Tennessee Court Of Appeals Rules That Submission To Examination Under Oath Is Condition Precedent To Recovery
I commend to your reading the recent case of Spears v. Tennessee Farmers Mutual Insurance Company, No. M2008-00842-COA-R3-CV (Tenn. Ct. App. Middle Section), filed July 17, 2009. For a PDF copy of this case, download here (pdf). In this case, the Court was presented with the question of whether the failure of an insured to answer questions in an examination under oath was a material breach of the policy terms, and whether compliance with an EUO request was a condition precedent to the insured’s recovery under the policy. The Court noted:
We likewise find that submission to answer questions under oath when requested as provided for in the insurance policy at issue is a condition precedent to an insured’s recovery under that policy.
As an aside, the court also acknowledged that depositions are different than examination under oath (see my post of June 18, 2009 under “Claim Tips”). The Court found that:
Giving a deposition after having filed suit against the insurer for failing to pay an insurance claim does not constitute cooperation under the terms of the policy.
The Court noted that Tennessee Farmers’ decision to seek an examination under oath was discretionary, but once the carrier made such a request, the policyholder was under an obligation to submit.
Trigger Happy Policyholders?
Parks Chastain recently wrote here about trigger happy policyholders prematurely filing lawsuits against insurance companies before a denial ever occurs. The reason for this is the provision in insurance policies that shortens the applicable statute of limitations to a period of usually one or two years from the date of the loss. As Parks mentioned, however, Tennessee courts have held that these shortened periods for filing lawsuits don't begin to run until a cause of action accrues, which is usually (but not always) when the insurer denies the claim.
There are a few practical problems associated with figuring out when it is necessary to file a lawsuit "to protect the statute of limitations." First, I have been involved in a couple of cases in which there were factual disputes about whether a claim had actually been denied. For example, there have been many times when I have seen an insurance company deny a claim, but then agree to reconsider that denial for various reasons. So is the statute of limitations running during that reconsideration period? Another common scenario occurs when there is no formal denial, but the adjuster just ignores part of a claim or casually brushes it off in conversation. Is that a denial that triggers the running of the statute of limitations? Probably not, but you can see the potential problems (and sleepless nights) that these situations can cause.
In my view, the best way to handle this issue is just to be up front about it and get an agreement, in writing, with the insurance company. Twice in the past year, I could foresee potential problems due to confusing facts (partial denials, etc.) and simply obtained written agreements with opposing counsel that the contractual limitations period had not began to run. This doesn't have to be anything fancy - just a short one or two paragraph letter from the insurance company or its lawyer will suffice.
General Contractors' Overhead and Profit Charges - Recoverable?
This is one of those topics that comes up regularly. Does an insurer have to pay general contractors' overhead and profit charges? The short answer is "Yes" but there are some exceptions. According to a 2005 Sixth Circuit Court of Appeals case (interpreting Tennessee law), the costs of a contractor (overhead and profit) are recoverable if the the insured would reasonably be expected to hire a contractor to repair its property. See Parkway Assoc., LLC v. Harleysville Mut. Ins. Co., 129 Fed. Appx. 955 (6th Cir. 2005).
Several nationwide class actions have been filed over the past few years concerning insurance companies' refusal to pay profit and overhead. Despite such class actions and the clear statement of the law by the Sixth Circuit, I still hear about this occurring from time to time. If an insurance company tries to tell you its not going to pay overhead and profit, stand up for yourself and point out this case to the adjuster. Somehow I doubt it will be the first time he or she has heard of it.
When Must Suit Be Filed Over Failure To Pay An Insurance Claim?
What a simple question, you might think. It’s a contract and, therefore, it’s a six year statute of limitations in Tennessee, right?
Wrong, in most cases of first party coverage or payment disputes. Most policies contain a clause which limits, and reduces, the time for filing a suit over a dispute in coverage or payment of a claim. For instance, most policy forms contain a clause similar to the following:
Suit Against Us. No action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year [sometimes two years] after the date of loss or damage.
Provisions limiting the time of a suit or action on the policy to a year after the date of loss have been interpreted, by Tennessee Courts, to mean twelve months after the cause of action accrues. See, e.g., Das v. State Farm Fire and Casualty Company, 713 S.W.2d 318, 322 (Tenn. Ct. App. 1986), perm. app. denied. See also Sharp v. Allstate Insurance Company, 1992 Tenn. App. LEXIS 860 at *3 (Tenn. Ct. App. W.S. 1992).
So, we have one year or sometimes two years from the date of loss to sue, right? Wrong, again. In the Das case, the courts held that a cause of action based upon the denial of a claim accrued at the time of denial. One appellate statement of the law has been that the insured’s right to sue accrues upon the insurer’s absolute and unconditional denial of liability on the policy. See, e.g., Dixon v. Thomas Jefferson Insurance Company, 1989 Tenn. App. LEXIS 814 (Tenn. Ct. App. W.S. 1989).
But, what if there has been partial payment, and you just cannot agree with the carrier on the last coverage line, or the amount thereof? It seems that, under these cases, the cause of action would only accrue when there is a breach of the contract, i.e., when the carrier fails to pay what the insured wants. Until then, the policyholder and his/her counsel are happy, and would have no reason to sue.
Why is a lawyer who typically represents insurance companies explaining this? While the co-author of this blog, Brandon McWherter, will hopefully chime in, I have a simple reason for explaining this position. As much as I do enjoy and appreciate the opportunity to earn income from files such as this, they are short lived and usually completely unnecessary. In the past two years, I have had five suits filed against my clients where the attorneys thought that they had to file “to protect the statute of limitations.” While I completely understand that concern, where these suit clauses exist, and where, for instance, there has been no refusal or failure to pay, an insured simply does not a cause of action in, and there is no need to file to protect the statute of limitations. These suits get adversarial much too early, and I firmly believe that my clients really work to pay what they owe. I had rather see negotiations continue to a conclusion, if possible, before a lawyer (for either side) has to get involved. Sometimes it is necessary, but I can count five cases in two years where it really has been unnecessary.
What is Bad Faith and When Should the Bad Faith Penalty Be Awarded?
In a post several days ago, the co-author of this blog, Parks Chastain, commented that Tennessee's statutory bad faith penalty should rarely be awarded against an insurer. In reaching this conclusion, he noted a 1961 federal district court case that stated that the the bad faith penalty should not be awarded unless the insurer's conduct involves moral turpitude. While I won't bore you with the numerous cases in Tennessee which clearly demonstrate a different standard, I would like to point out one of the most obvious reasons why a finding of "conduct involving moral turpitude" is unnecessary for an an award of bad faith.
The bad faith statute itself, T.C.A. 56-7-105 doesn't speak in terms of "bad faith," but rather states the penalty is appropriate when "the refusal to pay the loss was not in good faith." Such a standard has no inference of any required vileness or depravity such to constitute "conduct involving moral turpitude."
So, you might ask, what is good faith? Obviously, the answer to that question depends on the circumstances, but here are a few pointers:
- An insurance company should not make a strained interpretation of an insurance policy. Every insurance company in Tennessee knows that a policy provision capable of two reasonable interpretations must be construed in favor of the insured.
- An insurance company should never attempt to settle a claim for less than what is owed under the policy.
- An insurance company should not condition payment of one portion of a claim until the entire claim is resolved or on the insured's agreement to drop other portions of the claim
- An insurance company must fully investigate a claim and make sure it has all available information before denying a claim.
- An insurance company must not rely on biased or speculative information and opinions in denying a claim.
- An insurance company must treat its insured's interests equal to that of its own.
These are just a few examples, but hopefully my readers get the point. When it comes right down to it, the absence of good faith is analogous to pornography - you know it when you see it. Also, don't forget about Tennessee's Unfair Claims Settlement Practices Act, which provides some very solid rules about good faith claims handling. For a discussion of that statute, see my previous post here.
Bad Faith Penalty Against an Insured?
My learned friend Parks Chastain recently posted here that Tennessee law provides for a reverse bad faith penalty of not more than 25% of the amount claimed when a policyholder does not bring an action in good faith. Parks' use of the adage "what's good for the goose is good for the gander" is right on point. I agree that a policyholder that files a clearly fraudulent claim should be held accountable. For example, if an insured files a claim for theft that is clearly proven to be staged and fraudulent, a reverse bad faith penalty is appropriate.
However, the facts necessary to bring such a claim are not commonplace, and if alleged in the wrong case, could prove catastrophic for the insurance company. If a jury finds in favor of the insured and believes he or she to be truthful, the fact that the insurance company has added insult to injury by filing a counterclaim will just add fuel to the fire as to the insured's bad faith or Consumer Protection Act claim against the insurer.
Experts Hired by Insurance Companies to Assist with Claim Decisions Should be Unbiased
As a result of the numerous tornados that have passed through Tennessee over the past decade, I have become acutely aware of the fact that insurance companies use the same engineering firms over and over again in their investigation of whether a claim constitutes a covered loss. The obvious problem with insurance companies' repeated use of the same engineering firm is the fact that the engineering firm's opinions are clearly going to be biased. After years and years of repeat business, the engineers rely on the income generated by the insurance claim inspections in order keep their lights on. If an engineer finds in favor of the policyholder too often, he or she could soon feel the pain of a drop in referrals, and a corresponding drop in cash in his or her pocket.
I believe that an insurance company's reliance on biased expert opinions can constitute bad faith, especially when combined with other aggravating factors. If an insurance company is going to use the same engineer over and over again, it should certainly make sure the expert is qualified, that the engineer considers all possibilities, and that the expert utilizes accepted methodologies in determining the cause or scope of a loss. Unfortunately, many experts hired by insurance companies go into the investigation looking for a reason that the claim should be denied rather than giving an independent assessment. So for those policyholders out there who have recently been told by their adjuster that an engineer will be sent out to inspect the loss, you should consider hiring your own as well. Although it can be expensive, it sure beats a denial. You might even consider having your own expert present when the insurance company's engineer is conducting his site visit to make sure all appropriate factors are considered.
For a discussion on this same topic with references to a recent case out of Texas, click here for a post by Chip Merlin on his blog, Property Insurance Coverage Law Blog.
The "Goose and Gander" Rule - The Policyholder's Bad Faith
Tennessee Code Annotated § 56-7-106 brings the old adage of “what’s good for the goose is good for the gander” to first party insurance litigation in Tennessee. It provides a penalty against the policyholder of an amount not exceeding twenty-five percent (25%) of the amount claimed when:
- The policyholder does not recover under the policy; and
- Where the policyholder did not bring the action in good faith.
There is much less case law on this statute. As I have urged elsewhere on this blog, with respect to “bad faith” allegations against the insurance carrier, it would seem rare that this penalty would be awarded against an insured. In twenty years of practice however, I have actually seen this penalty awarded more often than the penalty under TCA § 56-7-106. I have obtained a verdict on this claim in several cases. All of them involved situations where:
- The insured was responsible for the loss (either arson or staged theft);
- The insured made material misrepresentations in the post-loss context (either in the examination under oath or in the sworn statement in proof of loss); and
- Despite denial of the claim, the insured chose to pursue litigation against the carrier.
As with any war story, each of these cases had its unique twist, from being able to produce some of the allegedly stolen property that the policyholder had sold at a yard sale to showing through neighbors that the policyholder had misrepresented his presence at the home immediately prior to the fire (when the policyholder, the jury believed, was moving truckloads of personal property out of the house).
Thus, if you represent the insured, be aware of this possibility. While the cases in which the penalty has been awarded have unique facts, the fact is that there is some level of proof that does exist where a jury will find that the policyholder has actually acted in bad faith against the insurer.
The Statutory Bad Faith Penalty Should Rarely Be Awarded Against An Insurer
Tennessee Code Annotated § 56-7-105 provides that when an insurance company refuses to pay a loss within 60 days after demand, the company shall be liable to the holder of the policy, in addition to the loss and interest thereon, in a sum not exceeding twenty-five (25%) percent of the liability for the loss, providing that it appears to the court or jury that the refusal to pay the loss was not in good faith and that such failure inflicted additional expense, loss or injury upon the holder of the policy. This allegation appears far too often in cases where an insurer had a justifiable reason to refuse to pay a claim. Obviously, if the insurer prevails, the insured would clearly not be entitled to the statutory penalty since one of the elements necessary for recovery is that the policyholder must be successful in his suit to recover the policy proceeds. See, e.g., Squires v. Republic Ins. Co., 572 F.2d 560, 561 (6th Cir. 1978).
But what if the insurer loses on the coverage case? Does that man that the statutory ”bad faith” should be automatically awarded, even where the policyholder has been forced to incur expenses and bring suit? Absolutely not! Under the Tennessee statute, the penalty 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). An insurance company is entitled to rely upon the available defenses if there are substantial legal grounds that the policy does afford coverage for the alleged loss. Nelms v. Tennessee Farmers Mutual Ins. Co., 613 S.W.2d 481 (Tenn. Ct. App. 1978), cert. denied.
Some cases have held that the penalty should not be awarded to the insured under the statute unless the insurer’s conduct involves moral turpitude. Moore v. New Amsterdam Casualty Ins. Co., 199 F.Supp. 1941 (E.D. Tenn. 1961). The best definition of “moral turpitude” I could find is that “moral turpitude” is:
An act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen or to society in general, contrary to the accepted rule or right and duty between man and man.
Brooks v. State, 213 S.W. 2d 7, 11 (Tenn. 1948). How often does such action occur in claim handling? Very rarely. While attorneys may disagree with the claim handling, or the decision made by the insurer, an objective assessment of its conduct should lead, more often than not, to the conclusion that the carrier did not violate this statute, and did not fail to act in good faith.
