The End of the Consumer Protection Act in Insurance Cases

This will probably come as no surprise to most but my feelings concerning the legislature's recent removal of the insurance industry from the protection of the Tennessee Consumer Protection Act are pretty strong.  I called every member of the legislature I knew, and some I didn't, in an attempt to stop the bill.  But there is a very strong insurance lobby in this state, and the bill flew through both the House and the Senate with flying colors.  

The saddest part about the new law is that it sends a clear signal that insurance companies are above the law, i.e., that ethical conduct is required of all businesses in this state except insurance companies who are free to act unfairly and deceptively without the threat of private recourse via the consumer protection statutes.  A decision by an insurance company to deny a claim is a very calculated risk.  Only a very small percentage of people whose claims have been denied will even pursue litigation.  And without the protection of the Consumer Protection Act, things will only get worse.  The consumer protection statutes helped even the playing field, and heightened the risk for insurance companies that wrongfully denied claims by exposing them to attorney's fees and treble damages in the event a judge decided that it intentionally acted unfairly or deceptively.  

The new law only hurts the consumer and really created no benefit at all for the insurance companies out there that were already acting in a good faith fashion.  On the other hand, it benefits greatly those insurance companies who treat their insureds unfairly.  This was not an area of the law that needed reform.  There was no risk of a runaway jury because the judge, not the jury, decided whether to award attorney's fees and treble damages under the Consumer Protection Act.  But without those protections, insurance companies can freely fun roughshod over insureds with little recourse.  

There is one positive about the new law, and that is that the language utilized in the new statute may have acknowledged the existence of a common law bad faith claim. More on that in future posts . . .

Tennessee Legislature Restricts Application of Consumer Protection Act, Overruling Myint v. Allstate

On April 29, 2011, the Tennessee legislature adopted House Bill 1189 was enacted into law and signed by Governor Haslam. Public Chapter No. 130 will be codified in Tennessee Code Annotated, Title 56, Chapter 8, Part 1. The signed law is available by clicking here.

The law amends Title 56 related to insurance business acts and practices. It provides that Titles 50 and Title 56 shall provide the sole and exclusive statutory remedies and sanctions available for the “alleged breach of, or for alleged unfair or deceptive acts and practices in connection with a contract of insurance.” . The law essentially overrules the case of Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn.1998), which had allowed recovery under the Tennessee Consumer Protection Act for unfair or deceptive acts or practices in the handling of an insurance claim, obviously after the consumer transaction which created the relationship between the insured and insurer. This brought with it exposure for attorney fees and the potential for trebled damages.

 

Prior to Myint, it had long been the rule that statutes such as T.C.A. § 56-7-105, provided for the sole and exclusive remedies available to insureds for a carrier’s failure to handle a claim in good faith. It appears this is now the case once again. 

 

In other entries on this blog, reader can see how Tennessee Consumer Protection Act allegations have expanded in scope since the Myint decision. I have handled cases where the consumer protection act allegations against the carrier were based upon alleged actions of independent adjusters, and even independent expert witnesses. Because of the expansive scope of Myint, courts were reluctant to dismiss even those cases on summary judgment. 

Discovery in Bad Faith and Consumer Protection Act Cases, Part I

In bad faith and Tennessee Consumer Protection Act cases, I routinely run into work product objections during discovery. Often these objections are made even as to reports and documents generated before the claim was denied. I believe work-product objections as to pre-denial materials are improper. As we know, Rule 26.02(3) protects against disclosure of materials prepared in anticipation of litigation. In general, courts seek to distinguish those materials that are generated “in the ordinary course of business” from those prepared “in anticipation of litigation.” The work product doctrine does not protect documents prepared in the ordinary course of business. See Boyd v. Comdata Network, Inc., 88 S.W.3d 203, 225 n.33 (Tenn. Ct. App. 2002) (citing Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir. 1987). In light of the above, the obvious question in litigation involving an insurance claim is when the insurance company begins investigating and acting “in anticipation of litigation” as opposed to doing so in the ordinary course of its business. Fortunately, there is case law to help, and I’ve compiled a few helpful citations below for use by lawyers fighting this decades old battle:

 

  • “The investigation and evaluation of claims is part of the regular, ordinary and principal business of insurance companies." Fine v. Bellefonte Underwriters Ins. Co., 91 F.R.D. 420, 422 (S.D.N.Y. 1981).
  • “It is . . . well established that insurance companies have an independent obligation to review and follow up on claims, and their reports are thus not protected, although they are usually prepared with an eye toward litigation." Fru-Con Constr. Corp. v. Sacramento Mun. Util. Dist., 2006 U.S. Dist. LEXIS 53763 at *4 fn. 3 (E.D. Cal. July 20, 2006) (citing Harper v. Auto-Owners Ins. Co., 138 F.R.D. 655 (S.D. Ind. 1991)).
  • Any investigation, including statements obtained as part of this process, would fall within the insurance company's ordinary business and independent duty to investigate and evaluate claims. Accordingly, it can be presumed that "documents which were produced by an insurer for concurrent purposes before making a claims decision would have been produced regardless of litigation purposes . . . ." Stout v. Illinois Farmers Ins. Co., 150 F.R.D. 594, 605 (S.D. Ind. 1993).

If any Tennessee practitioners have dealt with this issue and received rulings from trial courts, I keep a database of such Orders and would love to hear from you.  

 

What Does a Mercedes-Benz Have to Do with Insurance Litigation?

The Tennessee Court of Appeals, Eastern Section, issued a new opinion yesterday interpreting the Tennessee Consumer Protection Act.  The case, Timoshchuk v. Long of Chattanooga Mercedes-Benz et al (.pdf), arose from a Mercedes dealer's sale of a "new" Mercedes which turned out to be not so new.  A few months after purchasing his shiny new Mercedes, the very distraught and obviously angry new car owner discovered that the paint on the vehicle's trunk appeared discolored in certain lighting conditions.  The car owner eventually learned that the car had been damaged during shipment and subsequently repaired by a dealer.  Now thoroughly upset, he demanded to return the vehicle, which the dealer refused to accept.  As expected, a lawsuit ensued.

The issue in the case, as relevant for our discussion here, was whether the defendants violated the Tennessee Consumer Protection Act's general prohibition "unfair or deceptive acts or practices affecting the conduct of any trade or commerce constitute unlawful acts or practices."   T.C.A. 47-18-104.  The defendant argued that the TCPA claim was barred because the plaintiff could not prove one of the specifically enumerated acts or practices of TCA 47-18-104(b).  The Court of Appeals disagreed with this analysis, noting that such an argument ignores the fact that a specific claim was made under the broader prohibition of T.C.A. 47-18-104(a).

Although the case itself has nothing to do with insurance, it is important because it makes clear that a plaintiff does not have to plead one of the specifically enumerated unfair or deceptive acts or practices of TCA 47-18-104(b).  Granted, TCA 47-18-104(b) also has a "catch-all" provision that prohibits "engaging in any other act or practice which is deceptive to the consumer."  But this provision of subsection (b) only prohibits "deceptive" conduct, not both "unfair" and "deceptive" conduct.  This distinction is important because "unfair" and"deceptive" have been separately defined by Tennessee courts, with the term "deceptive" having a somewhat more limited scope than "unfair."  

I've had this issue come up in several cases when defense attorneys argue that a particular claim is barred when relief is sought for an act that fits into the definition of "unfair" but not "deceptive."  Although I never considered it to have much merit, such an argument is now officially dead in the water. The Timoshchuk case makes clear that there are really two "catch-all" provisions in the TCPA. One is at TCA 47-18-104(b)(27) (engaging in "any other act or practice which is deceptive"), but the general prohibition in TCA 47-18-104(a) that prohibits both unfair and deceptive acts or practices is a stand-alone "catch-all" provision as well.  

The lesson?  If you are going to plead violations of the TCPA by pleading violations of specific portions of the statute, then be sure to plead both TCA 47-18-104(a) and (b).  

By the way, the unhappy Mercedes owner didn't fare too well.  His claims were dismissed (for reasons completely unrelated to the issues discussed above).

 

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.



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).