The issue of whether punitive damages are available to an insured when an insurance company wrongfully denies a claim was recently addressed by the Tennessee Court of Appeals in Riad v. Erie Insurance Exchange. Over the years, this issue has been confused by many state and federal courts in Tennessee, but the Riad court got it right. In a nutshell, the Court of Appeals held that punitive damages can be available in breach of contract cases (even those involving insurance policies) under certain circumstances. Those circumstances are limited to "the most egregious cases," and an award of punitive damages is appropriate only when there is clear and convincing proof that the defendant has acted intentionally, fraudulently, maliciously, or recklessly. Rogers v. Louisville Land Co., 367 S.W.3d 196 (Tenn. 2012).
The Riad case is an important opinion in light of the general consensus of Tennessee courts that there is no common law tort of bad faith and the legislature’s action in 2011 to remove the insurance industry from the purview of the Tennessee Consumer Protection Act. Generally, it stands for the proposition that there are other methods of recovery for extra-contractual damages outside of the 25% statutory bad faith penalty provided for at T.C.A. 56-7-105. Although the circumstances in which punitive damages are available in insurance disputes are clearly limited, this case makes clear that they are indeed available when the circumstance are right. And when those circumstances exist, there is no need to allege bad faith. All that is required is a breach of contract by the insurance company that was "intentional, fraudulent, malicious, or reckless."