that was designed to stop the type of claims activity that was demonstrated in the Brooks case?  For the life of me, I can’t thing of a single reason how the 2011 legislation that removed the TCPA from policyholder’s available remedies in any way benefits the citizens of this State.  Perhaps someone out there will enlighten me.

The Law of Matching in Tennessee

A hail storm hits a shingled roof, but only damages a handful of shingles.  Unfortunately, the shingles on the roof are no longer manufactured, which would result in a mismatched checkerboard of colors on the roof if only the few damaged shingles were replaced.  In those circumstances, is the insurance company obligated to replace the entire roof?  Common sense and an understanding of the purpose of insurance and indemnity tells me “yes.”   Over the past few years, I’ve had numerous adjusters and defense attorneys argue with me about this and take the position that Tennessee law does not require “matching.”  That’s not true – – there are actually at least two cases that support the idea that matching is required in order to put the insured’s property back in its pre-loss condition:

  • Alexander v. Phillips, 1984 Tenn. App. LEXIS 3097 (Tenn. Ct. App. 1984) (affirming trial court’s award of damages for replacement of entire roof in breach of construction contract case, and noting that patching of cedar shake roof would end up in a “bad appearing roof”).
  • Hutcherson v. Tenn. Farmers Mut. Ins. Co., 1986 Tenn. App. LEXIS 3259 (Tenn. Ct. App. 1986) (affirming trial court’s award of damages for replacement of entire front facade despite fact that only one area of the front facade was damaged because the “damaged spot alone was not capable of being repaired satisfactorily because of aesthetic reasons”).

Based on these cases, and absent policy provisions to the contrary, it seems fairly clear that Tennessee, like many others, is a “matching state.”

Cosmetic Damage – Honest Disagreement or Reckless Misbehavior?

Insurance companies are increasingly denying claims based on engineering reports that there is “no functional damage” (damage which impairs the functionality of the roof) and that the damage is “cosmetic only.”  For example, if a hail storm comes through and wreaks havoc on a metal roof to a home, it might still be functional even though it’s covered with dents.  I’ve commented previously on this issue, but my general view is that the whole idea of denying a claim because there is no “functional damage” is just absurd absent a specific provision in the policy that disallows damage that is “cosmetic only.”  I bet an adjuster who’s car that gets beat up with hail would be quick to make a claim for the dents to his car, even though he or she could certainly still drive it just as he/she did before.

In any event, the point of this post is to highlight a recent case out of South Dakota that addressed this very issue – – Lead GHR Enters. v. Am. States Ins. Co., 2014 U.S. Dist. LEXIS 137830 (S.D. Sept. 30, 2014).  In Lead, like most policies, the insuring clause provided that the insurance company would insure the policyholder against “direct physical damage.”  The insured’s metal roof was dented by hail, but the insurance company denied the claim on the basis that the roof suffered no “functional damage.”  In considering the issue, the District Court judge described the insurer’s position as “tenuous at best” and ultimately concluded that the dents were certainly “direct physical damage.”

Perhaps most importantly, the Lead court also concluded that the insurance company’s disingenuous coverage position could subject it to liability for bad faith and punitive damages, holding that a “denial of coverage based on a purposed lack of functional damage [was] an unreasonable basis on which to deny coverage” and sufficient to allow a jury to conclude that such constitutes a “reckless disregard for its obligations under the insurance policy.”

The co-author of this blog, Parks Chastain, recently blogged about an Oklahoma case that held that an honest disagreement does not provide grounds for a bad faith judgment.  I generally agree,  but the key phrase is “honest.”  Is it truly an honest and reasonable disagreement or is it really an unreasonable interpretation of a policy provision or perhaps blind reliance on a biased expert?  The Lead case demonstrates an insurance company can’t blindly accept an engineer’s report that damage is cosmetic only and then deny the claim entirely.  Insurance doesn’t work like that – – insurance carriers have an obligation to indemnify their insureds against direct physical loss.  And dents in metal roofs constitute “direct physical loss” every time.

Insureds Have Obligations Too

In this age where assaults against policy conditions are common, it is good to see a court recognize that an insured has an obligation, and a burden, when seeking to recover insurance benefits.  In Meyers v. Farm Aid Association of Loudon County, No. E2103-02585-COA-R9-CV, filed December 9, 2014 (download Meyers v. Farmers Aid), the Tennessee Court of Appeals upheld a “twelve month” suit clause contained in the policy, which required suit to be filed “within twelve months next after inception of the loss.”  The Court held that an insured’s cause of action accrued sixty days after the insured submitted his Proof of Loss.  The policy at issue provided that payment would be made within sixty days after the company reviewed the Proof of Loss, and either reached agreement with the insured, there was a final judgment entered or there was a filing of an appraisal award. That much of the holding has become fairly standard.

Factually, there was apparently no communication between the carrier and Mr. Meyers after the Proof of Loss until the filing of suit, which occurred 18 months after the loss and more than a year and a half after the insured filed the Proof of Loss.  There was obviously no coverage denial.  The trial court, in denying the carrier’s motion for summary judgment, excused the failure to comply with policy conditions, arguing that the carrier’s failure to ascertain the loss tolled the contractual limitations period.  The appellate court reversed and remanded for entry of an order granting summary judgment to FAA in a suit that sought damages for breach of contract, bad faith and consumer protection violations. 

While this is significant in and of itself, I wanted to draw attention to the Court’s commentary on the burden that the insured had:

Of course, any right of payment under the policy inured to Mr. Meyers’s benefit, and it was his burden to protect those rights….While we may find some measure of fault in FAA’s inaction, it was Mr. Meyers who waited more than a year before taking any action to secure payment of his insurance claim.

Legitimate Difference of Opinion Should Not Constitute Bad Faith

Tennessee “bad faith” law has long held that the statutory “bad faith penalty” set forth in T.C.A. 56-7-105 is not appropriate when the insurer’s refusal to pay rests upon legitimate and substantial legal grounds or when the payment demand is greater than the judgment ultimately recovered.  Tyber v. Great Central Ins. Co., 572 F.2d 562 (6th Cir. 1978). More and more, we see allegations of “bad faith” made when all that really exists is a simple, but legitimate, disagreement on the cause of loss or the provisions of coverage.  It’s refreshing when a court recognizes this should not constitute “bad faith.”  After all, denial of an insurance claim should not be viewed as a matter of almost strict liability, but rather something more than a mere disagreement.  As one court noted:

there can be disagreements between insurer and insured on a variety of matters such as insurable interest, extent of coverage, cause of loss, amount of loss, or breach of policy conditions…

 without there being “bad faith.” Cole v. Shelter Mut. Ins. Co., 2014 WL 5018591, 2 (W.D.Okla.,2014).  In the case, relying on two roofing evaluations, the carrier denied coverage. The Court noted that their opinion that plaintiff’s roof damage was a:

reasonable and legitimate basis for denying plaintiff’s claim. Further, the fact that plaintiff has a differing opinion about the damage on his roof from an independent roofer is not evidence that defendant acted in bad faith, but is only evidence that there is a legitimate dispute between the parties regarding the damage to plaintiff’s roof. Accordingly, the Court finds that defendant is entitled to summary judgment on plaintiff’s bad faith claim.

Cole, 2014 WL 5018591 at 3.  Three cheers to the Court! 

Tennessee Federal Court Allows Claim for Punitive Damages Against Insurer to Proceed

In Montesi v. Nationwide Mut. Ins. Co., 970 F. Supp.2d 784 (W.D. Tenn. Aug. 8, 2013), the United States District Court for the Western District of Tennessee allowed a policyholder’s claim for punitive damages to proceed, holding that punitive damages are recoverable in a stand-alone claim for negligence infliction of emotional distress.  Ms. Montesi was sued in Alabama for defamation, a case that ended poorly for her with a $70,000 adverse judgment.  Following the Alabama defamation suit, Montesi filed an insurance claim with Nationwide, seeking reimbursement under her policies for the $70,000 loss she incurred.  Nationwide failed to honor the claim, and Montesi sued Nationwide in Tennessee for several claims, including the tort claim of negligent infliction of emotional distress and punitive damages.  Not surprisingly, Nationwide sought dismissal of the punitive damages claim, asserting that the bad faith penalty statute provides the exclusive remedy for actions against an insurance company.  Montesi responded her negligent infliction of emotional distress claim carries with it the availability of punitive damages.  The court agreed with Montesi, and allowed Montesi’s request for punitive damages to stand.

This case is yet another example of the established law that the bad faith statute is not the sole and exclusive remedy for extra-contractual type damages.  It is noteworthy that Ms. Montesi did not seek punitive damages associated with Nationwide’s asserted breach of contract, but under the authority of Riad v. Erie Ins. Exchange, 2013 Tenn. App. LEXIS 712 (Tenn. Ct. App. Oct. 31, 2013) and similarly holding cases, such a claim would have been upheld as well if she could have demonstrated that the insurance company acted intentionally, fraudulently, maliciously, or recklessly.  For a discussion of that issue, see my prior post here.

New Hampshire Ins. Co. v. Blackjack Cove, LLC, Part III

This is my last post on Judge Sharp’s recent decision in New Hampshire Ins. Co. v. Blackjack Cove, LLC (the opinion can be viewed here) – – unless Parks decides to pick a fight with me about the case.  In this installment, I’m going to focus on a small section of the opinion involving replacement cost insurance.  To briefly remind you of the facts, the insured property was a marina that was damaged during a tornado.  As part of the claim, the insurance company sought summary judgment as to the marina owner’s claim “for the value [the marina] lost due to [the insurer’s] ‘failure to total docks’ at the marina.”  Specifically, the marina owner made a claim for “the difference between the value of the property it should have had under the policy and the value of the property that it ended up with,” arguing that the policy provided that damaged property would be valued at replacement cost but it “was left with patched-up 40 year old docks rather than new docks.”  This is where the train left the rails for the insured, with Judge Sharp agreeing that summary judgment was appropriate on the claim for replacement cost.  Specifically, the court ruled:

The policy provides that [the insurer] will “determine the value of Covered Property in the event of loss or damage at replacement cost (without deduction for depreciation) as of the time of loss or damage.”  The Court is hard-pressed to understand why [the insurer] was required to “total” the docks, and [the insured] points to no provision of the policy that supports its argument. Nor does [the insured] explain why the policy terms entitle it to “new docks” rather than “patched-up 40 year old docks” if those patches restore the docks’ total value to what it was when the docks were insured in 2009, i.e., “without deduction for depreciation.” As [the insured] has failed to point to evidence that demonstrates a triable material fact on this damages claim, the Court grants [the insurer] summary judgment on it.

Before I express my opinions about this conclusion, let me first say that the ruling on this issue was fairly sparse, I’ve not read the parties’ briefs, and I have no knowledge of the policy at issue except for that portion quoted by the court in the opinion.  That being said, I believe that the policyholder was absolutely correct in its argument that it should not have been left with “patched-up 40 year old docks” when it had replacement cost insurance.  Here’s why – – the whole concept of replacement cost insurance is different that traditional principles of indemnity, which would require that an insured be put back in pre-loss condition.   Replacement cost insurance costs more because it gives more – – if you have a 40 year old dock that is destroyed by a covered peril, replacement cost insurance requires that the insurance company replace it with a new dock.  Now that doesn’t mean that you always get a new dock for just any damage, but you certainly would in the case of a total loss.  In the Blackjack Cove case, the court seemed to confuse the principles of replacement cost coverage with market value when it held that the insured failed “to explain why the policy terms entitle it to ‘new docks’ rather than ‘patched-up 40 year old docks’ if those patches restore the docks’ total value to what it was when the docks were insured in 2009, i.e.,’without deduction for depreciation.'”  The problem with this phraseology is that the market value of the docks in 2009 is totally irrelevant to a determination of replacement cost value.   Tennessee case law makes clear that replacement cost includes all costs associated with replacement of the damage. If damage can be repaired, then the proper query is what it costs to repair the damage – – market value is irrelevant to replacement cost coverage.

In conclusion, I suspect that the court was simply holding that it was not necessary to replace the damaged dock in its entirety and that the insured failed to demonstrate why the dock should be totaled.  If that’s the case, then the issue before the court was really one of scope and not of the proper measure of valuation, causing the language concerning “the docks’ total value” to be mere dicta and not necessary to the ultimate holding.



New Hampshire Ins. Co. v. Blackjack Cove, LLC, Part II

Yesterday I commented on Judge Sharp’s denial of the insurer’s motion for summary judgment on the policyholder’s bad faith claim in New Hampshire Ins. Co. v. Blackjack Cove, LLC, but there was another gold nugget in his opinion as well.  The basic facts of the case were that Blackjack Cove (a marina on Old Hickory Lake) was damaged during a tornado that hit the Nashville area in 2009.  During the course of repairs to the marina, the heavy trucks hauling debris and construction material from the property caused more than $350,000 of damage to the asphalt parking lots.  The owner of the marina correctly made a claim for repair cost to the asphalt, and the insurance company rejected the claim, arguing that the “covered peril” – the storm – did not cause the asphalt damage.  Judge Sharp’s rejected the argument, and his ruling was clear and concise:

[The] argument[] fall[s] flat.  For one thing, [the insurer] reads the debris-removal provision’s causation language too narrowly.  While the storm did not “cause” the asphalt damage, a reasonable jury could find the asphalt damage “resulted from” the storm.

This was the right result, and the holding can be applied to dozens of similar claims where there are consequential type damages that are not directly caused by a covered loss but do result from the covered loss.  Another win for the policyholder.

Tennessee Federal Court Denies Motion for Summary Judgment as to Bad Faith Claim

In a recent opinion by the U.S. District Court for the Middle District of Tennessee, Judge Sharp denied an insurance company’s motion for summary judgment seeking dismissal of an insured’s claim for statutory bad faith.  The case is New Hampshire Ins. Co. v. Blackjack Cove, LLC, 2014 U.S. Dist. LEXIS 40122 (M.D. Tenn. March 26, 2014), and a copy can be downloaded here.  Essentially, the policyholder asserted that the insurance company acted in bad faith by failing to pay its supplemental claim and by failing to comport with the terms of the policy when making an initial payment shortly after the subject tornado damage.  A denial of summary judgment on a bad faith claim is not particularly noteworthy in and of itself, but this case is a bit unique in that the court’s decision was entirely policy based.  Specifically, Judge Sharp ruled:

With respect to the initial storm damage claim, a jury could find that [the insurer] acted in bad faith because its payments totaling $2,595,558 did not comport with the terms of the policy and the extent of the claim submitted.  . . . [With respect to the supplemental claim], if a jury finds [the insurer] denied [the policyholder’s] claims for reasons untethered to the terms of the policy to which [the insurer] bound itself, it could reasonably conclude that [the insurer] acted in bad faith.

This case is a good example of the trend among Tennessee courts to find that an insurer’s failure to follow the policy can amount to bad faith.  Granted, there are cases holding that something more than a simple breach is required for bad faith liability to attach, but Judge Sharp did not apply that antiquated law here.

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.