Thoughts on Advances
If you're a reader of insurance blogs, I'm certain you've read the recent warfare between Parks Chastain and Chip Merlin. They both make good points on the issue of advance payments (see their posts here and here). The truth is that there really is very little law in Tennessee concerning advance payments. Even so, Tennessee's Unfair Claims Settlement Act of 2009 provides some guidance:
- An insurer must adopt and implement reasonable standards for the prompt settlement of claims arising under its policies (T.C.A. 56-8-105(3)). This would seem to necessarily require that an insurance company have standards in place for advances as to undisputed portions of a claim. Even an insurance company would have a hard time making the argument that it doesn't have an obligation to pay a few thousand dollars to its insureds after a fire to ensure that they aren't sleeping on the street until the claim is resolved in full.
- An insurer must attempt to effectuate prompt, fair, and equitable settlement of claims submitted in which liability has become reasonably clear. (T.C.A. 56-8-105(4)). In other words, an insurance company has an absolute obligation to promptly pay undisputed portions of a claim.
- When making a payment, an insurer must indicate the coverage under which payment is being made. (T.C.A. 56-8-105(10)). Certainly an insurance company is entitled to a credit against the policy limits of the applicable coverage when it makes an advance, but this provision makes it mandatory that the insurance company let the insured know the coverage under which an advance is being made.
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.
Utilizing the Unfair Claims Settlement Practices Act
The Tennessee legislature has listed certain certain practices which constitute unfair acts or practices in the business of insurance. See T.C.A. § 56-8-105. The statute, known as the Unfair Claims Settlement Practices Act, creates standards and rules by which insurance companies must abide when settling claims. For example, the Unfair Claims Settlement Practices Act provides that it is unfair and deceptive to "[fail] to affirm or deny coverage of claims within a reasonable time after proof of loss statements have been completed." T.C.A. § 56-8-105(7). Similarly, it is an unfair claims practice to "[fail] to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies." T.C.A. § 56-8-105(2).
Although the Unfair Claims Settlement Practices Act does not provide a private cause of action, that doesn't necessarily mean that it is irrelevant to a first party claim. Because the Unfair Claims Settlement Practices Act enumerates certain unfair or deceptive practices, it can be bootstrapped into defining violations of the Tennessee Consumer Protection Act, which obviously does provide a private cause of action. Both Acts prohibit "unfair" or "deceptive" practices, and the Unfair Claims Settlement Practices Act just happens to provide some very good guidance as to what constitutes unfair or deceptive practices by an insurance company.
Although I am aware of no Tennessee case addressing this issue head on, courts from other states have held that while there may not be a cause of action under a state's unfair claims practices act, the terms of such act are properly considered in determining whether an insurer's conduct amounts to bad faith. See, e.g., MacFarland v. United States Fidelity & Guarantee Co., 818 F.Supp. 108 (E.D. Pa. 1993); Wailua Associates v. Aetna Casualty & Surety Co., 27 F.Supp.2d 1211 (D. Hawaii 1998).
So what's the lesson? When drafting a complaint for bad faith and for violations of the Tennessee Consumer Protection Act, mimic the language of the Unfair Claims Settlement Practices Act. Although it does not provide a private cause of action, it is strong evidence of activities that reach the threshold of bad faith or unfair/deceptive actions.
