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, 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

Another Court Allows Punitive Damages Claim to Proceed

In June of this year, Judge Tom Anderson joined the ranks of other judges in Tennessee that have held that punitive damages can be awarded against an insurance company for breach of an insurance contract, if the breach was intentional, malicious, reckless, or malicious.  The case was Carroll v. Nationwide Property & Casualty Company, 2015 U.S. Dist. LEXIS 73674 (W.D. Tenn. June 8, 2015). This case confirms yet again that the 25% penalty afforded by the bad faith statute is not a policyholder’s sole and exclusive remedy for extra-contractual type damages for an insurance company’s bad behavior in handling and making a decision regarding an insurance claim.  The decision was a big win for my clients and Tennesseans as a whole.  For prior posts on this topic, click here and here.

Sixth Circuit Holds that Demolition Can Trigger Application of the Valued Policy Law

Tennessee is a valued policy state, which means that in most instances an insurance company must pay policy limits in the event of a “total loss.”  Back in 2009, Parks and I offered some differing viewpoints about what a total loss is or should be (see here and here).  One of the issues we discussed way back then was whether a mandatory demolition of a structure after a fire loss should trigger the valued policy law.  After a jury trial and an appeal to the Sixth Circuit Court of Appeals, Tennesseans got an answer to that question.

In Cincinnati Ins. Co. v. Banks, the City of Manchester issued a mandatory demolition order after a fire loss to the policyholders’ residence.  In summary, the City of Manchester required that the home be demolished, but absent the demolition the home may not have been considered a “total loss” because much of the structure was still standing and may not have lost its character and identity as a home.  The insurer argued that it did not owe policy limits for just that reason – that absent the demolition order the property still looked like a house and therefore should not be considered a total loss.  On the other hand, my clients argued and successfully convinced the trial court that a municipal demolition order creates a constructive total loss.  After considering the issue, the Sixth Circuit affirmed the trial court’s ruling that the home should be considered a total loss, but for a different reason:

The constructive loss doctrine and the identity-and-character test are not mutually exclusive, and can lead to the same result.  The demolition order was valid, and therefore the dwelling would not maintain its identity and character after being razed. Thus the property is an actual total loss, not a constructive total loss.

Translation:  If your Tennessee home or business is damaged and then your local municipality or county enforces its codes and requires that the structure be demolished, that triggers the application of Tennessee’s valued policy law, therefore requiring your insurer to pay the full policy limits.  This is a big, big deal – – particularly in cities (such as Memphis) that have codes authorizing demolition in the event the repair costs exceed 50% of the property’s value.


On April 6, 2015, the Tennessee Court of Appeals (Western Section), decided the case of Daniel v. Allstate, No. W2014-01965-COA-R3-CV (download copy here).  In this case, the trial court had granted summary judgment to an insurer based upon the one-year contractual limitations period under the policy.  Factually, the subject property was damaged by fire on December 15, 2011.  A claim was submitted, but the case does not indicate that formal Proof of Loss was involved.  The insurer submitted an estimate and tendered a settlement check to the insured, advising actual cash value was being paid at that time, and that the insured would be entitled to a claim for recoverable depreciation in accordance with the policy.  Over a year later, the insured filed suit alleging they were owed additional monies under the policy.  The trial court granted summary judgment to Allstate, and the Court of Appeal affirmed.

The Court of Appeals noted:

             The trial court determined that Allstate’s acceptance of the Daniels’ claim had the same effect as a denial in triggering the contractual limitations period prior to the expiration of the settlement.  The trial court concluded that because the Daniels failed to file suit within one year of the date that the settlement check was tendered and accepted their claim was barred by the one-year contractual limitations period.  We agree with the trial court’s reasoning. 

(See Page 5).  In explaining the rationale, the court noted:

             Accordingly, regardless of whether the insurer choses to grant or deny the claim prior to the end of the settlement period, its determination to do one or the other acts as a waiver of its immunity from suit, and the contractual limitation period begins to run…if the Daniels were not satisfied with the amount of Allstate’s estimate and/or settlement check, they had one year from that date to challenge it in court. 

(See Page 6).

The real point of this case was that it was the insureds who knew, or could have known, that they were dissatisfied with the payment made by the insurance company, and they had the power to timely file suit.  Please note the court seemingly broadened older cases holding an absolute denial or refusal to pay a claim submitted by the insured was required, as the case does not indicate that either occurred.  This holding is even more favorable to the insurance companies than are those cases which base the contractual period of limitations upon the failure to pay a Proof of Loss within the loss payment period.  The case does not detail whether a Proof of Loss was ever submitted, and we have detailed other cases on this blog which use the date of the Proof of Loss as the determinative date to begin the loss payment and contractual limitations period.

Practically, this case makes sense.  If the insureds are dissatisfied with the payment, they should file suit within that contractual limitations period.  If they do not, they seem to be barred under this holding.

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.