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.
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.
