Tennessee Insurance Litigation Blog

A Venue Quiz

Brandon McWherter — Wed, 10 Feb 2010 01:16:58 -0600

The facts: Plaintiff Doe presently lives in Carroll County, and his fire damaged home was also in Carroll County. Defendant Insurance Company has a claims office in Madison County. Defendant Agent resides in Carroll County, has his principal place of business in Carroll County, but also has a satellite office in Madison County. Plaintiff Doe brought suit against the Defendants for negligence, breach of contract, and violations of the Tennessee Consumer Protection Act in Madison County.

The question: Is venue appropriate in Madison County in light of the general venue rule that suit must be filed in the common county of residence?

The answer: Suit must be brought in Carroll County, right? Wrong. According to a very recent ruling by Chancellor Jimmy Butler (and the Tennessee Code), venue is appropriate in Madison County. Although the general rule is that suit must be brought in the common county of residence, the Tennessee Consumer Protection Act has a special venue statute (T.C.A. 47-18-109) that trumps the general venue rules. Under the TCPA's special venue provision, suit can be brought in the county where the defendant resides, where he has his principal place of business, or the county in which he transacts or has transacted business. Under these facts, because the agent has a satellite office in Madison County, Madison County is a proper venue even though the plaintiff and the agent both live in Carroll County, the alleged negligence occurred in Carroll County, and the the insured home was in Carroll County.

The TCPA's special venue statute can be an effective weapon in the right case, and practitioners should be aware of the options for venue that it might afford. The right judge, or the right jury pool, can obviously make a huge difference in some cases.

Full disclosure - The above facts outline the facts of a real case I am handling. To their credit, the defendant agent and his attorney, disagree with the Chancellor Butler's decision and may seek an interlocutory appeal. Although I don't anticipate that the result will change in light of the plain language of the TCPA, I'll be sure to post any contrary rulings.

THE "CO-INSURANCE" PENALTY - OR INSUFFICIENT INSURANCE TO VALUE - AND ITS IMPACT ON AN INSURED

Parks Chastain — Wed, 06 Jan 2010 11:19:38 -0600

What happens when an insured does not carry enough insurance on his/her/its property? Often, the answer is that, that insured, when suffering a loss, also suffers what some have characterized as a “co-insurance” penalty, or as some prefer, a penalty for maintaining insufficient “insurance to value.”

Remember that, for the most part, the insured is the person initially setting the value of the property. In most instances, an insured will be asked what the property is worth by the agent, or perhaps how much insurance is designed. When that coverage is written, and a loss occurs, the companies will often look to see if the insured had sufficient insurance when compared to the value of the property.

Many policies - especially commercial policies - contain a formula for determining the amount of coverage owed in instances where there is insufficient insurance to value. Here is a typical formula:

1. Coinsurance

If a Coinsurance percentage is shown in the Declarations, the following condition applies.

a. We will not pay the full amount of any loss if the value of Covered property at the time of loss times the Coinsurance percentage shown for it in the Declarations is greater than the Limit of Insurance for the property.

Instead, we will determine the most we will pay using the following steps:

(1) Multiply the value of Covered Property at the time of loss by the Coinsurance percentage;

(2) Divide the Limit of Insurance of the property by the figure determined in Step (1);

(3) Multiply the total amount of loss, before the application of any deductible, by the figure determined in Step (2); and

(4) Subtract the deductible from the figure determined in Step (3).

We will pay the amount determined in Step (4) or the limit of insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself.

So, let’s go through an example. Assume that an insured has a limit of coverage for $100,000.00. When a loss occurs, the value of the property at the time of loss is placed at $250,000.00. The policy has an 80% coinsurance percentage, meaning that the building has to be insured to 80% of value. The deductible is $500.00, and the amount of loss is $50,000.00. Let’s follow the steps set forth above:

(1) We first multiply the value of property at the time of loss ($250,000) by the coinsurance percentage (80%). This product is $200,000, which represents the minimum amount of insurance an insured must have to be in compliance with the Coinsurance requirements.

(2) Since the insured does not have that much coverage, we proceed through the calculation. We divide the limit of insurance ($100,000.00) by the figure derived in step 1 ($200,000). This leads to a figure of .50

(3) Then, we would multiply the total amount of loss ($50,000.00) by the figure in step 2 (.50), which gives us $25,000.00

(4) Then we subtract the deductible from this figure ($25,000.00 - $500.00), leaving $24,500.00.

The company’s proper obligation on a $50,000.00 loss is thus only $24,500.00.

Whose fault is under-valuation? In most cases I have seen, the fault lies with the insured. Remember that, typically speaking, an agent has no duty to verify the accuracy of information provided by an applicant when seeking coverage. Thus, when an applicant walks into an insurance agent’s office, and asks for $300,000.00 in insurance on his home, that’s what the agent will write. Clearly, there are some circumstances where the agent’s expertise is involved, and even circumstances when an agent provides the value, but the typical scenario involves the applicant/insured seeking a specified coverage amount. Also, remember that the carrier is actually not under a duty to inspect the property once the application is submitted and the policy is written. Elsewhere in this blog, we have discussed the imposition of the valued policy law, which can arise when the carrier has failed to inspect the property. But, the carrier can simply decide not to conduct the inspection and live with the valued policy law in cases of covered total losses. Therefore, the responsibility for valuation really lies with the insured, at least initially.

Rules of Interpretation for Insurance Policies

Brandon McWherter — Mon, 04 Jan 2010 22:20:50 -0600

Insurance litigation requires a lot of briefing so we keep a stash of helpful citations that are often used in our court filings. An example is the rules that courts must follow when interpreting insurance policies. These rules of construction can be quite helpful in the right case. Below are several that insurance practitioners should not forget:

Insurance contracts, being subject to the same rules of construction as contracts generally, should be interpreted and enforced as written. Absent fraud or mistake, the terms of a contract should be given their plain and ordinary meaning, for the primary rule of contract interpretation is to ascertain and give effect to the intent of the parties. U.S. Bank, N.A. v. Tennessee Farmers Mut. Ins. Co., 277 S.W.3d 381, 387 (Tenn. 2009).

The parties' respective rights and obligations are governed by their contract of insurance whose terms are embodied in the policy. As with any other contract, our responsibility is to give effect to the expressed intention of the parties, by construing the policy fairly and reasonably, and by giving the policy's language its common and ordinary meaning. We are not at liberty to rewrite an insurance policy simply because we do not favor its terms or because its provisions produce harsh results. In the absence of fraud, overreaching, or unconscionability, the courts must give effect to an insurance policy if its language is clear and its intent certain. Angus v. Western Heritage Ins. Co., 48 S.W.3d 728, 731 (Tenn.Ct.App. 2000).

Exclusionary clauses are to be strictly construed against the insurer when drafted by the insurer. Palmer v. State Farm Mut. Auto. Ins. Co., 614 S.W.2d 788, 789 (Tenn. 1981).

The language of the policy must be taken and understood in its plain, ordinary and popular sense. Where language is susceptible to more than one reasonable interpretation, the language is ambiguous. If such ambiguous language limits the coverage of the insurance policy, that language must be construed in favor of the insured. In determining the “plain, ordinary and popular” meaning of language, courts may refer to dictionary definitions. CBL & Associates Management, Inc. v. Lumbermens Mut. Cas. Co., 2006 WL 2087625, 6 (E.D.Tenn. 2006); Am. Justice Ins. Reciprocal v. Hutchison, 15 S.W.3d 811, 814 (Tenn. 2000).

Language in a policy is ambiguous if it is capable of more than one reasonable interpretation. Tata v. Nichols, 848 S.W.2d 649, 650 (Tenn. 1993). A contract is ambiguous only if it is of uncertain meaning and may fairly be understood in more ways than one. Rogers v. First Tennessee Bank Nat. Ass'n., 738 S.W.2d 635 (Tenn.Ct.App. 1987).

If possible, all provisions in the contract should be construed in harmony with each other to promote consistency and to avoid repugnancy between the various provisions. Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn. 1999).

In Tennessee, exceptions, exclusions, and limitations in insurance policies must be construed against the insurance company and in favor of the insured. Allstate Ins. Co. v. Watts, 811 S.W.2d 883, 886 (Tenn. 1991). The entire policy, however, including insuring clauses and exceptions thereto, must be read as a whole. Am. Sav. & Loan Ass'n v. Lawyers Title Ins. Corp., 793 F.2d 780, 782 (6th Cir. 1986). Further, exceptions should not be construed so narrowly as to defeat their evident purpose. Standard Fire Ins. Co. v. Chester-O'Donley & Assocs., Inc., 972 S.W.2d 1, 8 (Tenn. Ct. App. 1998).

“[T]he paramount rule of construction in insurance law is to ascertain the intent of the parties.” Blue Diamond Coal v. Holland-America Ins. Co., 671 S.W.2d 829, 833 (Tenn.1984).

The insuring agreement defines the outer limits of an insurance company's contractual liability. The courts are not at liberty to rewrite an insurance policy solely because they do not favor its terms, and must avoid forced constructions that render a provision ineffective or extend a provision beyond its intended scope. As long as a policy's terms are unambiguous, it will be enforced as written, and courts cannot rewrite an unambiguous policy simply to avoid harsh results. Therefore, the insured cannot simply focus on the declarations/summary portion of a contract in isolation; the policy must be read as a whole. Hoyt v. Pyles, 2007 WL 1217264, 5-6 (Tenn.Ct.App. 2007).

The insuring agreement sets the outer limits of an insurer's contractual liability. If coverage cannot be found in the insuring agreement, it will not be found elsewhere in the policy. Exclusions help define and shape the scope of coverage, but they must be read in terms of the insuring agreement to which they apply. Exclusions can only decrease coverage; they cannot increase it. Exclusions should also be read seriatim. Each exclusion reduces coverage and operates independently with reference to the insuring agreement. Exclusions should not be construed broadly in favor of the insurer, nor should they be construed so narrowly as to defeat their intended purpose. Once an insurer has established that an exclusion applies, the burden shifts to the insured to demonstrate that its claim fits within an exception to the exclusion. Standard Fire Ins. Co. v. Chester O'Donley & Associates, Inc., 972 S.W.2d 1, 8 (Tenn. Ct. App. 1998).

An insurance contract should be construed in “a reasonable and logical manner.” Standard Fire Ins. Co. v. Chester O'Donley & Associates, Inc., 972 S.W.2d 1, 7 (Tenn. Ct. App. 1998). When coverage questions arise, the components of a policy should be construed in the following order: 1) the declarations; 2) the insuring agreements and definitions; 3) the exclusions; 4) the conditions; and 5) the endorsements. Id.

Please Just Give Me a Trial by Ambush

Brandon McWherter — Mon, 07 Dec 2009 10:07:08 -0600

I came in this morning to an email from my partner, Justin Gilbert. Justin lost a jury trial last week in Decatur County Circuit Court, and offered some insightful thoughts about the experience in a short article he entitled, "Please Just Give Me a Trial by Ambush." Here's an excerpt:

The point is this: The cost of our normal legal rules is a price too steep for most
Tennesseeans. Often, we cannot enforce our laws because it is too expensive to follow our rules.

Today, motions for summary judgment -- intended to weed out frivolous cases and
conserve on the cost of litigation -- are filed in every discrimination case. Most
depositions are taken not because they are needed to better understand a case; they are taken to mount and respond to summary judgment. And electronic discovery requirements can overwhelm, regardless of the actual merits or size of the case.

Many employment discrimination cases do settle, particularly if it’s done early.
But something is fundamentally unsettling where the basis for the settlement is the
monetary price of the alternative: Our own judicial system. It makes companies feel
“extorted” by the judicial system. And employees feel cheapened because their
discrimination complaints are processed by system costs.

I’ve practiced fifteen years now. I had grown accustomed to, if not wary of, some
of the rules and their costs to individual claimants in Tennessee. If my recent experience was a “trial by ambush,” or one resembling “the days of old,” can you please just give me some more of that?

Justin practices employment discrimination law with Gilbert Russell McWherter PLC. You may write to him at jgilbert@gilbertfirm.com or at www.gilbertfirm.com

An Insured Need Not Rebuild at the Same Premises in Order to Recover Replacement Cost

Brandon McWherter — Sun, 29 Nov 2009 10:01:01 -0600

Parks' recent post about whether an insured has to rebuild at the same location in order to recover replacement cost got me thinking, and then researching. Here's what I found:

Although none in Tennessee, there are a dozen or so cases across the country dealing with the issue of whether an insured has to rebuild at the same location in order to recover replacement cost. For example, in Hess v. N. Pac. Ins. Co., 859 P.2d 586 (Wash. 1993), the Supreme Court of Washington held that insureds are entitled to replace at an alternate location, but that the reimbursement amount is limited to the amount it would have cost to rebuild at the original location. Specifically, the court stated,

"This particular limitation does not require repair or replacement of an identical building on the same premises, but places that rebuilding amount as one of the measures of damage to apply in calculating liability under the replacement cost coverage. The effect of this limitation comes into play when the insured desires to rebuild either a different structure or on different premises. In those instances, the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds."

Several other courts have rendered similar decisions. See, e.g., Kumar v. Travelers Ins. Co., 211 A.D.2d 128 (N.Y. 1995) (holding that insurance provision offering to pay full cost to repair or replace damaged dwelling on the same premises merely established the limits of coverage and that replacement cost is limited to what it would cost to replace the damaged structure on the same premises, however, the insured is not required to replace the damaged dwelling on the same premises in order to recover replacement cost); Conway v. Farmers Home Mut. Ins. Co. , 26 Cal. App.4^th 1185 (Cal. App. 1994 (“[W]hen the insured desires to rebuild either a different structure or on different premises . . . the company’s liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises); S and S Tobacco and Candy Co., Inc. v. Greater New York Mutual Ins. Co., 617 A.2d 1388 (Conn. 1992) (holding that construction of replacement structure at different location constituted replacement under the policy).

So as much I hate to say it, Parks seems to have a lot of folks with "Judge" in front of their names who agree with him. And so I guess I agree as well.

Hope everyone had a great Thanksgiving!

In Order to Invoke Replacement Cost Coverage, Does An Insured Have to Rebuild at the Same Location?

Parks Chastain — Fri, 20 Nov 2009 13:05:08 -0600

In most cases, the answer is no. Most policies use replacement cost at a specific location as a measure of the maximum recovery that can be afforded under a property insurance policy. Most policies contain a “Valuation” condition similar to the following:

B. Replacement Cost – When replacement cost is shown on the “declarations” for covered property, the value of covered property will be based on the replacement cost without any deduction for depreciation.

The replacement cost is limited to the cost of repair or replacement with similar materials on the same site and used for the same purpose. The payment shall not exceed the amount “you” spend to repair or replace the damaged or destroyed property.

Replacement cost valuation does not apply until the damaged or destroyed property is repaired or replaced. “You” may make a claim for actual cash value before repair or replacement takes place, and later for the replacement cost if “you” notify “us” of “your” intent within 180 days after the loss.

Typically, absent any other endorsement or provision, this policy language simply limits the amount of replacement cost coverage that is available to the cost of repairing or rebuilding on the same site, with like kind and quality. Therefore, if an insured wants to move to a different location, and spends more than the actual cash value payment made by the insurance company, that insured could possibly be entitled to replacement cost coverage, even though not rebuilding at the same location.

However, it is important to recognize that the “same site” (some policies use the phrase “same location”) requirement will be a cap upon the amount of replacement costs. Let’s assume that the property insured is in Hickman County, Tennessee (a fairly rural area). It is a 2000 sq. ft. brick home with all amenities. The replacement cost of that home, for the sake of argument, would be $175,000.00. When a loss occurs, the policyholder decides that she wants to move to Williamson County, Tennessee (a more suburban area) and builds a home almost exactly like the one that existed in Hickman County. The price of this home was $380,000.00. The carrier previously paid an actual cash value amount (replacement cost less depreciation) of $125,000.00. What additional monies does the policyholder get upon completing the property in Williamson County?

The answer should be only $50,000.00 – the amount it would have taken to rebuild the house with material of like kind and quality at the same site or same location in Hickman County.

The Little Recognized Side Effect of the Broad Duty to Defend

Parks Chastain — Wed, 18 Nov 2009 13:30:27 -0600

As our first substantive liability blog, I want to talk about the duty to defend. Most attorneys recognize that the duty to defend is a broad duty – one broader than the duty to indemnify. But, the breadth of that duty has a side effect that some lawyers have not anticipated. If, after looking at the duty to defend, not a single allegation of the Complaint would raise a duty to defend, then by necessity, there cannot be a duty to indemnify. If the duty to defend is broader than the duty to indemnify, and analysis of the Complaint or claims against the insured show that there is no duty to defend, then there can never be a duty to indemnify.

In these cases, it is entirely appropriate for an insurer simply to disclaim coverage and, effectively, walk about from the claim or suit. There is no reason for the insurance carrier to remain involved if the duty to defend does not exist. I am often met with an objection when a defense is withdrawn of – “but you don’t know what will happen.” If the duty to defend does not exist, then what happens in that suit, where no duty to defend exists – is really a moot point. If the broad duty cannot exist, the specific duty of indemnity cannot exist.

Case law holds that this conclusion is based upon “logic and common sense,” and the cases hold that logic and common sense dictate that if there is no duty to defend, then there must be no duty to indemnify. See e.g. American States ins. Co. v. Bailey, 133 F. 3d 363 (5th Cir. 1998).

Tennessee courts have long noted it is not uncommon that an insurer will have a duty to defend based on the allegations in the complaint, yet have no subsequent duty to indemnify the insured. St. Paul Fire & Marine Ins. Co. v. Torpoco, 879 S.W.2d 831(Tenn. 1994). I point this “twist” out because it has come up in a couple of my recent cases, where my client is challenging both the duty to defend and the duty to indemnify.

THIRD-PARTY COVERAGE LITIGATION ISSUES NOW ADDRESSED ON BLOG

Parks Chastain — Wed, 18 Nov 2009 13:20:11 -0600

Although the focus of this blog was, and will remain, first-party insurance coverage litigation, many of our readers have asked if we are going to include third-party coverage litigation topics in the blog. While we initially wanted to remain “purists,” so to speak, demand is such that we will create a separate “Category” entitled “Third-Party Coverage Issues” and will start blogging on these when first-party coverage litigation issues get a little slow or as the need arises. Our focus will remain first-party coverage litigation, but hopefully these new topics will prove helpful and provoke continued discussion.

A Break from the Intricacies of Insurance Litigation

Brandon McWherter — Tue, 27 Oct 2009 22:54:12 -0600

A fine lawyer and an even better friend, Jonathan Bobbitt, sent an article around the office this morning that reminded me of something very important - the value of knowing your priorities, and, just as importantly, possessing the ability to disregard the unimportant. The article was written by Peter Bregman, and is entitled "Two Lists You Should Look at Every Morning." Those two lists are (1) your focus list; and (2) your ignore list. An excerpt,

Some people already have the first list. Very few have the second. But given how easily we get distracted and how many distractions we have these days, the second is more important than ever. The leaders who will continue to thrive in the future know the answers to these questions and each time there's a demand on their attention they ask whether it will further their focus or dilute it.

Which means you shouldn't create these lists once and then put them in a drawer. These two lists are your map for each day. Review them each morning, along with your calendar, and ask: what's the plan for today? Where will I spend my time? How will it further my focus? How might I get distracted? Then find the courage to follow through, make choices, and maybe disappoint a few people.

The rigorous demands of practicing law, and life in general, simply require you to prioritize your time and energies in order to be efficient and effective. With emails blasting across your Outlook inbox at an ever increasing pace, it is incredibly easy to lose focus in the shuffle. So have the courage to close Outlook from time to time, and focus on the things that deserve your time. When I exercise the discipline it takes to do that, those often turn out to be my most productive days.

What Does a Mercedes-Benz Have to Do with Insurance Litigation?

Brandon McWherter — Fri, 09 Oct 2009 01:00:00 -0600

The Tennessee Court of Appeals, Eastern Section, issued a new opinion yesterday interpreting the Tennessee Consumer Protection Act. The case, Timoshchuk v. Long of Chattanooga Mercedes-Benz et al (.pdf), arose from a Mercedes dealer's sale of a "new" Mercedes which turned out to be not so new. A few months after purchasing his shiny new Mercedes, the very distraught and obviously angry new car owner discovered that the paint on the vehicle's trunk appeared discolored in certain lighting conditions. The car owner eventually learned that the car had been damaged during shipment and subsequently repaired by a dealer. Now thoroughly upset, he demanded to return the vehicle, which the dealer refused to accept. As expected, a lawsuit ensued.

The issue in the case, as relevant for our discussion here, was whether the defendants violated the Tennessee Consumer Protection Act's general prohibition "unfair or deceptive acts or practices affecting the conduct of any trade or commerce constitute unlawful acts or practices." T.C.A. 47-18-104. The defendant argued that the TCPA claim was barred because the plaintiff could not prove one of the specifically enumerated acts or practices of TCA 47-18-104(b). The Court of Appeals disagreed with this analysis, noting that such an argument ignores the fact that a specific claim was made under the broader prohibition of T.C.A. 47-18-104(a).

Although the case itself has nothing to do with insurance, it is important because it makes clear that a plaintiff does not have to plead one of the specifically enumerated unfair or deceptive acts or practices of TCA 47-18-104(b). Granted, TCA 47-18-104(b) also has a "catch-all" provision that prohibits "engaging in any other act or practice which is deceptive to the consumer." But this provision of subsection (b) only prohibits "deceptive" conduct, not both "unfair" and "deceptive" conduct. This distinction is important because "unfair" and"deceptive" have been separately defined by Tennessee courts, with the term "deceptive" having a somewhat more limited scope than "unfair."

I've had this issue come up in several cases when defense attorneys argue that a particular claim is barred when relief is sought for an act that fits into the definition of "unfair" but not "deceptive." Although I never considered it to have much merit, such an argument is now officially dead in the water. The Timoshchuk case makes clear that there are really two "catch-all" provisions in the TCPA. One is at TCA 47-18-104(b)(27) (engaging in "any other act or practice which is deceptive"), but the general prohibition in TCA 47-18-104(a) that prohibits both unfair and deceptive acts or practices is a stand-alone "catch-all" provision as well.

The lesson? If you are going to plead violations of the TCPA by pleading violations of specific portions of the statute, then be sure to plead both TCA 47-18-104(a) and (b).

By the way, the unhappy Mercedes owner didn't fare too well. His claims were dismissed (for reasons completely unrelated to the issues discussed above).

Revisions to Local Rules in Western District

Brandon McWherter — Tue, 29 Sep 2009 20:53:51 -0600

Several attorneys have been appointed to revise the Local Rules for the federal courts in West Tennessee. The committee is scheduled to meet in mid-October and the committee members are actively seeking input from the local bar for suggestions and comments regarding revisions to the present Local Rules. A very significant portion of my firm's cases are in federal court so we fully intend to take advantage of this opportunity, as should other members of the federal bar. If anyone has an interest in offering suggestions or input but doesn't know who to call, send me an email and I'll be happy to send you contact information for the committee members. The deadline for comment is October 16, 2009.

Cell Phones and Spoliation of Evidence

Brandon McWherter — Wed, 09 Sep 2009 06:46:25 -0600

An Oklahoma insurance lawyer, Steven Buckman, recently started a new blog called Oklahoma Insurance Law. Its well written with a bit of comedy, including frequent accounts with "Bubba" (the redneck policyholder) and the "tall building lawyer" (the insurer's counsel).

In the latest post, the topic was whether deleting photographs from a cell phone constitutes spoliation of evidence. Here's a taste of Buckman's writings:

The "tall building lawyer" found out during the EUO that Bubba took photos of all the hand guns one week before the fire. Bubba was going to send the photos to a disabled vet who just returned home due to a medical discharge for combat injuries. Bubba has a big heart and wanted to do something for one of our soldiers wounded in the service of our country. He was going to let this soldier have his pick of any gun he wanted and give it to him as a gesture of appreciation. The fire destroyed the guns so he never sent the photos. The insurer learned about the photos and wanted a copy to document the claim.

The photos no longer exist. Bubba, while scouting his favorite deer stand, saw a "buck with a rack that makes ya as giddy as a schoolgirl gettin' ready for her first date." He took so many pictures of the buck that he overwrote the photos of the guns.

Is this spoliation? Maybe, depending on whether litigation was anticipated at the time the photos are deleted.

Good luck with the new blog Steven.

Mediating First Party Property Cases

Parks Chastain — Tue, 08 Sep 2009 12:32:47 -0600

In the past two weeks, I have mediated three first party property cases. None of them was alike, and I wanted to share some thoughts on approaching such mediations from the carrier’s perspective, and some comments on the way the insureds have approached the mediation – making it better or worse for fruitful negotiations.

First of all, I think it is most beneficial when both sides have a realistic assessment of their case. I know that some attorneys representing plaintiffs think they have to come into a mediation with a very high number, for fear they will not get very much out of the proceeding. The problem is that it creates a certain client expectation, and the client sometimes becomes immovable based upon these positions.

It has been my experience that my clients approach the mediation with a fair and accurate, and realistic, assessment of their exposure. When I go into a mediation, I make sure that my client knows what the risks are. In other words, I do not “sugar coat” the client’s exposure. Some lawyers who typically represent insureds think that we “insurance lawyers” dig in on non-meritorious positions because we want to continue the client relationship with the insurance carrier. For those of you who do not practice in this area, let me give you a piece of advice – such a strategy will not work in today’s insurance business climate, and is a poor client development strategy.

The reasons are simple. While no client perhaps likes to hear they are wrong in litigation, there is a time to tell them and a time not to tell them. The time not to tell them is one week before trial, when nothing new has happened for the last four months. That raises the question of -- what did you miss four months ago? We had a chance to settle this case at mediation six months ago, and you told me the case was a great case to defend? If you have done your investigation and work correctly, the assessment that you have going into the mediation should be the same that you have four weeks before the trial, and one day before the trial. I have had cases where some “bomb shell” has dropped, but those are rare.

The most successful mediations occur when the insurance carrier comes at it from this perspective, and so does the insured. Let’s take a case where a question exists as to whether a covered water loss resulted in damage. The insured has an expert witness, as does the carrier. Not unsurprisingly they disagree as to the cause of loss. Both sides cannot be right. In assessing who actually is right, one needs to look at the opinions of the experts, qualifications of the experts, and the “common sense” value of the opinion. I spent the Labor Day weekend with my best friend – who happens to be a plaintiff’s lawyer in Louisville, Kentucky who routinely sues insurance companies – and he was telling me about his personal water loss. His insurance adjuster agreed that water came in from an opening created by a storm, and damaged his kitchen. There was water damage in the basement directly below the kitchen, with no other obvious source of water entry into the basement, but that adjuster did not believe the water damage in the basement was related to the storm. You know, there may be a good explanation of that from an engineering perspective, but there is not from a common sense perspective.

When both parties approach their task at mediation with a realistic assessment of the strengths and weaknesses of the case, the role of advocate shows itself in the negotiations from there. There has to be movement in order for cases to settle, and both sides will always recognize some potential for loss. Being realistic – from either side – is the best representation of your client.

Thoughts on Advances

Brandon McWherter — Sun, 23 Aug 2009 20:33:02 -0600

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.

Policyholder's Advocate's Blog Questioning Misconceptions on Advances Shows Extent of Misconceptions, and the Reasons Why They Are Problematic

Parks Chastain — Sun, 23 Aug 2009 07:52:48 -0600

William F. "Chip" Merlin, Jr., of the Merlin Law Group, wrote a blog in which he derided (a nice word) the blog I posted on August 18, entitled “Advances-Common Misconception.” Mr. Merlin is a Plaintiff's/Policyholder's Attorney. (www.merlinlawgroup.com). His website describes him as “The Policyholder’s Advocate.” His advocacy is evident as his comments concerning advances misunderstand the very points I was making, misconstrue the true nature of advances, evidence a misreading of the actual blog I posted. Check out his commentary at:

http://www.propertyinsurancecoveragelaw.com/2009/08/articles/insurance/partial-and-advance-paymentsan-insurance-company-attorney-claims-that-there-is-no-legal-obligation-to-pay-undisputed-benefits/

Chip missed the point, and also missed the reason the blog was posted. He asks:

Why do insurance company attorneys tell their insurance company clients that they can abuse their policyholders with legal immunity?

Did you see anywhere in the blog where I suggested advances should never be made? Of course not, as most who read it could tell. Even Brandon, my worthy usual adversary and co-author of this blog, has not “taken me to task,” as Chip purports to do. My point was to educate and prevent misconceptions from arising. Here are Chip’s two biggest mistakes – let’s call them continued “misconceptions” – although one wonders how someone with his experience could unintentionally misunderstand statements made in the blog:

1. He cited to some policies that do require advances. The exact wording of my blog posted August 18 states:

Generally speaking, most insurance policies do not require the insurance carrier to make an advance

That did NOT say that no policy exists which may not require an advance.

2. He then says we have an obligation to pay the undisputed portion of the claim – and I agree. But any knowledgeable reader knows that is not what an advance is – an advance is money paid before an investigation is complete. If it is complete, we know the undisputed portion. Based upon that analogy, he argues that payments could wait years, and violate applicable laws. Obviously, that is an incorrect assessment. If you start with a bad premise (i.e., the advance is the really the “undisputed portion”), you must reach a faulty conclusion, as Chip has done.

Anyway, thanks to Chip for pointing out exactly why we needed to clear up misconceptions. His blog demonstrates my point exactly, although I really had not thought that anyone would have these misconceptions.

And, let me add this, my blog notes that some carriers do make advances and some do not. It is not a condemnation of advances, but rather an attempt to clear up misconceptions to which some policyholder attorneys contribute. These misconceptions evidenced by Chip’s posting cause a problem, when the attorney for the policyholder convinces the insured that a company is treating them unfairly by not making advances. The insured often decides to become adversarial, to the benefit of the policy holders attorney, when it is often not necessary. If attorneys would be objective in their assessments as to policy obligations, much litigation could be avoided.

I enjoy the challenge of litigating with lawyers who know the rules, and understand the issues involved. When I deal with lawyers new to coverage litigation, I find that they have many of the same misconceptions I have set forth, and perhaps those that Chip has evidenced. In many cases, the companies I have represented have made advances, but the insured claimed they were not enough. The policyholder’s attorney usually writes a letter demanding an advance, copies to his client. That creates a perception it the mind of the policyholder that an advance is required, when it may not be. Things are never the same after that, as the policyholder is convinced the carrier has failed to do something required. In most cases, nothing could be further from the truth.

Advances - Common Misconceptions

Parks Chastain — Tue, 18 Aug 2009 12:54:13 -0600

I want to address some misconceptions about advances under first party policies. By this, I mean a request for money made by an insured before the investigation is complete. While the circumstances of an insured’s loss often place the insured in a difficult financial situation, that situation does not alter the insurance contract. Therefore, let’s debunk some common misconceptions:

1. Generally speaking, most insurance policies do not require the insurance carrier to make an advance. Rather, the policies provide a timeframe for investigation and the insured’s compliance with conditions precedent to recovery. With only a couple of exceptions, there is no right to payment until the policyholder has complied with policy conditions.

2. Therefore, there is no “right” or “entitlement” to an advance.

3. Advance payments do not constitute an admission of liability. I direct your attention to T.C.A. § 56-7-131, a statute that seems to address both first and third party advance payments. To download a PDF copy, click here.

4. If a verdict results in favor of the insured, the advanced amount should reduce the amount awarded to the plaintiff. T.C.A. § 56-7-131.

5. Subsection (c) of T.C.A. § 56-7-131 specifically provides that any payments made by an insurance company shall be deemed to have been made pursuant to the limits of the policy, and shall be credited against the insurer’s obligation to the insured arising from the policy.

6. If an advance is made, and there is no coverage, the carrier should be entitled to recover that advance.

7. The statute also provides, as does most case law, that an advance does not toll any statute of limitations or contractual suit period.

Some carriers make advances, and others do not. Much depends upon the nature of the claim, the status of the investigation, and the situation of the insured/policyholder. When advances are made, there is no right to another advance.

I would just reinforce for all readers that the policy will set forth the requirements imposed upon an insured, and the quicker and more completely an insured complies, the quicker and ore completely the carrier can evaluate the claim.

"Total Loss" Doesn't Necessarily Mean "Burned to the Ground"

Brandon McWherter — Thu, 06 Aug 2009 05:15:43 -0600

Tennessee's valued policy law(T.C.A. 56-7-803) provides that an insurer is liable to the policyholder for the full policy limits if a total loss occurs. As a result, the big "fight" is often over the issue of whether a loss is "total" or "partial" in nature. Back in May, Parks Chastain commented here that the identity test should be used to determine whether a structure will be deemed a total loss. Parks relied on the Laurenzi and Hollingsworth cases to support his contention that the test is whether a building has lost its identity and specific character as a building. I think our courts interpret the valued policy law in a less restrictive manner than Parks suggests is appropriate.

First, let me point out that the Tennessee Supreme Court, with its present composition, would almost certainly adopt the prudent man test if given the opportunity. Such a test would be an alternative to the identity test referenced by the Laurenzi decision. Under the prudent man test, a house could be considered a total loss if a prudent man would not repair the property because the repair costs would be close to or exceed the replacement cost of the structure. Such a test has been widely accepted across the nation.

Second, and more importantly for a present analysis, the Tennessee Court of Appeals has made clear that Tennessee law does not require that a house is necessarily only a partial loss simply because it can still be identified as to its type of structure. King v. Dunlap, 945 S.W.2d 736 (Tenn. Ct .App. 1996). On the contrary, both the King and Laurenzi cases make clear that a building can still be deemed a total loss even when walls are still standing, the foundation is unimpaired, and some parts of the structure are unconsumed. There is no requirement that there be an absolute extinction, or that all materials be physically destroyed. For example, in Mann v. Grange Mut. Cas. Co., 1986 WL 14223 (Tenn. Ct. App. 1986), the Tennessee Court of Appeals affirmed the trial court's holding that a building was a total loss even when the second level of the house, including the roof and walls, were not completely destroyed.

The lesson? Just because the brick is still standing doesn't mean your loss isn't total in nature. Don't get confused by the "total loss" language. At its base level, it really all boils down to whether it would be reasonable to repair a house or not. Even though that's not technically the legal test, its going to result in the same conclusion most of the time. So if an insurance company attempts to argue that a house isn't a total loss even though it is agreeing the home needs to be demolished and rebuilt, don't go for it. You've got a total loss, and you are entitled to the full face value of your insurance policy.

Tennessee Court Of Appeals Rules That Submission To Examination Under Oath Is Condition Precedent To Recovery

Parks Chastain — Tue, 28 Jul 2009 13:09:39 -0600

I commend to your reading the recent case of Spears v. Tennessee Farmers Mutual Insurance Company, No. M2008-00842-COA-R3-CV (Tenn. Ct. App. Middle Section), filed July 17, 2009. For a PDF copy of this case, download here (pdf). In this case, the Court was presented with the question of whether the failure of an insured to answer questions in an examination under oath was a material breach of the policy terms, and whether compliance with an EUO request was a condition precedent to the insured’s recovery under the policy. The Court noted:

We likewise find that submission to answer questions under oath when requested as provided for in the insurance policy at issue is a condition precedent to an insured’s recovery under that policy.

As an aside, the court also acknowledged that depositions are different than examination under oath (see my post of June 18, 2009 under “Claim Tips”). The Court found that:

Giving a deposition after having filed suit against the insurer for failing to pay an insurance claim does not constitute cooperation under the terms of the policy.

The Court noted that Tennessee Farmers’ decision to seek an examination under oath was discretionary, but once the carrier made such a request, the policyholder was under an obligation to submit.

Trigger Happy Policyholders?

Brandon McWherter — Fri, 24 Jul 2009 05:24:34 -0600

Parks Chastain recently wrote here about trigger happy policyholders prematurely filing lawsuits against insurance companies before a denial ever occurs. The reason for this is the provision in insurance policies that shortens the applicable statute of limitations to a period of usually one or two years from the date of the loss. As Parks mentioned, however, Tennessee courts have held that these shortened periods for filing lawsuits don't begin to run until a cause of action accrues, which is usually (but not always) when the insurer denies the claim.

There are a few practical problems associated with figuring out when it is necessary to file a lawsuit "to protect the statute of limitations." First, I have been involved in a couple of cases in which there were factual disputes about whether a claim had actually been denied. For example, there have been many times when I have seen an insurance company deny a claim, but then agree to reconsider that denial for various reasons. So is the statute of limitations running during that reconsideration period? Another common scenario occurs when there is no formal denial, but the adjuster just ignores part of a claim or casually brushes it off in conversation. Is that a denial that triggers the running of the statute of limitations? Probably not, but you can see the potential problems (and sleepless nights) that these situations can cause.

In my view, the best way to handle this issue is just to be up front about it and get an agreement, in writing, with the insurance company. Twice in the past year, I could foresee potential problems due to confusing facts (partial denials, etc.) and simply obtained written agreements with opposing counsel that the contractual limitations period had not began to run. This doesn't have to be anything fancy - just a short one or two paragraph letter from the insurance company or its lawyer will suffice.

General Contractors' Overhead and Profit Charges - Recoverable?

Brandon McWherter — Thu, 23 Jul 2009 05:30:29 -0600

This is one of those topics that comes up regularly. Does an insurer have to pay general contractors' overhead and profit charges? The short answer is "Yes" but there are some exceptions. According to a 2005 Sixth Circuit Court of Appeals case (interpreting Tennessee law), the costs of a contractor (overhead and profit) are recoverable if the the insured would reasonably be expected to hire a contractor to repair its property. See Parkway Assoc., LLC v. Harleysville Mut. Ins. Co., 129 Fed. Appx. 955 (6th Cir. 2005).

Several nationwide class actions have been filed over the past few years concerning insurance companies' refusal to pay profit and overhead. Despite such class actions and the clear statement of the law by the Sixth Circuit, I still hear about this occurring from time to time. If an insurance company tries to tell you its not going to pay overhead and profit, stand up for yourself and point out this case to the adjuster. Somehow I doubt it will be the first time he or she has heard of it.