The Tennessee Supreme Court's Treatment of Tennessee Consumer Protection Act Claims in the Insurance Setting
I ran across a good article (pdf) this evening by Robins H. Ledyard entitled Treatment of Insurance Claims under Tennessee Consumer Protection Act. Published in the Federation of Regulatory Counsel Journal in the Fall of 2008, the article gives a short synopsis of our Supreme Court's analysis of TCPA claims in the insurance setting. Although not exhaustive, its a good primer for those who don't practice in this area often. The article gives a quick summary of the most often reported Tennessee Supreme Court insurance cases - - Myint v. Allstate, Sparks v. Allstate, and Gaston v. Tennessee Farmers.
A Word About the Crossley Decision
On the topic of whether independent adjusters should be held liable under the Tennessee Consumer Protection Act (see my prior post here and Parks' rebuttal here), a case commonly cited by defendant insurance companies and adjusters is Crossley Const. Corp. v. National Fire Ins. Co. of Hartford, 237 S.W.2d 652 (Tenn. Ct. App. 2007). Although Crossley does hold that the TCPA does not apply to the claims handling process, the opinion is somewhat of an aberration in that it is completely out of line with other decisions of the Tennessee Court of Appeals and the Tennessee Supreme Court. For example, in Gaston v. Tenn. Farmers Mut. Ins. Co., 120 S.W.3d 815 (Tenn. 2003), the Tennessee Supreme Court encountered the issue of whether an insurer can be held liable under the Tennessee Consumer Protection Act for unfair and deceitful actions in the handling of an insured's claim. In that case, the insurance adjuster withheld important information from the insureds concerning how the insureds needed to proceed during the claims process. The insurance company argued that the TCPA does not apply to insurance companies in the handling of claims, but this argument was flatly rejected by the Tennessee Supreme Court. See also Newman v. Allstate Ins. Co., 42 S.W.3d 920 (Tenn. Ct. App. 2000); Stooksbury v. Am. Nat'l. Prop. & Cas. Co., 126 S.W.3d 505 (Tenn. Ct. App. 2003).
In my opinion, the Crossley decision was simply not an accurate application of binding Tennessee law. The purpose of the TCPA is to protect consumers from those who engage in unfair or deceptive acts or practices of any trade or commerce, and it must be construed broadly to effectuate that purpose. As a result, it would be contradictory to public policy and the stated intent of the legislature if unfair or deceptive actions of adjusters, whether employees or independent, were punishable only up until the point of contract formation. Everything is usually rosy and nice at the front end when the policy is first obtained. Its what happens when a claim is filed that demands attention.
Independent Adjusters Should Not Be Liable To Insureds Under The Tennessee Consumer Protection Act
I understand the reasoning of Magistrate Bryant, and the state court judges with whom I have debated this topic, but it just does not seem right that a person or entity not associated with the consumer transaction at all should be held liable under the Act. How was the independent adjuster involved in the consumer transaction of issuing the contract of insurance with the insured? He or she was not. How could someone not associated with the consumer transaction be liable under a statute designed to protect consumers from unfair or deceptive trade acts or practices by consumer entities?
I certainly do not dispute that the Tennessee Consumer Protection Act was made applicable to insurance companiesunder Myint v. Allstate Insurance Company, 970 S.W.2d 920 (Tenn. 1998) under the premise that “the sale of a policy of insurance easily falls under this definition of “trade” and “commerce.” Id. at 926. But that premise should not apply to someone who did not contract or sell the insurance policy in question, should it? According to Myint, the Tennessee Consumer Protection Act is applied to insurance companies selling policies to Tennessee consumers when the insurance company is found guilty of unfair or deceptive trade practices. Id. at 926. It seems to me that the consumer entity may be liable for the actions of the independent adjuster, if the requisite elements of agency can be shown, but it does not seem appropriate to impose liability under the Act to an independent adjuster who was not a party to the formation of the contract of insurance and did not sell the insurance policy in question. Where would this stop? Could liability be imposed against the expert engineer retained by the insurance carrier to investigate the loss? Could it be imposed upon the lawyer hired by the carrier to take the Examination Under Oath?
I have some Tennessee case law support for my position. One case is Crossley Const. Corp. v. National Fire Ins. Co. of Hartford, 237 S.W.3d 652, 657 (Tenn.Ct.App.,2007). In this case, the Court held that the Tennessee Consumer Protection Act was not applicable to post transaction acts because none of the defendant's actions complained of by plaintiff were a part of "the advertising, offering for sale, lease or rental, or distribution of any goods, services, or property…" Tenn. Code Ann. § 47-18-103(11) (2001). Id. Are the acts of an independent adjuster, handling a claim perhaps 5 or 10 years after the date of the consumer transaction, really part of the “advertising, offering for sale, or the distribution” of the contract of insurance? I understand the breadth of the Act, but simply believe the answer to this question must be an unequivocal “NO!”
Next, there has been no clear state law pronouncement of the duty owed by an independent adjuster. I tried to get the Court of Appeals to rule on this issue back in 2000, but the Court determined that our extraordinary appeal did “not present an appropriate vehicle for determining whether insureds may maintain either negligence or Tennessee Consumer Protection Act claims against adjusting companies because the Heatherlys' claims, even if they had them, are clearly time-barred.” See Heatherly v. Merrimack Mut. Fire Ins. Co. , 43 S.W.3d 911, 915 (Tenn.Ct.App.,2000).
So I hope the issue is resolved by our state courts very soon. My concern over broadening the scope of this Act to persons not involved in the transaction itself – or since privity is not required, perhaps the better way to say it is broadening the scope of this Act to persons not even contemplated to be involved at the time of the transaction – is that there is no logical stopping point. If the Act truly does apply to an independent adjuster because an insurance carrier hiring that adjuster sold an insurance policy some years ago, the implications for potential “slippery slope” liability are simply unacceptable.
Examinations Under Oath and Depositions are Different
I cannot count the number of times I have had an insured’s lawyer misunderstand the difference between these two proceedings. Depositions and examinations under oath are different activities. Cases recognize that “depositions and examinations under oath serve different purposes.” Nationwide Ins. Co. v. Nilsen, 745 So. 2d 264, 268 (Ala. 1999); accord Goldman v. State Farm Fire Gen. Ins. Co., 660 So. 2d 300, 305 (Fla. 4th DCA 1995). The Supreme Court of Alabama explained:
[A]n examination under oath is a part of the claims investigation process. In contrast, a deposition is not part of the claims investigation process; it is designed to facilitate the gathering of information once an insured has denied the insured’s claim.
Nationwide Ins. Co., 745 So. 2d 269; accord Goldman, 660 So. 2d 305 (listing numerous distinctions between EUO’s and depositions, one of which explains that “examinations under oath are taken before litigation to augment the insurer’s investigation of the claim while a deposition is not part of the claim process”); see also Archie v. State Farm Fire & Cas. Co., 813 F. Supp. 1208, 1213 (S.D. Miss. 1992) (holding that depositions are different from examinations under oath); Craft v. Western Mut. Ins. Co., No. E030318, 2002 WL 225947, at *3 (Cal. Ct. App. Feb. 14, 2002) (“A deposition is not the examination under oath which the policy required.”)
In Tennessee, an insured may have a lawyer present at the Examination Under Oath, but the lawyer cannot participate in the Examination, either by asking questions or lodging objections. See e.g. Shelter Ins. Companies v. Spence 656 S.W.2d 36, 38 (Tenn.App.,1983)
Also, keep in mind that the mere filing of suit may not terminate the carrier’s right to demand an Examination Under Oath. There are many cases, mainly from other jurisdictions, that allow a carrier to take an Examination Under Oath even after litigation has been filed. Of course, it depends upon the status of the case, but even in those post-litigation situations, an attorney for the insured may not be able to participate.
Independent Adjusters Can Be Held Liable for Violations of the Tennessee Consumer Protection Act
Magistrate Ed Bryant (W.D. Tenn.) recently issued a Report and Recommendation in one of my cases in which he held that Tennessee law allows an independent adjuster to be held liable under the Tennessee Consumer Protection Act. The defendant independent adjuster argued that my client failed to state a claim under the TCPA because the adjuster provided a service to the insurance company and not the insured. Rejecting this argument, Judge Bryant ruled that the TCPA's broad scope contemplates services rendered by independent agents and adjusters who work in connection with insurance companies when adjusting claims.
The opinion also sheds some light on what actions of independent adjusters might constitute violations of the TCPA:
Plaintiff's Amended Complaint alleges that Defendant Cross, inter alia, destroyed estimates providing support for Plaintiff's claim, advised Plaintiff to reduce property value of damaged items to "cash value" and then fraudulently and deceptively depreciated the items further, resulting in "double depreciation," and unfairly delayed adjusting the claim resulting in a loss of the property to foreclosure. On these facts, there is an arguably reasonable basis for predicting that state law might impose liability . . .
Although the issue before the Court was whether the case should be remanded, this is yet another opinion that can help define the scope of the TCPA's application in first party insurance cases. For a copy of the opinion, click here (pdf).
An Insured's Willingness to Take a Polygraph Test - Admissible?
Here's a tidbit that can come in handy in the right case. In Murphy v. Cincinnati Ins. Co., 772 F.2d 273 (6th Cir. 1985), the Sixth Circuit Court of Appeals affirmed a district court's ruling that an insured's willingness to submit to a polygraph test as part of the insurance company's investigation was admissible evidence at trial. In so holding, the court noted that a willingness to submit to a polygraph test does not depend on the scientific acceptability which is necessary to support the admissibility of polygraph test results. In other words, an insured's willingness to submit to a polygraph test may be admissible as probative of the insured's credibility and the insurer's motive for denial, but the polygraph test results most likely will be ruled inadmissible.
This type of evidence can obviously be very persuasive, especially in an arson case. So the next time an insurance company seems to be ramping up their investigation for suspected arson but your client swears up and down he or she had nothing to do with the fire, send a letter to the insurance company notifying it of your client's willingness to submit to a polygraph test. This approach obviously demands a risk v. reward analysis, but it is a great tactic in the right case. Also be aware of a distinguishing case, Wolfel v. Holbrook, 823 F.2d 970 (6th Cir. 1987), which made a point of noting that it was the insurer in Murphy that requested that the insured submit to the polygraph test.
The Florida Sun
You may have noticed I haven't posted any entries for a few days, but I've got a good excuse - - sunny, beautiful Florida.
While I was out basking in the sun, banging a golf ball from sand-trap to sand-trap, and watching my little girls explore the ocean, John Day made reference to our new blog at his very popular weblog, Day on Torts. John must have quite a following because the hits on this site skyrocketed after that post. Thanks for blogging about us John!
Certificates of Insurance Do Not Create Policy Coverage Obligations
One of the issues that arises far too often in cases I handle is lack of understanding of the purpose or role of documents called “Certificates of Insurance.” A “Certificate of Insurance” is not an insurance policy – it has no insuring provision, no exclusions, and typically no terms or conditions. These “Certificates” are usually issued by agents, brokers, or other producers, not the actual insuring entity. In such a situation, the correct and limited purpose of a “Certificate of Insurance” is merely to certify that a policy was issued to the named insured for the specific period listed.
“Certificates of Insurance” do not provide coverage, nor do they confer any rights upon the certificate holder. When people assume that the “Certificates” represent coverage that does not exist on a policy, the “Certificates” become the subject of litigation. Most “Certificates” contain language on their face indicating that the “Certificate” is only issued as a matter of information and does not amend or alter the policy coverage. I have successfully litigated cases involving the following language, and obtained rulings that the subject “Certificate” did not create coverage:
I.
This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below.
II.
We certify that we have issued the policy to the Named Insured for the policy period as identified in this Certificate. Notwithstanding any requirements, terms or conditions of any contract or other document with respect to which this Certificate may be issued, the insurance is that which we customarily provide for the coverage indicated in Item 6 below. This Certificate is issued as a matter of information only and does not amend, extend or alter the coverage afforded by the policy.
Now, the producer issuing the “Certificate” may face liability for failing to accomplish the directions of its client. But, absent any misrepresentation or conduct estopping the insurance carrier from denying that coverage exists, “Certificates of Insurance” should not create coverage.
Policy Language Often Provides Valuation Measure
While I acknowledge Clift v. Fulton Fire Insurance Company, 315 S.W.2d 9 (Tenn. Ct. App. 1958), cert. denied, provides a rule for allowing valuation of property under a somewhat “elastic” standard of “value to the owner,” this ambiguous standard should not apply where the valuation provisions of property coverage are specifically set forth in the policy. For instance, most policy provisions now provide that valuation will be based upon an “actual cash value” basis until such time as repair or replacement has occurred. Once repair or replacement has occurred, the insured may be entitled to additional amounts up to the cost of replacement (where replacement coverage is afforded).
Older cases like Clift do not rely upon policies containing the definition of “actual cash value,” a term defined by many modern policies. That definition, widely found in policies today, is similar to the following:
“Actual Cash Value” means replacement cost less a deduction that reflects depreciation, age, condition and obsolescence.
Where similar valuation provisions exist, and particularly where component terms are defined by the policy, I think it would be error for a court to step outside of the definition and apply any other valuation measure, whether it be “value to the owner” or some other measure of damage. Our law has long held that courts are not at liberty to rewrite an insurance policy, even where the court does not favor its terms. Merrimack Mut. Fire Ins. Co. v. Batts, 59 S.W.3d 142, 148 (Tenn. Ct. App. 2001), perm. app. denied.
Utilizing the Unfair Claims Settlement Practices Act
The Tennessee legislature has listed certain certain practices which constitute unfair acts or practices in the business of insurance. See T.C.A. § 56-8-105. The statute, known as the Unfair Claims Settlement Practices Act, creates standards and rules by which insurance companies must abide when settling claims. For example, the Unfair Claims Settlement Practices Act provides that it is unfair and deceptive to "[fail] to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed." T.C.A. § 56-8-105(7). Similarly, it is an unfair claims practice to "[fail] to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies." T.C.A. § 56-8-105(2).
Although the Unfair Claims Settlement Practices Act does not provide a private cause of action, that doesn't necessarily mean that it is irrelevant to a first party claim. Because the Unfair Claims Settlement Practices Act enumerates certain unfair or deceptive practices, it can be bootstrapped into defining violations of the Tennessee Consumer Protection Act, which obviously does provide a private cause of action. Both Acts prohibit "unfair" or "deceptive" practices, and the Unfair Claims Settlement Practices Act just happens to provide some very good guidance as to what constitutes unfair or deceptive practices by an insurance company.
Although I am aware of no Tennessee case addressing this issue head on, courts from other states have held that while there may not be a cause of action under a state's unfair claims practices act, the terms of such act are properly considered in determining whether an insurer's conduct amounts to bad faith. See, e.g., MacFarland v. United States Fidelity & Guarantee Co., 818 F.Supp. 108 (E.D. Pa. 1993); Wailua Associates v. Aetna Casualty & Surety Co., 27 F.Supp.2d 1211 (D. Hawaii 1998).
So what's the lesson? When drafting a complaint for bad faith and for violations of the Tennessee Consumer Protection Act, mimic the language of the Unfair Claims Settlement Practices Act. Although it does not provide a private cause of action, it is strong evidence of activities that reach the threshold of bad faith or unfair/deceptive actions.
