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.
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.
Yesterday I wrote about the February 2011 landmark decision of the Tennessee Supreme Court in Morrison v. Allen. There was one relatively minor point concerning an alleged misrepresentation in an application that grabbed my attention. In Morrison, the insurance company denied Ms. Morrison's claim for life insurance benefits based on alleged misrepresentations of her husband in his application for insurance. Specifically, the application asked, "In the past five years, have any proposed insureds been charged with or convicted of driving under the influence of alcohol or drugs or had any driving violations?" The insured answered, "No."
The alleged misrepresentation arose from the insured's conviction for driving while impaired ("DWI") a couple of years prior to the submission of the application. On first glance, it might appear clear that failure to disclose the DWI would constitute a material misrepresentation based on the language of the question in the application. But not so fast. The Supreme Court affirmed that the insured's response was technically correct because he was convicted of DWI, which is a separate offense from driving under the influence.
Although this particular issue was literally just a footnote in the very lengthy opinion, it might come in handy one of these days for the unfortunate soul who finds his claim denied as a result of an undisclosed DWI.
Consider this scenario - - Jane Doe insures her home for $100,000, with a $1,000 deductible. Unfortunately, Jane's house burns to the ground and is undeniably a "total loss" within the meaning of Tennessee's valued policy statute (click here for a prior post on when a loss should be considered a "total loss"). After months of investigation, the insurance company decides to pay the claim "in full" and sends a check to Jane for $99,000 (policy limits minus the deductible). Was Jane inappropriately shorted $1,000. In my opinion, yes.
Under Tennessee's valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs. In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases. My research reveals only one case addressing this precise issue, and that is Thurston Nat'l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976). In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas' valued policy law. There is no logical reason why the same rule of law would not be true in Tennessee as well.
Chip Merlin, in his Property Insurance Coverage Law Blog, commented a few days ago about a recent case out of Washington, Holden v. Farmers Insurance of Washington, 2010 WL 3504821 (Wash. Sept. 10, 2010). The issue there was whether sales tax should be included in insurers' calculations of actual cash value and replacement cash value. In summary, the court rightly determined that sales tax should be included when determining the amount owed, even when paying actual cash value as opposed to replacement cost value.
Although sales tax is a minor issue in many claims, it can add up to a lot of money, particularly when viewed from the vantage that an insurer in Tennessee is basically saving ten percent by refusing to pay sales tax. To view Merlin's full post with a more in depth discussion of the case, click here.