Tennessee Code Annotated § 56-7-105 provides that when an insurance company refuses to pay a loss within 60 days after demand, the company shall be liable to the holder of the policy, in addition to the loss and interest thereon, in a sum not exceeding twenty-five (25%) percent of the liability for the loss, providing that it appears to the court or jury that the refusal to pay the loss was not in good faith and that such failure inflicted additional expense, loss or injury upon the holder of the policy. This allegation appears far too often in cases where an insurer had a justifiable reason to refuse to pay a claim. Obviously, if the insurer prevails, the insured would clearly not be entitled to the statutory penalty since one of the elements necessary for recovery is that the policyholder must be successful in his suit to recover the policy proceeds. See, e.g., Squires v. Republic Ins. Co., 572 F.2d 560, 561 (6th Cir. 1978).


But what if the insurer loses on the coverage case? Does that man that the statutory ”bad faith” should be automatically awarded, even where the policyholder has been forced to incur expenses and bring suit? Absolutely not! Under the Tennessee statute, the penalty is not appropriate when the insurer’s refusal to pay rests upon legitimate and substantial legal grounds or when the payment demand is greater than the judgment ultimately recovered. Tyber v. Great Central Ins. Co., 572 F.2d 562 (6th Cir. 1978). An insurance company is entitled to rely upon the available defenses if there are substantial legal grounds that the policy does afford coverage for the alleged loss. Nelms v. Tennessee Farmers Mutual Ins. Co., 613 S.W.2d 481 (Tenn. Ct. App. 1978), cert. denied.


Some cases have held that the penalty should not be awarded to the insured under the statute unless the insurer’s conduct involves moral turpitude. Moore v. New Amsterdam Casualty Ins. Co., 199 F.Supp. 1941 (E.D. Tenn. 1961). The best definition of “moral turpitude” I could find is that “moral turpitude” is:

An act of baseness, vileness, or depravity in the private and social duties which a man owes to his fellowmen or to society in general, contrary to the accepted rule or right and duty between man and man.

Brooks v. State, 213 S.W. 2d 7, 11 (Tenn. 1948). How often does such action occur in claim handling? Very rarely. While attorneys may disagree with the claim handling, or the decision made by the insurer, an objective assessment of its conduct should lead, more often than not, to the conclusion that the carrier did not violate this statute, and did not fail to act in good faith.