The issue of whether punitive damages are available to an insured when an insurance company wrongfully denies a claim was recently addressed by the Tennessee Court of Appeals in Riad v. Erie Insurance Exchange. Over the years, this issue has been confused by many state and federal courts in Tennessee, but the Riad court got it right. In a nutshell, the Court of Appeals held that punitive damages can be available in breach of contract cases (even those involving insurance policies) under certain circumstances. Those circumstances are limited to "the most egregious cases," and an award of punitive damages is appropriate only when there is clear and convincing proof that the defendant has acted intentionally, fraudulently, maliciously, or recklessly. Rogers v. Louisville Land Co., 367 S.W.3d 196 (Tenn. 2012).
The Riad case is an important opinion in light of the general consensus of Tennessee courts that there is no common law tort of bad faith and the legislature's action in 2011 to remove the insurance industry from the purview of the Tennessee Consumer Protection Act. Generally, it stands for the proposition that there are other methods of recovery for extra-contractual damages outside of the 25% statutory bad faith penalty provided for at T.C.A. 56-7-105. Although the circumstances in which punitive damages are available in insurance disputes are clearly limited, this case makes clear that they are indeed available when the circumstance are right. And when those circumstances exist, there is no need to allege bad faith. All that is required is a breach of contract by the insurance company that was "intentional, fraudulent, malicious, or reckless."
You might recall the 2011 legislation that took away consumers' right to bring claims against insurance companies under the Tennessee Consumer Protection Act, but that same legislation seemed to recognize the existence of a common law cause of action for bad faith in Tennessee. (click here for a prior post on that topic). Since that time, I've been tracking a couple of bad faith cases working their way through the Tennessee appellate courts. Today the Court of Appeals for the Western Section issued its ruling in one of those cases. See U.S. Bank v. Tennessee Farmers Mutual Insurance Company.
The opinion itself was rather "ho-hum," and doesn't offer much of any substantive discussion regarding common law bad faith claims, but it impliedly holds that such a cause of action exists. The issue in the case was whether a mortgage company who is a named mortgagee on an insurance policy has a duty to notify the insurance company of a foreclosure on the insured property. The Tennessee Supreme Court previously ruled that no such duty exists, but on remand one of the issues to be considered was the Bank's common law bad faith claim. After hearing proof on the issue, the trial court (Judge Clayburn Peeples) ruled that such a cause of action exists and expressly held that Tennessee Farmers Insurance Company acted in bad faith in denying the Bank's claim for insurance proceeds. In reviewing Judge Peeples' decision, the Court of Appeals quoted his ruling at length, which stated in part:
US Bank has shown by a preponderance of the evidence the following elements of a claim for common law claim for a bad faith failure to pay:
a.That [Tennessee Farmers] issued a policy of insurance to US Bank and that US Bank made lawful, reasonable claim under that policy;
b. That [Tennessee Farmers] intentionally refused to pay US Bank's claim;
c. That [Tennessee Farmers] had no reasonably legitimate or arguable reason for its refusal to pay the claim;
d. That [Tennessee Farmers] had actual knowledge of the absence of a reasonably legitimate, debatable or arguable reason for the refusal; and
e. That [Tennessee Farmers] intentionally failed to determine whether it had a reasonably legitimate or arguable reason for refusing to pay US Bank's claim.
In reviewing this holding by the trial court (which was a specific issue on appeal), the Court of Appeals seemingly accepted the elements of a bad faith claim as set forth by Judge Peeples, but then went on to hold that the facts before the Court did not amount to bad faith. Its a rather odd opinion for such a big issue, but nonetheless is an extraordinary win for victims of insurance bad faith in Tennessee. The door is now wide open for future common law bad faith claims.
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 . . .