Bad Faith Penalty Against an Insured?
My learned friend Parks Chastain recently posted here that Tennessee law provides for a reverse bad faith penalty of not more than 25% of the amount claimed when a policyholder does not bring an action in good faith. Parks' use of the adage "what's good for the goose is good for the gander" is right on point. I agree that a policyholder that files a clearly fraudulent claim should be held accountable. For example, if an insured files a claim for theft that is clearly proven to be staged and fraudulent, a reverse bad faith penalty is appropriate.
However, the facts necessary to bring such a claim are not commonplace, and if alleged in the wrong case, could prove catastrophic for the insurance company. If a jury finds in favor of the insured and believes he or she to be truthful, the fact that the insurance company has added insult to injury by filing a counterclaim will just add fuel to the fire as to the insured's bad faith or Consumer Protection Act claim against the insurer.
The "Goose and Gander" Rule - The Policyholder's Bad Faith
Tennessee Code Annotated § 56-7-106 brings the old adage of “what’s good for the goose is good for the gander” to first party insurance litigation in Tennessee. It provides a penalty against the policyholder of an amount not exceeding twenty-five percent (25%) of the amount claimed when:
- The policyholder does not recover under the policy; and
- Where the policyholder did not bring the action in good faith.
There is much less case law on this statute. As I have urged elsewhere on this blog, with respect to “bad faith” allegations against the insurance carrier, it would seem rare that this penalty would be awarded against an insured. In twenty years of practice however, I have actually seen this penalty awarded more often than the penalty under TCA § 56-7-106. I have obtained a verdict on this claim in several cases. All of them involved situations where:
- The insured was responsible for the loss (either arson or staged theft);
- The insured made material misrepresentations in the post-loss context (either in the examination under oath or in the sworn statement in proof of loss); and
- Despite denial of the claim, the insured chose to pursue litigation against the carrier.
As with any war story, each of these cases had its unique twist, from being able to produce some of the allegedly stolen property that the policyholder had sold at a yard sale to showing through neighbors that the policyholder had misrepresented his presence at the home immediately prior to the fire (when the policyholder, the jury believed, was moving truckloads of personal property out of the house).
Thus, if you represent the insured, be aware of this possibility. While the cases in which the penalty has been awarded have unique facts, the fact is that there is some level of proof that does exist where a jury will find that the policyholder has actually acted in bad faith against the insurer.
