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.

The Proper Scope of Appraisal - Thoughts from the Battlefield

In Parks' last post, "What is the Proper Scope of Appraisal in Tennessee?", he pointed out the Merrimack decision in which the Court of Appeals held that appraisal is not appropriate for decisions regarding coverage and liability.  In considering my response, I spoke with Chuck Howarth, who is part of The Howarth Group, a claims consulting and public adjusting business based out of Nashville.  Chuck's perspective on the appraisal process is unique for two reasons.  First, his group handles more insurance appraisals in Tennessee than anyone else of which I'm aware.  Second, he worked for eight or ten years with State Farm as an adjuster before moving to the other side of the fence as a public adjuster, which is where he's served for almost 25 years now.  In fact, he even trained staff adjusters for State Farm so his experience with the inner workings of insurance companies can come in handy.

So, when Chuck and his business partner, Denis Rowe (both Tennessee Public Adjusters), read Parks' recent post about appraisal, they had a few comments.  First, as to whether appraisal can be beneficial, they stated:

While we have used both public adjusting and the appraisal process to resolve claims, we have found that in Tennessee, Alabama, and Kentucky we get far better settlements using appraisal than serving as a property owner's public adjuster.  Of course its critical that a public adjuster have signficant experience with the appraisal process before heading this road.

Another issue they pointed out was that some insurance companies are taking the Merrimack case to the extreme and "are trying to prevent appraisals from happening by saying that the only thing an appraisal panel can do is to determine the pricing of their scope that they have decided is part of the loss."  Under this interpretation, the insurance company, not the appraisers, determine the scope of the damage.  This is definitely not good for insureds because the biggest problem with insurance adjusters' estimates is usually the scope of the necessary repairs, not the price.  For example if a tornado damages a home and everyone agrees the damage is covered, an appraiser's job would be to determine what needs to be repaired and the necessary cost of those repairs.  In that situation, some insurance companies would counter that an appraisal is inappropriate to determine what items need to be repaired (i.e., the scope), but rather appraisal is only appropriate for determining the necessary cost of repairs for the scope as determined by the insurance company.  Although I've not researched that particular issue yet, I feel certain that insurance companies taking this position are dead wrong.  More on that next time.

What is the Proper Scope of Appraisal in Tennessee?

In the past ten (10) years, we have seen much litigation arise concerning the proper scope of the appraisal clause. Although different policies have different provisions, the “gist” of an appraisal clause can be seen in the following policy provision:



If we and you disagree on the amount of loss, either may make written demand for an appraisal of the amount of loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. 


These “simple” provisions have created a myriad of issues. Chief among them is – just what exactly is this appraisal condition supposed to decide? It is important for all to understand what binding effect an appraisal award has, and what effect it does not have. The most common dispute centers over questions of coverage and causation. Does the appraisal clause resolve questions of coverage? What about questions of whether a particular element of damage was caused by a particular covered, or non-covered, event.


In Tennessee, the case of Merrimack Mutual Fire Insurance Company v. Batts, 59 S.W. 3d 142 (Tenn. Ct. App. 2001), perm app. denied, established that the appraisal process does not resolve questions of causation or coverage. The appellate court specifically noted:


·        “An appraiser’s authority is limited to the authority granted in the insurance policy or granted by some other express agreement of the parties.” Id. at 152.


·        “The appraisal clause in Mrs. Batts’s homeowners policy is limited to determining the ‘amount of the loss’-the monetary value of property damage.” Id.


·        [The appraisal clause] “does not vest the appraisers with the authority to decide questions of coverage and liability.” Id.


In the case, in which I represented the carrier, an appraisal award was entered. The company went through the award, and declined to pay for certain things because they (1) were not covered and/or (2) the damage was not caused by the particular tornado loss at issue.


The Court indicated that questions of coverage and causation were not within the authority of the appraisal panel. These issues could be resolved by the court, if necessary. The court also established that appraisal is NOT arbitration.


That is the right answer, I submit. The Court did note that it would also have been appropriate to go through the claim before entering appraisal, and simply decline to enter appraisal on issues of coverage and causation. 

Should Contractors Be Named As Payees On Insurance Payment Drafts?

I write today to explain why insurance companies include the name of contractors on insurance payment drafts, sometimes to the chagrin of policyholders. Unfortunately, in many instances, the homeowner and his/her contractor have come to a disagreement by the time the insurance company is ready to issue the final dwelling payment, usually an amount of recoverable depreciation to be paid upon completion of repairs. When the draft is issued, and provided to the insured, we sometimes receive a request to reissue the draft without the contractor because the contractor will not sign the check because of the dispute with the homeowner.


Should the insurance company list the name of the contractor on the draft? The statute is actually not crystal clear. Tennessee Code Annotated TCA 56-7-111 provides:


Property or casualty insurance -- General contractor as a payee


When insured property losses in excess of one thousand dollars ($ 1,000) accrue to the owners of dwellings or other structures insured under policies of property or casualty insurance as defined in § 56-2-201, the insurance company shall name the general contractor, as defined in § 62-6-102, of any uncompleted construction or building contract as a payee on the draft to the owner covering payment for the loss. The insurance company shall name the general contractor as payee on such draft pursuant to this section regardless of whether the work which was performed or is yet to be performed is less than twenty-five thousand dollars ($ 25,000).


Some have tried to argue that this does not require the naming of a restoration contractor on the draft. They argue it only applies when there is building going on at the date and time of loss. I do not think such a construction of the statute in its entirety is correct. We have recently had the opportunity to look at the legislative history of this statute, and I think it supports the proposition that contractors working on repairs must be named if the statute otherwise applies. 


In 1974, the Tennessee House addressed the Bill, which had passed the Senate’s consent calendar without opposition. The House gave only brief consideration to the Bill also. But, what happened in that short period of time gives us a glimpse into the legislative intent behind the statute. During the introduction, Representative Bowman explained that this bill allowed general contractors to be placed as payee on a check so there is “no hold up with payment to the general contractor when he is repairing houses.” 


Then, in 1998, the statute was amended to include the language that appears in the last sentence of the statute “regardless of whether the work which was performed or is yet to be performed is less than twenty-five thousand dollars.” This amendment was brought by Senator Carter, who explained that the Vice Mayor of Jackson (who was a contractor) was repairing property damage as part of an insurance claim, which was valued at less than $25,000. The general contractor was not listed as a payee on the check from the insurance company, and the property owner for whom the repairs were made filed bankruptcy, and the contractor was never paid. His purpose in the amendment was to clarify that a contractor who performed work totaling any amount (even less than $25,000) was entitled to be named as a payee on a check from the insurance company. As the story of Jackson’s Vice Mayor indicates he was repairing a house that had incurred damage, the legislators clearly felt he deserved to have been paid for his work.  


Thus, while the statute is not crystal clear, this history is supportive of the primary interpretation given to the statute. I hope this clears things up for both sides of the argument. 

Answering Questions Posed About Valuation for Purposes of the Co-Insurance Penalty


We have had some excellent comments and questions on the topic of co-insurance, and specifically whether there can be any “iron-clad” or “black and white” rules as to who is responsible for any undervaluation. Obviously, the readers are concerned as to who, between the applicant/insured and the agent or company, should be held responsible for the valuation of the property. 


There may be some “hard and fast” rules in some jurisdictions, but for the most part, the answer as to who will be responsible is – it depends! If an applicant approaches an agent, and affirmatively represents the value of property, and the agent or company takes no step to assess the property’s valuation, then the likelihood is that the insured would be responsible for any undervaluation. This should be true even if the applicant is basing his or her opinion as to the value of the property on a real estate appraisal done in the course of obtaining financing, a tax assessment (which almost always undervalues the property), or any other type of valuation. The point here is that, as between the agent and the applicant, the only person discussing valuation is the applicant. 


However, experience shows that agents and companies are often involved in the valuation of property. For instance, most agents today can run a replacement cost calculation based upon the square footage, the type of construction, and the location of the property. If we were to assume that an applicant contacted an agent, and stated that he or she did not know the value of the property (if, for instance, it was inherited),and asked the agent to run a valuation on the property, then who should be responsible if the coverage is issued for that amount,? In my mind, that is going to be the agent’s responsibility, and the carrier is probably going to be estopped to contest the insurance to value of the property, such that the co-insurance is not going to be applied. In another instance, as our readers know, Tennessee’s valued policy law provides a 90 day period during which a company can inspect the property and assign a different value to it than that contained on the application. I have seen his inspection change the value of the insured property on only a few occasions, but the point for consideration here is that a valuation specifically placed on property by the insurance company within 90 days of the issuance of the policy should estop the insurance company from contesting the value of the property when a loss occurs shortly thereafter.  


The bottom line is that there is really no rule, in my opinion, that will govern each and every case without regard to the facts. It is extremely important to assess who (as between the applicant and the agent/insurer) placed the value on the property. If the applicant had sole responsibility for placing the value, then the applicant should be responsible for an undervaluation. If the agent or company placed the value, then the company probably should not be able to assert the undervaluation of the property (presuming that the insured provided correct and accurate information). If it was a mixture of the two, it is going to depend on the circumstances. 

Innocent Spouse - What has the Tennessee Supreme Court signaled with respect to the innocent spouse or innocent co-insured doctrine?


Brandon has written a couple of excellent posts on the recent Tennessee Court of Appeals opinion of Tuturea v. Tennessee Farmers Mutual Insurance Company and whether the opinion calls the ability of an insurer to “end-around” (as he puts it) the innocent spouse or innocent co-insured doctrine. 


I think we must look to the pronouncements of our state’s highest court, the Tennessee Supreme Court. The most in depth discussion of these doctrines came in the case of Spence v. Allstate Ins. Co. , 883 S.W.2d 586, 591 (Tenn. 1994). In the case, Allstate relied upon the following provisions to deny recovery to the allegedly innocent spouse:



“You” or “Your”-means the person named on the declarations page as the insured and that person's resident spouse.

“Insured person”-means you and, if a resident of your household: (a) any relative; and (b) any dependent person in your care.

. . . . .


The terms of this policy impose joint obligations on persons defined as an insured person. This means that the responsibilities, acts and failures to act of a person defined as an insured person will be binding upon another person defined as an insured person.

. . . . .


This policy is void if it was obtained by misrepresentation, fraud or concealment of the material facts or if you intentionally conceal or misrepresent any material fact or circumstance, before or after loss.

Allstate contended that the policy unambiguously sets forth its intention to prevent an innocent co-insured from recovering for losses caused by the wrongdoing of an insured. The Tennessee Supreme Court disagreed, but stated:

Although we would be inclined to agree if these were the only provisions applicable to this case, other relevant provisions introduce a substantial amount of ambiguity into the status of an innocent co-insured under the policy. For example, in addition to the “CONCEALMENT OR FRAUD” provision, Allstate relied upon the following provision in its denial letters to James and Pamela Spence:



We do not cover loss to the property ... resulting in any manner from:

. . . . .

6. Intentional or criminal acts of an insured person, if the loss that occurs: (a) may be reasonably expected to result from such acts; or (b) is in fact the intended result of such acts.


Spence, 883 S.W.2d at 591. I would simply note that this case seemingly signals that our highest court would allow an insurance company to avoid the innocent spouse or innocent co-insured doctrine if the policy were clear, and its provisions did not create the ambiguity discussed in Spence.

Supplemental Claims and Reopen Claims - Is There a Difference?

Shaun Marker and Jeremy Tyler, attorneys at Merlin Law Group in Florida, recently posted a pair of blog posts - here and here -- regarding the difference between "supplemental" claims and "reopen" claims.  Indeed, there is a difference, and Shaun and Tyler did a good job showing why.  The distinction is especially relevant here in Tennessee after the recent flooding, as many Nashville and Middle Tennessee residents will find additional, previously unknown, damage in the months to come.

Thanks as always to the fine minds at the Property Insurance Coverage Law Blog.

Documenting Your Flood Claim - A First Hand Perspective

My home and garage were victim to the flood also, but we were much more fortunate than our neighbors, whose homes were totally destroyed. Those of us who work with insurance take much knowledge for granted. But, many people have had a tough time finding information, and have had to act without direction from anyone just to salvage what they can. So, remember the following at least:

1.         PLEASE make sure you document your claims. I know – from personal experience – that taking pictures of ruined items is not the first thing on your mind as water is still present, but make sure you document the condition of your property, and the damage. Most companies are overwhelmed due to the nature of this disaster, and much of your property may be gone by the time an adjuster actually visits your home. Pictures are an absolute necessity.

2.         Also, although I think this is mentioned in the FEMA materials Brandon references, you will need to get two (2) estimates for most items. 

3.         Finally, if you - like us – are replacing your HVAC units, and will be claiming those on your flood policy, preserve the units for the inspection of the company or FEMA representatives.

I wish all the best. If able, help those who have suffered more than you. And – putting off the lawyer hat and putting on the parent hat – get the kids involved in helping. It teaches them a great lesson about priorities.

Cowpokes and Deductibles

I recently resolved a case that I thought was interesting for this day and age, particularly here in Tennessee. Here’s the scenario – an insured claims to have had cattle stolen from him on multiple occasions, but by the same person - yes, you guessed it, the “cowpoke” in our story. 

It seems that our “cowpoke” used his position as ranch hand to take cattle. The “cowpoke’s” trailer carried no more than 20 head of cattle at one time, but there were several hundred head missing. The policyholder submitted a claim for “rustling loss.”  Let’s assume for the sake of argument there were over 200 head taken over a year period. For the sake of example, let’s assume the cattle were valued at $1,500.00 per head, and the applicable policy limit was only $60,000.00. The deductible was $1,000.00 per loss.

Obviously, there is not enough in the coverage limit to cover all the cattle unless, as a very good lawyer argued – each event when the cattle were transported from the farm was a separate theft, thereby opening up a separate limit each time it occurred. Obviously, the insured’s attorney recognized that his argument meant a separate deductible would apply to each claim, but he was more than willing to “bear that burden.” 

Case law in Tennessee was harder to find than those cattle, so we turned elsewhere. We obviously found that policy language was important, but that courts which had addressed losses where there was a systematic and organized scheme to steal from an insured have held that such a scheme would be a single occurrence or theft subject to a single deductible. For instance, one court found that there was but a single occurrence even though there were 653 separate “thefts.” EOTT Energy Corp. v. Storebrand Internat. Ins. Co., 45 Cal.App.4th 565, 578, 52 Cal.Rptr.2d 894, 901 - 902 (Cal.App. 2 Dist.,1996). The Court, based on the language in the contract and precedent, found one occurrence because “there was a systematic and organized scheme to steal” that proximately caused the injury. Id. at 575, 52 Cal.Rptr.2d 894.

In PECO Energy v. Boden, 64 F.3d 852 (3rd Cir.1995), an electric utility presented a claim to its various insurers under a series of all risk policies for losses it sustained over a six-year period as a result of a multitude of thefts of fuel oil by an independent trucking firm with whom the utility had contracted to haul its fuel oil to various generating facilities. The case was tried to a jury, which found that each theft was a part of a larger scheme and that the scheme to steal was the proximate cause of each theft. The Third Circuit upheld the district court's determination that the multiple thefts constituted a single occurrence, noting that in deciding the number of occurrences, a court should determine “if there was but one proximate, uninterrupted, and continuing cause which resulted in all of the injuries and damage.” Id. (quoting Appalachian Ins. Co. v. Liberty Mut. Ins. Co., 676 F.2d 56, 61 (3d Cir.1982)). The Court concluded that “when a scheme to steal property is the proximate and continuing cause of a series or combination of thefts, the losses for liability insurance purposes constitute part of a single occurrence.”

There are cases to the contrary, but this seemed to be the majority position. One court noted that each event had to be separate because each theft required a new decision by thief to get into his truck, drive to insured's storage facility, and steal insured's property.  Basler Turbo Conversions LLC v. HCC Ins. Co., 601 F.Supp.2d 1082 (E.D.Wis.,2009).



What happens when an insured does not carry enough insurance on his/her/its property? Often, the answer is that, that insured, when suffering a loss, also suffers what some have characterized as a “co-insurance” penalty, or as some prefer, a penalty for maintaining insufficient “insurance to value.” 


Remember that, for the most part, the insured is the person initially setting the value of the property. In most instances, an insured will be asked what the property is worth by the agent, or perhaps how much insurance is designed. When that coverage is written, and a loss occurs, the companies will often look to see if the insured had sufficient insurance when compared to the value of the property. 


Many policies - especially commercial policies - contain a formula for determining the amount of coverage owed in instances where there is insufficient insurance to value. Here is a typical formula: 


            1.         Coinsurance

                        If a Coinsurance percentage is shown in the Declarations, the following condition applies.

a.         We will not pay the full amount of any loss if the value of Covered property at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for the property.

            Instead, we will determine the most we will pay using the following steps:

(1)        Multiply the value of Covered Property at the time of loss by the Coinsurance percentage;

(2)        Divide the Limit of Insurance of the property by the figure determined in Step (1);

(3)        Multiply the total amount of loss, before the application of any deductible, by the figure determined in Step (2); and

(4)        Subtract the deductible from the figure determined in Step (3).

We will pay the amount determined in Step (4) or the limit of insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself.


So, let’s go through an example. Assume that an insured has a limit of coverage for $100,000.00. When a loss occurs, the value of the property at the time of loss is placed at $250,000.00. The policy has an 80% coinsurance percentage, meaning that the building has to be insured to 80% of value. The deductible is $500.00, and the amount of loss is $50,000.00.  Let’s follow the steps set forth above:


(1)       We first multiply the value of property at the time of loss ($250,000) by the coinsurance percentage (80%). This product is $200,000, which represents the minimum amount of insurance an insured must have to be in compliance with the Coinsurance requirements. 

(2)       Since the insured does not have that much coverage, we proceed through the calculation. We divide the limit of insurance ($100,000.00) by the figure derived in step 1 ($200,000). This leads to a figure of .50

(3)       Then, we would multiply the total amount of loss ($50,000.00) by the figure in step 2 (.50), which gives us $25,000.00

(4)       Then we subtract the deductible from this figure ($25,000.00 - $500.00), leaving $24,500.00.


The company’s proper obligation on a $50,000.00 loss is thus only $24,500.00.


Whose fault is under-valuation? In most cases I have seen, the fault lies with the insured. Remember that, typically speaking, an agent has no duty to verify the accuracy of information provided by an applicant when seeking coverage. Thus, when an applicant walks into an insurance agent’s office, and asks for $300,000.00 in insurance on his home, that’s what the agent will write. Clearly, there are some circumstances where the agent’s expertise is involved, and even circumstances when an agent provides the value, but the typical scenario involves the applicant/insured seeking a specified coverage amount. Also, remember that the carrier is actually not under a duty to inspect the property once the application is submitted and the policy is written. Elsewhere in this blog, we have discussed the imposition of the valued policy law, which can arise when the carrier has failed to inspect the property. But, the carrier can simply decide not to conduct the inspection and live with the valued policy law in cases of covered total losses. Therefore, the responsibility for valuation really lies with the insured, at least initially. 

An Insured Need Not Rebuild at the Same Premises in Order to Recover Replacement Cost

 Parks' recent post about whether an insured has to rebuild at the same location in order to recover replacement cost got me thinking, and then researching.  Here's what I found:

Although none in Tennessee, there are a dozen or so cases across the country dealing with the issue of whether an insured has to rebuild at the same location in order to recover replacement cost.  For example, in Hess v. N. Pac. Ins. Co., 859 P.2d 586 (Wash. 1993), the Supreme Court of Washington held that insureds are entitled to replace at an alternate location, but that the reimbursement amount is limited to the amount it would have cost to rebuild at the original location.  Specifically, the court stated,

"This particular limitation does not require repair or replacement of an identical building on the same premises, but places that rebuilding amount as one of the measures of damage to apply in calculating liability under the replacement cost coverage. The effect of this limitation comes into play when the insured desires to rebuild either a different structure or on different premises. In those instances, the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds."

Several other courts have rendered similar decisions.  See, e.g., Kumar v. Travelers Ins. Co., 211 A.D.2d 128 (N.Y. 1995) (holding that insurance provision offering to pay full cost to repair or replace damaged dwelling on the same premises merely established the limits of coverage and that replacement cost is limited to what it would cost to replace the damaged structure on the same premises, however, the insured is not required to replace the damaged dwelling on the same premises in order to recover replacement cost); Conway v. Farmers Home Mut. Ins. Co. , 26 Cal. App.4th 1185 (Cal. App. 1994 (“[W]hen the insured desires to rebuild either a different structure or on different premises . . . the company’s liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises); S and S Tobacco and Candy Co., Inc. v. Greater New York Mutual Ins. Co., 617 A.2d 1388 (Conn. 1992) (holding that construction of replacement structure at different location constituted replacement under the policy).

So as much I hate to say it, Parks seems to have a lot of folks with "Judge" in front of their names who agree with him.  And so I guess I agree as well.

Hope everyone had a great Thanksgiving!

In Order to Invoke Replacement Cost Coverage, Does An Insured Have to Rebuild at the Same Location?

In most cases, the answer is no. Most policies use replacement cost at a specific location as a measure of the maximum recovery that can be afforded under a property insurance policy. Most policies contain a “Valuation” condition similar to the following:

B.         Replacement Cost – When replacement cost is shown on the “declarations” for covered property, the value of covered property will be based on the replacement cost without any deduction for depreciation.


            The replacement cost is limited to the cost of repair or replacement with similar materials on the same site and used for the same purpose. The payment shall not exceed the amount “you” spend to repair or replace the damaged or destroyed property.


            Replacement cost valuation does not apply until the damaged or destroyed property is repaired or replaced. “You” may make a claim for actual cash value before repair or replacement takes place, and later for the replacement cost if “you” notify “us” of “your” intent within 180 days after the loss.


Typically, absent any other endorsement or provision, this policy language simply limits the amount of replacement cost coverage that is available to the cost of repairing or rebuilding on the same site, with like kind and quality. Therefore, if an insured wants to move to a different location, and spends more than the actual cash value payment made by the insurance company, that insured could possibly be entitled to replacement cost coverage, even though not rebuilding at the same location. 


However, it is important to recognize that the “same site” (some policies use the phrase “same location”) requirement will be a cap upon the amount of replacement costs. Let’s assume that the property insured is in Hickman County, Tennessee (a fairly rural area). It is a 2000 sq. ft. brick home with all amenities. The replacement cost of that home, for the sake of argument, would be $175,000.00. When a loss occurs, the policyholder decides that she wants to move to Williamson County, Tennessee (a more suburban area) and builds a home almost exactly like the one that existed in Hickman County. The price of this home was $380,000.00. The carrier previously paid an actual cash value amount (replacement cost less depreciation) of $125,000.00. What additional monies does the policyholder get upon completing the property in Williamson County? 

The answer should be only $50,000.00 – the amount it would have taken to rebuild the house with material of like kind and quality at the same site or same location in Hickman County. 

Thoughts on Advances

If you're a reader of insurance blogs, I'm certain you've read the recent warfare between Parks Chastain and Chip Merlin.  They both make good points on the issue of advance payments (see their posts here and here).  The truth is that there really is very little law in Tennessee concerning advance payments.  Even so, Tennessee's Unfair Claims Settlement Act of 2009 provides some guidance:

  • An insurer must adopt and implement reasonable standards for the prompt settlement of claims arising under its policies (T.C.A. 56-8-105(3)).  This would seem to necessarily require that an insurance company have standards in place for advances as to undisputed portions of a claim. Even an insurance company would have a hard time making the argument that it doesn't have an obligation to pay a few thousand dollars to its insureds after a fire to ensure that they aren't sleeping on the street until the claim is resolved in full.
  • An insurer must attempt to effectuate prompt, fair, and equitable settlement of claims submitted in which liability has become reasonably clear. (T.C.A. 56-8-105(4)).  In other words, an insurance company has an absolute obligation to promptly pay undisputed portions of a claim.
  • When making a payment, an insurer must indicate the coverage under which payment is being made.  (T.C.A. 56-8-105(10)).  Certainly an insurance company is entitled to a credit against the policy limits of the applicable coverage when it makes an advance, but this provision makes it mandatory that the insurance company let the insured know the coverage under which an advance is being made.  

Policyholder's Advocate's Blog Questioning Misconceptions on Advances Shows Extent of Misconceptions, and the Reasons Why They Are Problematic


William F. "Chip" Merlin, Jr., of the Merlin Law Group, wrote a blog in which he derided (a nice word) the blog I posted on August 18, entitled “Advances-Common Misconception.” Mr. Merlin is a Plaintiff's/Policyholder's Attorney. ( His website describes him as “The Policyholder’s Advocate.” His advocacy is evident as his comments concerning advances misunderstand the very points I was making, misconstrue the true nature of advances, evidence a misreading of the actual blog I posted. Check out his commentary at:


Chip missed the point, and also missed the reason the blog was posted. He asks:


Why do insurance company attorneys tell their insurance company clients that they can abuse their policyholders with legal immunity?


Did you see anywhere in the blog where I suggested advances should never be made? Of course not, as most who read it could tell. Even Brandon, my worthy usual adversary and co-author of this blog, has not “taken me to task,” as Chip purports to do. My point was to educate and prevent misconceptions from arising. Here are Chip’s two biggest mistakes – let’s call them continued “misconceptions” – although one wonders how someone with his experience could unintentionally misunderstand statements made in the blog:


1.         He cited to some policies that do require advances. The exact wording of my blog posted August 18 states:


Generally speaking, most insurance policies do not require the insurance carrier to make an advance


That did NOT say that no policy exists which may not require an advance.


2.         He then says we have an obligation to pay the undisputed portion of the claim – and I agree. But any knowledgeable reader knows that is not what an advance is – an advance is money paid before an investigation is complete. If it is complete, we know the undisputed portion. Based upon that analogy, he argues that payments could wait years, and violate applicable laws. Obviously, that is an incorrect assessment. If you start with a bad premise (i.e., the advance is the really the “undisputed portion”), you must reach a faulty conclusion, as Chip has done. 


Anyway, thanks to Chip for pointing out exactly why we needed to clear up misconceptions. His blog demonstrates my point exactly, although I really had not thought that anyone would have these misconceptions.


And, let me add this, my blog notes that some carriers do make advances and some do not. It is not a condemnation of advances, but rather an attempt to clear up misconceptions to which some policyholder attorneys contribute. These misconceptions evidenced by Chip’s posting cause a problem, when the attorney for the policyholder convinces the insured that a company is treating them unfairly by not making advances. The insured often decides to become adversarial, to the benefit of the policy holders attorney, when it is often not necessary.  If attorneys would be objective in their assessments as to policy obligations, much litigation could be avoided.


I enjoy the challenge of litigating with lawyers who know the rules, and understand the issues involved. When I deal with lawyers new to coverage litigation, I find that they have many of the same misconceptions I have set forth, and perhaps those that Chip has evidenced. In many cases, the companies I have represented have made advances, but the insured claimed they were not enough. The policyholder’s attorney usually writes a letter demanding an advance, copies to his client. That creates a perception it the mind of the policyholder that an advance is required, when it may not be. Things are never the same after that, as the policyholder is convinced the carrier has failed to do something required. In most cases, nothing could be further from the truth. 

Advances - Common Misconceptions


I want to address some misconceptions about advances under first party policies. By this, I mean a request for money made by an insured before the investigation is complete. While the circumstances of an insured’s loss often place the insured in a difficult financial situation, that situation does not alter the insurance contract. Therefore, let’s debunk some common misconceptions:


1.         Generally speaking, most insurance policies do not require the insurance carrier to make an advance. Rather, the policies provide a timeframe for investigation and the insured’s compliance with conditions precedent to recovery. With only a couple of exceptions, there is no right to payment until the policyholder has complied with policy conditions.   


2.         Therefore, there is no “right” or “entitlement” to an advance.


3.         Advance payments do not constitute an admission of liability. I direct your attention to T.C.A. § 56-7-131, a statute that seems to address both first and third party advance payments. To download a PDF copy, click here.


4.         If a verdict results in favor of the insured, the advanced amount should reduce the amount awarded to the plaintiff. T.C.A. § 56-7-131.


5.         Subsection (c) of T.C.A. § 56-7-131 specifically provides that any payments made by an insurance company shall be deemed to have been made pursuant to the limits of the policy, and shall be credited against the insurer’s obligation to the insured arising from the policy. 


6.         If an advance is made, and there is no coverage, the carrier should be entitled to recover that advance. 


7.         The statute also provides, as does most case law, that an advance does not toll any statute of limitations or contractual suit period.


Some carriers make advances, and others do not. Much depends upon the nature of the claim, the status of the investigation, and the situation of the insured/policyholder. When advances are made, there is no right to another advance. 


I would just reinforce for all readers that the policy will set forth the requirements imposed upon an insured, and the quicker and more completely an insured complies, the quicker and ore completely the carrier can evaluate the claim. 

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. 

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.

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 Importance of a Diary

Policyholders all too often underestimate the importance of keeping a diary of the various events that occur during the course of a claim.  Why is it important?  First, it is a simple fact that memories fade with time.  Although claims should be resolved promptly, they often are not.  The process can be complicated with numerous adjusters, claims managers, forms, conflicting instructions, etc.  Without making a record of what happened and when, important events become a blur.  By the time the claim is denied, insureds often have forgotten very important conversations and even when they remember them, the details are fuzzy.  For example, if in a bad faith claim one of the assertions is that the insurance company failed to act promptly and failed to respond to requests by the insureds, it is critical that the insured be able to show - with detail - exactly what the insurance company failed to do and the severity of the delay.  If the insured complains that an adjuster did not return his phone calls, that complaint has a lot more merit in a subsequent bad faith lawsuit if the insured can list every single unreturned phone call and the reason the insured was calling in the first place.

So what should be recorded?  Take detailed notes of all conversations with representatives of the insurance company.  Write down their names, their phone numbers, what was discussed, the date the conversation occurred, etc.   When an agreement is reached, write it down in your diary and confirm it in writing in a letter to the insurance company.  Your own actions should also be documented.  When you mail in your sworn proof of loss, document that action in your diary.  When you timely submit your personal property inventory, write down the date it was submitted and who you gave it to.  Most every insurance policy imposes certain duties on the policyholder.  Read the policy, determine what your duties are, and document your efforts to comply with those duties.  

Don't make the mistake of believing that your claim is different and put off starting a diary because you assume the insurance company is going to do the right thing and pay your claim.  If you're going to assume anything, go the opposite direction and document everything.  The little bit of extra effort will be worth it, and could be the difference in ultimately getting the claim paid.