Allstate Ins. Co. v. Tarrant - Part 1

In March 2012, the Tennessee Supreme Court issued a landmark opinion concerning the liabilty of insurers and insurance agents in cases involving failure to procure and maintain appropriate insurance coverage.  The case is Allstate Ins. Co. v. Tarrant.  The case is a "must read" for insurance practitioners, and is full of good nuggets.  Today I'll address the basic facts of the case and the first issue of ratification.

The basic facts in the Tarrant case were that Mrs. Tarrant was involved in an automobile accident, resulting in injuries to the driver of a motorcycle.  The injured motorcycle driver then sued the Tarrants, alleging that they were liable for his injuries. After the personal injury suit was filed, a dispute arose between the Tarrants and their vehicle insurer, Allstate, as to the amount of insurance coverage that was available.  Allstate claimed that Mr. Tarrant had requested that his agent move the vehicle from a commercial policy with limits of $500,000 to a personal policy with limits of $100,000.  Mr. Tarrant denied that he directed his agent to make that change, and that the transfer was the result of the agent's mistake. 

The agent didn't deny that the agency may have made a mistake, but argued that it was the Tarrants' responsibility to notify the agency of the mistake upon his receipt of the proof of insurance cards.  Instead, Mr. Tarrant did not notify the agent and continued to pay premiums.  Based on these facts, the trial court held that Mr. Tarrant ratified the change of insurance by continuing to pay premiums on the policy after receiving notice of the change.  The Supreme Court upheld the Court of Appeals' reversal of this decision, holding that an insured cannot ratify the actions of the insurance agent because the agent, by statute, is regarded as the agent of the insurance company, not the insured.  The full reasoning of the opinion is too in depth to discuss here, but the entire decision was premised around the application of Tenn. Code Ann. 56-6-115(b), which states that an insurance producer who obtains an application for insurance must be considered to be the the agent of the insurer and not the insured.  Applying that statutory mandate to the elements of ratification (which requires an adoption, approval or confirmation of a contract previously executed by another in his stead and for his benefit), the Supremes held that Mr. Tarrant could not have ratified the agent's actions.

Another interesting thing about the case is that the Court's decision was not in the slightest bit affected by any question of whether the agent was a true agent of the company as opposed to a broker, which is usually regarded as an agent of the insured.  In fact, the court implicitly noted that the same rules would apply to both because the relevant statute applies to "insurance producers," which are statutorily defined as persons required to be licensed under the laws of the state to sell, solocite, or negotiate insurance.

There were several other important points in the case that I'll address in following posts.  But for those who haven't heard, just wait til you hear what our Legislature did in response to this opinion!


The Proper Scope of Appraisal - Thoughts from the Battlefield

In Parks' last post, "What is the Proper Scope of Appraisal in Tennessee?", he pointed out the Merrimack decision in which the Court of Appeals held that appraisal is not appropriate for decisions regarding coverage and liability.  In considering my response, I spoke with Chuck Howarth, who is part of The Howarth Group, a claims consulting and public adjusting business based out of Nashville.  Chuck's perspective on the appraisal process is unique for two reasons.  First, his group handles more insurance appraisals in Tennessee than anyone else of which I'm aware.  Second, he worked for eight or ten years with State Farm as an adjuster before moving to the other side of the fence as a public adjuster, which is where he's served for almost 25 years now.  In fact, he even trained staff adjusters for State Farm so his experience with the inner workings of insurance companies can come in handy.

So, when Chuck and his business partner, Denis Rowe (both Tennessee Public Adjusters), read Parks' recent post about appraisal, they had a few comments.  First, as to whether appraisal can be beneficial, they stated:

While we have used both public adjusting and the appraisal process to resolve claims, we have found that in Tennessee, Alabama, and Kentucky we get far better settlements using appraisal than serving as a property owner's public adjuster.  Of course its critical that a public adjuster have signficant experience with the appraisal process before heading this road.

Another issue they pointed out was that some insurance companies are taking the Merrimack case to the extreme and "are trying to prevent appraisals from happening by saying that the only thing an appraisal panel can do is to determine the pricing of their scope that they have decided is part of the loss."  Under this interpretation, the insurance company, not the appraisers, determine the scope of the damage.  This is definitely not good for insureds because the biggest problem with insurance adjusters' estimates is usually the scope of the necessary repairs, not the price.  For example if a tornado damages a home and everyone agrees the damage is covered, an appraiser's job would be to determine what needs to be repaired and the necessary cost of those repairs.  In that situation, some insurance companies would counter that an appraisal is inappropriate to determine what items need to be repaired (i.e., the scope), but rather appraisal is only appropriate for determining the necessary cost of repairs for the scope as determined by the insurance company.  Although I've not researched that particular issue yet, I feel certain that insurance companies taking this position are dead wrong.  More on that next time.

A Follow Up to the Question of When Post-Loss Misrepresentations are Material

There are a few issues here that need to be clarified for our insureds out there who may be dealing with an insurance company making accusations of misrepresentations.  First, the rules are different depending on whether the alleged misrepresentation occurred before the loss or after the loss.  The one I see more often is the misrepresentation that occurs during the application process. That topic is certainly worthy of several posts on its own, but suffice it to say here that a material misrepresentation on an insurance application that increases the risk of loss can completely void the policy, meaning that the insurance company will refund the premiums as if the policy never existed at all.  As for misrepresentations that occur after the loss during the claim process, the law is much more generous to the insured.  In those cases, to avoid its obligations under the policy, the insurance company has the burden to show that the misrepresentation was intentional and designed to deceive. A simple mistake isn't enough. For example, if an insured fills out his proof of loss and makes a mistake in adding his personal property inventory and thus fills in the wrong number on the proof of loss, that would not be an intentional misrepresentation.  


Another requirement is that the alleged post-loss misrepresentation be material in nature.  So what is material?  In Nix v. Sentry Ins., 668 S.W.2d 462 (Tenn. Ct. App. 1983), the Court of Appeals dealt with precisely that question.  In that case, the issues at trial centered around whether the plaintiff had committed arson and whether the plaintiff had made material misrepresentations regarding what property was actually destroyed by the fire and its value.  The trial court found that there was no arson, but that there had been misrepresentations concerning the value of the property destroyed in the fire. The judge therefore found that the insurance company had no liability for the loss.  On appeal, the Tennessee Court of Appeals reversed, holding:


When the false swearing is in the application it forms the basis upon which the contract rests, and if fraud enters into it the policy would be voided even though the policy does not so provide.  But after the loss occurs then voiding the policy is in the nature of a penalty or forfeiture; in other words, in such cases the holding is virtually that, although the insured has had a loss, and may be entitled to recover from it, yet, as he has been guilty of fraud in the proofs, he must have his policy vacated and set aside as a punishment for such fraud, or attempted fraud.  In the latter case, as in all cases of forfeiture, a strict construction should be adopted, and the forfeiture not enforced except on the plainest grounds, if at all.


Nix, 666 S.W.2d at 463-64.  Most importantly to the issue of materiality, the court also noted "that if rights are to be forfeited under the terms of this insurance policy, the concealment or misrepresentation made must be relative to the loss claimed."  In that case, the insurance company pointed to alleged misrepresentations concerning the insured's financial condition which might have provided a motive for arson, but did not point to any specific misrepresentations in the proof of loss.  Because the court found there was no arson, any misrepresentations concerning the insured's financial condition were not material to the issue of his valuation of certain personal property, and the policy could not be voided.  


Nix is a very important case, and can be incredibly useful in insurance disputes.  It obviously isn't a license to misrepresent material facts, but it does substantially limit an insurance company's ability to void a policy altogether when the alleged misrepresentations just don't have anything to do with the issues at hand. 

The End of the Consumer Protection Act in Insurance Cases

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 . . .

Should a Deductible Be Subtracted in the Case of a Total Loss?

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. 

Discovery in Bad Faith and Consumer Protection Act Cases, Part I

In bad faith and Tennessee Consumer Protection Act cases, I routinely run into work product objections during discovery. Often these objections are made even as to reports and documents generated before the claim was denied. I believe work-product objections as to pre-denial materials are improper. As we know, Rule 26.02(3) protects against disclosure of materials prepared in anticipation of litigation. In general, courts seek to distinguish those materials that are generated “in the ordinary course of business” from those prepared “in anticipation of litigation.” The work product doctrine does not protect documents prepared in the ordinary course of business. See Boyd v. Comdata Network, Inc., 88 S.W.3d 203, 225 n.33 (Tenn. Ct. App. 2002) (citing Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir. 1987). In light of the above, the obvious question in litigation involving an insurance claim is when the insurance company begins investigating and acting “in anticipation of litigation” as opposed to doing so in the ordinary course of its business. Fortunately, there is case law to help, and I’ve compiled a few helpful citations below for use by lawyers fighting this decades old battle:


  • “The investigation and evaluation of claims is part of the regular, ordinary and principal business of insurance companies." Fine v. Bellefonte Underwriters Ins. Co., 91 F.R.D. 420, 422 (S.D.N.Y. 1981).
  • “It is . . . well established that insurance companies have an independent obligation to review and follow up on claims, and their reports are thus not protected, although they are usually prepared with an eye toward litigation." Fru-Con Constr. Corp. v. Sacramento Mun. Util. Dist., 2006 U.S. Dist. LEXIS 53763 at *4 fn. 3 (E.D. Cal. July 20, 2006) (citing Harper v. Auto-Owners Ins. Co., 138 F.R.D. 655 (S.D. Ind. 1991)).
  • Any investigation, including statements obtained as part of this process, would fall within the insurance company's ordinary business and independent duty to investigate and evaluate claims. Accordingly, it can be presumed that "documents which were produced by an insurer for concurrent purposes before making a claims decision would have been produced regardless of litigation purposes . . . ." Stout v. Illinois Farmers Ins. Co., 150 F.R.D. 594, 605 (S.D. Ind. 1993).

If any Tennessee practitioners have dealt with this issue and received rulings from trial courts, I keep a database of such Orders and would love to hear from you.  


Tennessee Insurance Litigation Blog Nominated as One of the Top 50 Insurance Blogs

 I just learned today that our blog, just under a year old, has been nominated as one of the top 50 insurance blogs.  The LexisNexis Insurance Law Community publishes the list each year.  Although its a bit late to ask all of you to send in positive comments to the folks at Lexis who decide which blogs make the final cut (the deadline for comments is tomorrow), thanks to all our readers for making our little blog a success.  

For a list of all the nominees or to comment on our blog or others, click here.

Supplemental Claims and Reopen Claims - Is There a Difference?

Shaun Marker and Jeremy Tyler, attorneys at Merlin Law Group in Florida, recently posted a pair of blog posts - here and here -- regarding the difference between "supplemental" claims and "reopen" claims.  Indeed, there is a difference, and Shaun and Tyler did a good job showing why.  The distinction is especially relevant here in Tennessee after the recent flooding, as many Nashville and Middle Tennessee residents will find additional, previously unknown, damage in the months to come.

Thanks as always to the fine minds at the Property Insurance Coverage Law Blog.

Tips for Filing a Flood Insurance Claim

 FEMA has published several tips for filing a flood insurance claim that can be accessed here and here.  Be sure to note that a proof of loss must be submitted within sixty days.  It also has a brochure that addresses common myths about the NFIP (National Flood Insurance Program) that can be downloaded here.

The Aftermath of the Great Flood

 Fifteen or so inches later, the rain has officially stopped.  The entire state breathed a sigh of relief yesterday as the sun started trying to dry things out.  I was one of the lucky ones who didn't have any damage, but there are thousands of people who have lost personal treasures.  Photographs, antiques . . . all floating in puddles of dirty water.  Numerous others lost their homes, and some have even lost their lives.  The aftermath has now begun, and the litigation won't be far behind.  Stay tuned.