Tennessee Insurance Litigation Blog

Tennessee Insurance Litigation Blog

Legal insights on insurance litigation in the State of Tennessee

The Policyholder’s Perspective from
Brandon McWherter
of Gilbert Russell McWherter Scott Bobbitt PLC
J. Brandon McWherter is a partner at Gilbert Russell McWherter Scott Bobbitt PLC, which has four Tennessee offices in Memphis, Jackson, Nashville, and Chattanooga. Read More
The Insurance Company’s Perspective from
Parks T. Chastain
of Brewer, Krause, Brooks & Chastain, PLLC
Parks T. Chastain, a member in the Nashville, Tennessee law firm of Brewer, Krause, Brooks, Chastain & Burrow, PLLC, focuses on the representation of insurers. Read More

MISREPRESENTATION AT INCEPTION OF POLICY IS EFFECTIVE TO VOID COVERAGE EVEN AFTER RENEWALS

I draw your attention to the June 25 Tennessee Court of Appeals decision in the case of Dutton v. Tennessee Farmers Mutual Insurance Company which addressed the question of whether misrepresentations made on an initial policy application which unquestionably increased the risk of loss would still operate to void that coverage when multiple renewals of coverage had taken place. Dutton v TN Farmers. The applicants unquestionably made misrepresentations on the policy application which were material, specifically dealing with drug use and convictions for drug related crimes. After the policy was issued (based upon that application), time passed, and multiple renewals occurred. In pertinent part, the changes made to the policy included the deletion of the individual who had the drug related problems. The insured argued the changes to the policy meant the misrepresentations no longer had any bearing on the risk that Tennessee Farmers was insuring.

The Court of Appeals disagreed. It correctly focused its attention on the inception of the policy, citing to T.C.A. § 56-7-103, as well as provisions of the insurance policy. Given the fact the insurance policy was void from its inception, the changes to the policy by virtue of renewals and changes were, in the opinion of the Court, “of no effect.” Those renewals were dependent upon the original insurance policy, which was void from its inception due to the material misrepresentations on the original application which increased the risk of loss. The Court of Appeals also looked at a couple of other cases from different jurisdictions addressing similar arguments and ultimately held that material misrepresentations made on the original application rendered the policy void and prevented its attaching from its inception, and that subsequent renewals and deletions and additions, or changes of named insureds, did not operate to render the misrepresentations non-material. It, thus, reversed the trial court and entered judgment in favor of Tennessee Farmers.

What Constitutes an “Ordinance or Law”?

In the case of Jefferson County Schools v. Tennessee Risk Management Trust, et al., No. E2017-01346-COA-R3-CV (decided March 15, 2018) (Jefferson County Schools v. TN Risk Management), the Tennessee Court of Appeals addressed the question of whether a Fire Marshal’s directive qualified as an “ordinance or law” for purposes of insurance coverage. Following a major rainstorm, a building at the Jefferson County High School collapsed. A policy issued by Travelers Indemnity Company contained an “ordinance or law” provision providing coverage for expenses “caused by the enforcement of any ordinance or law.” The Tennessee State Fire Marshal’s office issued a directive requiring the involvement of a structural engineer, with which the insured complied. That engineer determined compliance with the Fire Marshal’s directive required vertical reinforcement of the remainder of the damaged building. Travelers’ engineer opined that the additional reinforcement on the remainder of the building was not necessary, and Travelers declined to pay for the additional work. The insurer argued the Fire Marshal’s directive, which did not contain specific citation to Code violations, failed to constitute an “ordinance of law” for purposes of coverage under the policy. Because the Court of Appeals found it was the Fire Marshal’s authority under Tennessee law to issue the directive it did, such directive triggered the “ordinance or law” provisions of the insurance policy. The court commented the Fire Marshal’s “directive carried the force of law and Plaintiff had to obey it if it wished to re-occupy” the building.

The Court did acknowledge the insurers’ concerns “regarding the limits to their responsibility under the policy,” which it described as “not open-ended.” However, based upon the facts of the case, and the testimony given, this Court held the directive of the Fire Marshal triggered the “ordinance or law” coverage. In evaluating claims under similar provisions, therefore, it does appear it will be necessary to evaluate the extent to which the Fire Marshal or other governmental authority had the actual authority to issue any particular Order under consideration.

Post-Loss Assignment of Claims are Valid in Tennessee

Not so fast Mr. Adjuster, my assignment of claim is valid even if the insurance policy says its not.

Time and time again, contractors and purchasers of property impacted by a loss have come to me complaining that insurance carriers won’t honor an assignment of an insurance claim.  Generally, the reason given by the insurance carrier is language in the policy known as the anti-transfer clause, which usually reads something like this:  “Your rights and duties under this policy may not be transferred without our written consent except in the case of death of an individual named insured.”  Other policies are even clearer and state, “Assignment of this policy will not be valid unless we give our written consent.”

According to several Tennessee court decisions, there is a difference between pre-loss assignments (which are typically not allowed) and post-loss assignments (which are allowed).  The reason for this is quite easy to understand, and perhaps best demonstrated by an example.  Consider an insurance company that insures a house for $250,000 to a couple with perfect credit, no loss history, no criminal background, 2 angel kids, and a well behaved dog that’s never bitten anyone.  The insurance company feels good about its risk-reward analysis in underwriting the property.  Now consider that same scenario, but add the fact that the young couple in living in Pleasantville assigned its insurance policy to a convicted felon who has a history of insurance fraud, arson, drug use and sales, and managing dog-fighting competitions.  Then, after the assignment, the perfect house burns under suspicious circumstances and the assignee (the felon) makes a claim.  Under those facts, the insurance company would justifiably want to contest coverage for this person they knew nothing about prior to the loss.  Under those facts, the pre-loss assignment would not be valid and the law would not help you.

In contrast, if that same young couple living in Pleasantville assigned their claim to the same ne’er-do-well after the fire loss, then the assignment would be valid and enforceable. Why the difference?   Quite simply, the assignment of the policy benefits of a claim after a loss occurs results in no increased risk to the insurance company.  The loss has already occurred, and an insured has a right to assign the claim if he or she so chooses.

The real distinction is that the law allows the assignment of policy proceeds, as opposed to the insurance policy itself.  Here’s a quote from one Tennessee case on the topic:

We believe it is fairly well-settled that in Tennessee, an insured may assign an insurance policy after a loss has occurred, despite an anti-assignment clause purportedly prohibiting assignments without the consent of the insurer.  Zaharias v. Vassis, 789 S.W.2d 906, 910 (Tenn. Ct. App. 1989); Ford v. Robertson, 739 S.W.2d 3, 5 (Tenn. Ct. App. 1987); Metro. Life Ins. Co. v. Brown, 25 Tenn. App. 514, 160 S.W.2d 434, 437-38 (Tenn. Ct. App. 1941).  However, the assignee of the policy “stands in the shoes” of the assignor and receives nothing more than what the assignor held. See Zaharias, 789 S.W.2d at 910-11.

Manley v. Auto Ins. Co., 169 S.W.3d 207, 214 (Tenn. Ct. App. 2005).  So the next time an insurance adjuster tells you your post-loss assignment of claim isn’t valid, send them a copy of this blog post and see if that helps.  The law is well-settled and isn’t really even open to much debate as this is the majority rule around the country.

Okay, So It’s Not Strictly Coverage, But You “Gotta” Know About Medical Expenses…

We don’t usually post liability related matters on this blog, but every once and a while there is a ruling that warrants mention.  That ruling was issued today by the Tennessee Supreme Court in Dedmon v. Steelman W2015-01462-SC-R11-CV (click on case for full copy of opinion).  While I may disagree with the result, it is an extremely well written opinion from Judge Kirby.  The bottom line is that the Tennessee Supreme Court unanimously held Tennessee law does allow plaintiffs to use the full, undiscounted amount of medical bills to prove their medical expenses instead of the discounted amounts paid by insurance companies and accepted by medical providers. The defense is no longer even permitted to introduce the amount of the discounted bills period.  I commend the full opinion to your reading, as it contains an excellent overview and history of the collateral source rule, as well as detailed analyses of the differing rationales used by other courts to allow introduction of those discounted and accepted medical expenses.

 

MS Insurance Commissioner Issues Bulletin Regarding Labor Depreciation

This past Friday (Aug. 4, 2017), Mississippi’s Insurance Commissioner, Mike Chaney, issued a bulletin that alerts insurers that they should not be depreciating labor in Mississippi unless policy language clearly allows it, and even then, estimates must clearly delineate that labor was depreciated.  I’ve quoted the bulletin below:

It is the purpose of this Bulletin to provide the position of the Mississippi Insurance Department regarding the depreciation of labor expenses by an insurer in the adjustment of property loss claims.

There is no statutory law in Mississippi prohibiting the practice of labor depreciation in the adjustment of property loss claims.  If such a practice is used, the insurer should clearly provide for the depreciation of of labor in the insurance policy. Likewise, if material and/or labor depreciation is applied, the insurer should clearly set any such depreciation on the claim estimate furnished by the insurer.

This bulletin shall not apply to automobile physical damage claims

The bulletin can be found here.

Commissioner Confirms Insurers Must Pay for Matching

Parks recently posted about the new Rules adopted by the Tennessee Commissioner of Insurance that go into effect on October 9, 2017.  The first of those rules makes clear the purpose “is to set forth minimum standards for the investigation and disposition of claims.”  (Rule 0780-01-05-.01).  While there are plenty of items worthy of discussion in the Commissioner’s soon-to-be effective Rules, the one that stood out to me  relates to “matching.”  Here’s what the Rule says:

When the policy provides for the adjustment and settlement of first party losses based on replacement cost, the following shall apply:

. . .

(b) When a loss requires replacement of items and the replaced items do not match in quality, color or size, the insurer shall replace items so as to confirm to a reasonably uniform appearance according to the applicable policy provisions.  This applies to interior and exterior losses. The insured shall not bear any cost over the applicable deductible, if any.

0780-01-05-.10(1)(b).  This Rule confirms what I believed was previously already the law in Tennessee and that is that insurers must pay to match. The language adopted by the Commissioner is non-permissive in that it states that insurers “shall” match.  As for the statement that matching is required on both interior and exterior losses, that was a good addition due to the fact that many insurers in the past have agreed to pay for matching on the interior but not the exterior. For example, if a 1 x 1 square of sheetrock needs replacing, nearly all carriers will pay to paint the whole wall.  In contrast, if several shingles need replacing but can’t be matched, some insurers have taken the position they don’t owe to match.  Why the difference between inside and out?  I’d venture to say it has a lot to do with the cost – it might be a few hundred bucks to paint that wall but the roof would obviously be much, much more.

One other note concerning the comment to the Rule that Parks mentioned in his post.  Specifically, the Commissioner’s “Response to Comment 8” noted that the rule only applies to replacement of items and does not contemplate repairs.  In my view, this “clarification” is of no significance on most roof claims.  For example, if an existing damaged shingle can be repaired, then there is no matching problem anyway because the existing shingle stays.  But if a shingle is blown off or otherwise damaged such that it must be “replaced,” then the matching requirement is mandatory if “there is a deviation in quantity, color, or size of a replacement item.”

All in all, the Commissioner’s new rule should go a long way in confirming that Tennessee is indeed a “matching” state, just as I noted long ago in a prior post.

2017 TENNESSEE UNFAIR CLAIMS PRACTICES REGULATIONS – Replacement Cost Valuation Rules

I’ve just posted the new regulations promulgated by the Tennessee Department of Commerce and Insurance governing the investigation and disposition of claims arising under certain types of insurance issued to residents in Tennessee.  We’ve attended the hearings that were held on these regulations, and followed the rulemaking process.  Regulation 0780-01-05-.010, entitled Standards for Prompt, Fair and Equitable Settlements Applicable to Fire and Extended Coverage Type Policies with Replacement Cost Coverage, contains two provisions which may expand fire insurer’s obligations when calculating replacement cost:

a.The replacement cost must include the value of any consequential physical damage incurred in making such repair or replacement unless otherwise excluded by the policy. The insured does not have to pay for any cost except for betterment an any applicable deductions; and

b.When a loss requires replacement of items and they do not match in quality, color or size, the insurer shall replace items so as to conform to a reasonably uniform appearance according to the applicable policy provisions. This applies to interior and exterior losses. The insured shall not bear any cost over the applicable deductible, if any.

There were comments during the process regarding this rule, particularly the “matching” component. One comment was discussed in the regulations:

Comment 8

0780-01 -05-.10(1 )(b)

It was commented that the phrase “uniform appearance,” when referring to replacement of an item when the replacement item does not match the item being replaced under a property insurance policy, may be ambiguous. The commenter indicated that a reasonableness factor is already applied to replacement claims. It was further commented that there is concern this may also apply to repairs of damaged items.

Response to Comment 8

The Division disagrees with this comment. The term “reasonably uniform appearance” is sufficiently specific when read in the full context of Rule 0780-01-05-.10(1 )(b), as that rule clarifies that this reasonableness assessment must be made when there is a deviation in quantity, color, or size of a replacement item. Read in context, it is clear when such a determination must be made, and a reasonableness assessment is already an industry standard. The Rule specifically states it applies in instances “[w]hen a loss requires replacement of items[,]” and does not contemplate repair claims.

So, we know the matching requirement only exists with replacement claims, but what is the impact of policy language? The regulations seem to open the door for application of clear policy language. This will have to be more fully addressed as matters arise under the regulations.

2017 TENNESSEE UNFAIR CLAIMS PRACTICES REGULATIONS

On July 11, 2017, the Tennessee Department of Commerce and Insurance filed the final version of new regulations governing the investigation and disposition of claims arising under certain types of insurance issued to residents in Tennessee. These regulations will take effect October 9, 2017. These regulations are not intended to cover claims involving workers’ compensation or healthcare. The regulations are intended to define practices which constitute “unfair claims practices” as determined by the Commissioner. I’ll be making more posts about significant portions of the regulations, but until then, click here for a copy of the regulations may be downloaded here –  TN Unfair Claims Regs.  Stay tuned for more.

What Misrepresentations Increase the Risk of Loss?

The Court of Appeals recently provided further insight on what type of misrepresentations increase the risk of loss. In the case of Freeze v. Tennessee Farmers Mutual Insurance Company, filed March 28, 2017 (Freeze v. TFMIC), the Eastern Section Court of Appeals upheld the grant of summary judgment to Tennessee Farmers in a case which alleged misrepresentation under T.C.A. § 56-7-103, which provided as follows:

56-7-103. Misrepresentation or warranty will not avoid policy – Exceptions. – No written or oral misrepresentation or warranty therein made in the negotiations of a contract or policy of insurance, or in the application therefor, by the insured or in the insured’s behalf, shall be deemed material or defeat or void the policy or prevent its attaching, unless such misrepresentation or warranty is made with actual intent to deceive, or unless the matter represented increases the risk of loss.

The Court first acknowledged that determining whether a particular misrepresentation increased the risk of loss is a question of law for the Court. The Court ruled misrepresentations contained on an application signed (but perhaps not read) were sufficient to void the policy of insurance when made with respect to:

  1. Pending legal actions;
  2. Charges or convictions of felony crimes; and/or
  3. Charges or convictions of arson, fraud, theft, or drug related crimes.

The Court found it particularly important Tennessee Farmers had made it clear that two of these questions provided that the agent would be unable to bind coverage if the questions were answered in the affirmative. The Court also reaffirmed the longstanding principle that the failure to read an application does not insulate an applicant from errors or omissions on a signed application.  The Court held these misrepresentations increased the risk of loss to Tennessee Farmers under T.C.A. § 56-7-103, and summary judgment was appropriate.

Wildfires and Soot Testing

As many victims of the East Tennessee wildfires are working through the claim process, this seems to be a good time for a quick word about soot testing.  Smoke and soot from the wildfires likely affected hundreds of property owners whose properties were never touched by an actual flame.  Even with no actual fire damage, the infiltration of smoke and soot into cavities of a structure clearly constitutes a covered loss under most policies.

In some cases, a good old fashioned thorough cleaning with appropriate materials by trained professionals might do the trick.  But in many other cases, smoke and soot deposits appear in wall cavities and other inaccessible places that require a much more invasive restoration protocol, including removal and replacement of sheetrock, etc.  Smoke just has a way of getting into those hard to reach places, traveling through electrical outlets, conduit, HVAC systems, etc., and it’s important to get it removed.

Thankfully, there are many trained hygienists who can perform the necessary testing to determine the proper scope of fire, smoke, and soot restoration.  The test samples are then shipped off to a qualified laboratory, which produces results that can assist the property owner or contractor discover how far the smoke traveled and how much work needs to be done to remediate it.   The hygienist can determine what type of testing is needed, but I typically see both air and surface samples. On the surface samples, it is often necessary to make small test openings in the drywall or other wall covering to access the cavity that lays behind.

Policyholders are entitled under most properties to be put back in pre-loss condition so if there wasn’t smoke and soot in your walls before the fire, and there is now, there should be coverage for the cost of removing it.

Happy New Year everyone!