Back in 2009, Parks wrote about the Spears v. TFMIC case and correctly cited it for the proposition that an insured must submit to an examination under oath upon request, and that a failure to do so can bar recovery on an insurance claim. Notably absent from the Spears opinion was any requirement of prejudice in order to avoid payment. However, the Spears opinion is muddied a bit by a prior decision from the Sixth Circuit Court of Appeals in Talley v. State Farm Fire & Cas. Co., 223 F.3d 323 (6th Cir. 2000), in which the court held that an insurance company must prove prejudice in order to preclude recovery.
So what's the rule? Must an insurance company show prejudice to avoid payment of a claim on the basis of a refusal to submit to an EUO? In 2012, we almost got an answer to that very question in Farmers Mutual v. Atkins, 2012 Tenn. App. LEXIS 184 (Tenn. Ct. App. 2012). In that case, Judge Stafford noted the potential conflict between Spears and Talley, and seemed primed to rule on this murky issue. But unfortunately the ruling wasn't meant to be. In short, the trial court apparently just noted the divergence of opinion on the issue and then granted an interlocutory appeal without ever ruling at all. Thus, the matter was not ripe for consideration by the Court of Appeals and was remanded.
This particular topic isn't particularly exciting, but nonetheless should be considered by both insurers and insureds when claims are denied for failure to submit to an EUO. Depending on how this issue is ultimately decided, an insured's failure to show up just might not put the proverbial "nail in the coffin" of the insured.
Practitioners should be aware that Tennessee courts generally apply the law of the state where an insurance policy was issued and delivered if there is no enforceable choice of law clause in the policy. Gov't. Employees Ins. Co. v. Bloodworth, 2007 Tenn. App. LEXIS 404 (Tenn. Ct. App. 2007). So, for example, if a policy on a property in Nashville is issued and delivered to the owner at his home in California, the law of California would generally apply. However, the Bloodworth case cited above noted an exception that provides the an insurance policy is governed by the law of the principal location of the insured risk unless some other state has a more signficant relationship..
But what happens when there is a package policy that is delivered in California but covers properties in various states across the county? That's when it gets hairy, and there is authority going both ways. The best answer is probably found inThe Restatement (Second) of Conflicts, 193 cmt. f, which indicates that the court should treat such a case as if it involves multiple policies, each insuring its own individual risk. So if a house is located in state X were damaged by fire, then the law of State X would apply under this analysis.
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 . . .
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.
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.
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.
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.