Tennessee Insurance Litigation Blog

Another Take on the U.S. Bank Case

Parks Chastain — Tue, 04 Dec 2012 08:07:30 -0600

Far from being “ho hum” as my colleague writes, the case of U. S. Bank, N.A. as servicer for the Tennessee Housing Development Agency v. Tennessee Farmers Mutual Insurance Company, No. W2012-00053-COA-R3-CV, filed November 29, 2012, the did establish some important points of law - but from the insurer's perspective, in limiting bad faith and TCPA recovery. The Court of Appeals was presented with appellate review of a trial court finding imposing bad faith and Consumer Protection Act damages upon Tennessee Farmers Mutual Insurance Company for failing to pay a mortgagee. The case actually arose from a Supreme Court ruling in U. S. Bank, N.A. v Tennessee Farmers Mutual Insurance Company, 277 S.W. 3d 381 (Tenn. 2009), where the Tennessee Supreme Court held that the mere institution of foreclosure proceedings did not constitute and increase in hazard sufficient to allow an insurance company to avoid payment of a mortgagee under a standard mortgage clause. Upon remand, the trial court was presented with the issues of whether the interpretation advanced by Tennessee Farmers constituted bad faith and the violation of the Tennessee Consumer Protection Act. The trial court entered judgment under both bases, awarding the bank a judgment for the amount due on the mortgage plus accrued interest, but also attorney’s fees and costs based upon a finding that Tennessee Farmers’ interpretation of the policy amounted to bad faith and an unfair act or practice under the Tennessee Consumer Protection Act. The Court of Appeals reversed.

From a defense perspective, the significance of this holding lies in the fact that the issue was one of first impression, and the Court of Appeals noted as follows:

We respectfully disagree with the trial court’s conclusion that Tennessee Farmers’ interpretation of the policy throughout the litigation amounted to bad faith and an unfair act or practice under the TCPA. As noted by the Supreme Court, the issue of whether, under a standard mortgage clause in a fire insurance policy, the Bank’s commencement of foreclosure proceedings amounted to an increase in hazard requiring notification to Tennessee Farmers involved ‘a matter of first impression.’…The Supreme Court further noted that ‘no Tennessee case has squarely addressed the precise issue presented….’ Moreover, prior to the Supreme Court’s opinion, this Court agreed with Tennessee Farmers’ interpretation of the policy. Clearly, reasonable minds disagreed over the precise issue which the trial court claimed to be well-settled. In fact, had the Supreme Court agreed with the position taken by this Court, there would be no basis for the trial court’s reasoning that Tennessee Farmers’ interpretation was unreasonable and inconsistent with well-settled law.

Three cheers for the Court of Appeals! On an issue of first impression, even where law exists on both sides of the issue from other jurisdictions, it seems to this writer that a judgment of bad faith or violation of the Consumer Protection Act should not be warranted. This case may be appealed even further, and we will see if the Supreme Court takes further action, but for now, it seems that justice has been done.

But, Brandon contends that the Court of Appeals implicitly recognized a common law bad faith cause of action. I disagree. Brandon noted that it seemed a “rather odd opinion for such a big issue.” Indeed, creating or recognizing a cause of action which has not been recognized in Tennessee law would seem to be more noteworthy. But here’s why I do not think the Court of Appeals implicitly sanctioned the cause of action. First, the Court of Appeals did not really address it. Second, what they did address were the facts which formed the basis of the trial court’s findings on BOTH a bad faith action and the TCPA.

The Court of Appeals simply confirmed that, under neither theory, the same set of facts did not create liability. The cause of action for common law bad faith failure to pay has never been entrenched in Tennessee law, as evidenced by the fact that the trial court did not cite to any Tennessee case law supporting such cause of action. It would have been nice had the Court of Appeals indicated such a cause of action did not exist, but to make the leap that, under these facts, the Court of Appeals impliedly authorized such action seems, to use Brandon’s phrase in good natured banter, “rather odd.”

TN Court of Appeals Impliedly Recognizes Claim for Common Law Bad Faith

Brandon McWherter — Thu, 29 Nov 2012 22:52:50 -0600

You might recall the 2011 legislation that took away consumers' right to bring claims against insurance companies under the Tennessee Consumer Protection Act, but that same legislation seemed to recognize the existence of a common law cause of action for bad faith in Tennessee. (click here for a prior post on that topic). Since that time, I've been tracking a couple of bad faith cases working their way through the Tennessee appellate courts. Today the Court of Appeals for the Western Section issued its ruling in one of those cases. See U.S. Bank v. Tennessee Farmers Mutual Insurance Company.

The opinion itself was rather "ho-hum," and doesn't offer much of any substantive discussion regarding common law bad faith claims, but it impliedly holds that such a cause of action exists. The issue in the case was whether a mortgage company who is a named mortgagee on an insurance policy has a duty to notify the insurance company of a foreclosure on the insured property. The Tennessee Supreme Court previously ruled that no such duty exists, but on remand one of the issues to be considered was the Bank's common law bad faith claim. After hearing proof on the issue, the trial court (Judge Clayburn Peeples) ruled that such a cause of action exists and expressly held that Tennessee Farmers Insurance Company acted in bad faith in denying the Bank's claim for insurance proceeds. In reviewing Judge Peeples' decision, the Court of Appeals quoted his ruling at length, which stated in part:

US Bank has shown by a preponderance of the evidence the following elements of a claim for common law claim for a bad faith failure to pay:

a.That [Tennessee Farmers] issued a policy of insurance to US Bank and that US Bank made lawful, reasonable claim under that policy;

b. That [Tennessee Farmers] intentionally refused to pay US Bank's claim;

c. That [Tennessee Farmers] had no reasonably legitimate or arguable reason for its refusal to pay the claim;

d. That [Tennessee Farmers] had actual knowledge of the absence of a reasonably legitimate, debatable or arguable reason for the refusal; and

e. That [Tennessee Farmers] intentionally failed to determine whether it had a reasonably legitimate or arguable reason for refusing to pay US Bank's claim.

In reviewing this holding by the trial court (which was a specific issue on appeal), the Court of Appeals seemingly accepted the elements of a bad faith claim as set forth by Judge Peeples, but then went on to hold that the facts before the Court did not amount to bad faith. Its a rather odd opinion for such a big issue, but nonetheless is an extraordinary win for victims of insurance bad faith in Tennessee. The door is now wide open for future common law bad faith claims.

TN Farm Bureau Changes its Coverage on Roof Claims

Brandon McWherter — Mon, 12 Nov 2012 21:55:26 -0600

I recently learned that Tennessee Farmers Mutual Insurance Company (Farm Bureau) has changed the way it will pay roof claims. Specifically, a recent endorsement changes roof coverage to actual cash value for roofing materials instead of replacement cost. This means that roof materials will be depreciated in the event of a roof claim. For example, if hail damages a roof that is 10 years old, the replacement cost would be depreciated to account for the age of the roof. The depreciation rate will vary depending on the age and condition of the roof, but could be as high as 75%, which will impact consumers' ability to replace their roofs after a catastrophe. This is obviously a huge deal for Tennessee consumers, particularly in light of the wind and hail storm events that has become common in our state.

The Law of California Applies to an Insurance Policy Insuring Tennessee Property?

Brandon McWherter — Fri, 14 Sep 2012 09:21:39 -0600

Practitioners should be aware that Tennessee courts generally apply the law of the state where an insurance policy was issued and delivered if there is no enforceable choice of law clause in the policy. Gov't. Employees Ins. Co. v. Bloodworth, 2007 Tenn. App. LEXIS 404 (Tenn. Ct. App. 2007). So, for example, if a policy on a property in Nashville is issued and delivered to the owner at his home in California, the law of California would generally apply. However, the Bloodworth case cited above noted an exception that provides the an insurance policy is governed by the law of the principal location of the insured risk unless some other state has a more signficant relationship..

But what happens when there is a package policy that is delivered in California but covers properties in various states across the county? That's when it gets hairy, and there is authority going both ways. The best answer is probably found inThe Restatement (Second) of Conflicts, 193 cmt. f, which indicates that the court should treat such a case as if it involves multiple policies, each insuring its own individual risk. So if a house is located in state X were damaged by fire, then the law of State X would apply under this analysis.

Does Arson Constitute Vandalism?

Brandon McWherter — Mon, 23 Jul 2012 08:28:41 -0600

I represented a Memphis homeowner a couple of years ago whose residential rental property was destroyed by fire. The policy provided coverage for fire loss, but contained an exclusion for "vandalism and malicious mischief . . . if the dwelling has been vacant for more than 30 days immediately before the loss." In our case, it was undisputed that the house had been vacant for more than 30 days at the time of the fire, which was intentionally set by an unknown third person. These undisputed facts left one unanswered question - - does arson constitute vandalism or malicious mischief? If so, there would be no coverage for the claim. If not, then the claim should be paid in full.

After summary judgment briefing, Chancellor Armstrong in Shelby County ruled that arson isn't necessarily the same thing as vandalism or malicious mischief. Noting the split of authority across the country, Chancellor Armstrong ultimately ruled that fire is a separate peril from vandalism and malicious mischief, and that arson was not included within the exclusion applying to losses caused by vandalism or malicious mischief. Accordingly, the court granted my client's motion for summary judgment and the case was concluded, marking another victory for insureds in Tennessee.

Download a copy of Chancellor Armstrong's Order by clicking here.

Legislative Reaction To Recent Court Decisions

Parks Chastain — Tue, 29 May 2012 10:49:25 -0600

In response to a couple of cases rendered earlier this year, the Tennessee legislature has adopted Senate Bill 2271, which has two important impacts. The statute was signed into law by Governor Haslam on May 10, 2012. For a PDF copy, click here.

The new law provides that the signature of an applicant for or party to an insurance contract which states the type, amount, or terms of condition of coverage actually creates a rebuttable presumption that the statements provided by the person so signing bind all insureds and that the person signing such document has read, understands, and accepts the contents of the document.

Secondly, the new law provides that the payment of premium by an insured also creates a rebuttable presumption that the coverage provided has been accepted by all insureds.

This should have some immediate impact in coverage cases dealing with the knowledge of an insured as to certain coverages.

Allstate Ins. Co. v. Tarrant - Part 1

Brandon McWherter — Mon, 07 May 2012 15:27:41 -0600

In March 2012, the Tennessee Supreme Court issued a landmark opinion concerning the liabilty of insurers and insurance agents in cases involving failure to procure and maintain appropriate insurance coverage. The case is Allstate Ins. Co. v. Tarrant. The case is a "must read" for insurance practitioners, and is full of good nuggets. Today I'll address the basic facts of the case and the first issue of ratification.

The basic facts in the Tarrant case were that Mrs. Tarrant was involved in an automobile accident, resulting in injuries to the driver of a motorcycle. The injured motorcycle driver then sued the Tarrants, alleging that they were liable for his injuries. After the personal injury suit was filed, a dispute arose between the Tarrants and their vehicle insurer, Allstate, as to the amount of insurance coverage that was available. Allstate claimed that Mr. Tarrant had requested that his agent move the vehicle from a commercial policy with limits of $500,000 to a personal policy with limits of $100,000. Mr. Tarrant denied that he directed his agent to make that change, and that the transfer was the result of the agent's mistake.

The agent didn't deny that the agency may have made a mistake, but argued that it was the Tarrants' responsibility to notify the agency of the mistake upon his receipt of the proof of insurance cards. Instead, Mr. Tarrant did not notify the agent and continued to pay premiums. Based on these facts, the trial court held that Mr. Tarrant ratified the change of insurance by continuing to pay premiums on the policy after receiving notice of the change. The Supreme Court upheld the Court of Appeals' reversal of this decision, holding that an insured cannot ratify the actions of the insurance agent because the agent, by statute, is regarded as the agent of the insurance company, not the insured. The full reasoning of the opinion is too in depth to discuss here, but the entire decision was premised around the application of Tenn. Code Ann. 56-6-115(b), which states that an insurance producer who obtains an application for insurance must be considered to be the the agent of the insurer and not the insured. Applying that statutory mandate to the elements of ratification (which requires an adoption, approval or confirmation of a contract previously executed by another in his stead and for his benefit), the Supremes held that Mr. Tarrant could not have ratified the agent's actions.

Another interesting thing about the case is that the Court's decision was not in the slightest bit affected by any question of whether the agent was a true agent of the company as opposed to a broker, which is usually regarded as an agent of the insured. In fact, the court implicitly noted that the same rules would apply to both because the relevant statute applies to "insurance producers," which are statutorily defined as persons required to be licensed under the laws of the state to sell, solocite, or negotiate insurance.

There were several other important points in the case that I'll address in following posts. But for those who haven't heard, just wait til you hear what our Legislature did in response to this opinion!

Beware of the Shortened Limitation Period to File Suit Contained in Most Insurance Policies

Brandon McWherter — Tue, 06 Mar 2012 09:42:30 -0600

The Tennessee Court of Appeals rendered another decision yesterday concerning the limitations period that is applicable to lawsuits to enforce an insurance policy. The court upheld the dismissal of the lawsuit, ruling that the lawsuit was filed outside the time period allowed in the insurance policy. A copy of the case, Gagne v. State Farm. can be downloaded here.

Unfortunately, I see cases like this over and over again due to the common misunderstanding that the general 6 year statute of limitations is applicable to suits to enforce. Generally speaking, here are the rules practitioners and public adjusters should know:

Tennessee courts will enforce contractual limitation periods. Most policies contain language similar to the one in Gagne, which provided, "No action shall be brought unless there has been compliance with the policy provisions. The action must be started within one year after the date of loss or damage."
Using the one year period as quoted above as an example, Tennessee cases have construed the start date of the one year period to be the first in time of the following: (1) the date of denial; or (2) the date that payment is due.
So, assuming a fire on Jan. 1, 2012 and a proof of loss is submitted on Feb. 1, 2012, most policies will require payment within 60 days of submission of proof of loss. So in that case, the payment would be due, and the period of limitations would be triggered, sixty days from submission of the proof of loss (unless there is a denial before that time).

A Personal Plug for My Firm's New Website

Brandon McWherter — Sat, 03 Dec 2011 11:07:05 -0600

Ok, so this really has nothing to do with insurance. But my firm, Gilbert Russell McWherter PLC, just launched our new website. Check it out here. The update has been long overdue.

The Proper Scope of Appraisal - Thoughts from the Battlefield

Brandon McWherter — Fri, 04 Nov 2011 08:58:49 -0600

In Parks' last post, "What is the Proper Scope of Appraisal in Tennessee?", he pointed out the Merrimack decision in which the Court of Appeals held that appraisal is not appropriate for decisions regarding coverage and liability. In considering my response, I spoke with Chuck Howarth, who is part of The Howarth Group, a claims consulting and public adjusting business based out of Nashville. Chuck's perspective on the appraisal process is unique for two reasons. First, his group handles more insurance appraisals in Tennessee than anyone else of which I'm aware. Second, he worked for eight or ten years with State Farm as an adjuster before moving to the other side of the fence as a public adjuster, which is where he's served for almost 25 years now. In fact, he even trained staff adjusters for State Farm so his experience with the inner workings of insurance companies can come in handy.

So, when Chuck and his business partner, Denis Rowe (both Tennessee Public Adjusters), read Parks' recent post about appraisal, they had a few comments. First, as to whether appraisal can be beneficial, they stated:

While we have used both public adjusting and the appraisal process to resolve claims, we have found that in Tennessee, Alabama, and Kentucky we get far better settlements using appraisal than serving as a property owner's public adjuster. Of course its critical that a public adjuster have signficant experience with the appraisal process before heading this road.

Another issue they pointed out was that some insurance companies are taking the Merrimack case to the extreme and "are trying to prevent appraisals from happening by saying that the only thing an appraisal panel can do is to determine the pricing of their scope that they have decided is part of the loss." Under this interpretation, the insurance company, not the appraisers, determine the scope of the damage. This is definitely not good for insureds because the biggest problem with insurance adjusters' estimates is usually the scope of the necessary repairs, not the price. For example if a tornado damages a home and everyone agrees the damage is covered, an appraiser's job would be to determine what needs to be repaired and the necessary cost of those repairs. In that situation, some insurance companies would counter that an appraisal is inappropriate to determine what items need to be repaired (i.e., the scope), but rather appraisal is only appropriate for determining the necessary cost of repairs for the scope as determined by the insurance company. Although I've not researched that particular issue yet, I feel certain that insurance companies taking this position are dead wrong. More on that next time.

What is the Proper Scope of Appraisal in Tennessee?

Parks Chastain — Sun, 23 Oct 2011 13:49:44 -0600

In the past ten (10) years, we have seen much litigation arise concerning the proper scope of the appraisal clause. Although different policies have different provisions, the “gist” of an appraisal clause can be seen in the following policy provision:

Appraisal

If we and you disagree on the amount of loss, either may make written demand for an appraisal of the amount of loss. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state separately the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding.

These “simple” provisions have created a myriad of issues. Chief among them is – just what exactly is this appraisal condition supposed to decide? It is important for all to understand what binding effect an appraisal award has, and what effect it does not have. The most common dispute centers over questions of coverage and causation. Does the appraisal clause resolve questions of coverage? What about questions of whether a particular element of damage was caused by a particular covered, or non-covered, event.

In Tennessee, the case of Merrimack Mutual Fire Insurance Company v. Batts, 59 S.W. 3d 142 (Tenn. Ct. App. 2001), perm app. denied, established that the appraisal process does not resolve questions of causation or coverage. The appellate court specifically noted:

· “An appraiser’s authority is limited to the authority granted in the insurance policy or granted by some other express agreement of the parties.” Id. at 152.

· “The appraisal clause in Mrs. Batts’s homeowners policy is limited to determining the ‘amount of the loss’-the monetary value of property damage.” Id.

· [The appraisal clause] “does not vest the appraisers with the authority to decide questions of coverage and liability.” Id.

In the case, in which I represented the carrier, an appraisal award was entered. The company went through the award, and declined to pay for certain things because they (1) were not covered and/or (2) the damage was not caused by the particular tornado loss at issue.

The Court indicated that questions of coverage and causation were not within the authority of the appraisal panel. These issues could be resolved by the court, if necessary. The court also established that appraisal is NOT arbitration.

That is the right answer, I submit. The Court did note that it would also have been appropriate to go through the claim before entering appraisal, and simply decline to enter appraisal on issues of coverage and causation.

A Follow Up to the Question of When Post-Loss Misrepresentations are Material

Brandon McWherter — Thu, 06 Oct 2011 07:18:13 -0600

There are a few issues here that need to be clarified for our insureds out there who may be dealing with an insurance company making accusations of misrepresentations. First, the rules are different depending on whether the alleged misrepresentation occurred before the loss or after the loss. The one I see more often is the misrepresentation that occurs during the application process. That topic is certainly worthy of several posts on its own, but suffice it to say here that a material misrepresentation on an insurance application that increases the risk of loss can completely void the policy, meaning that the insurance company will refund the premiums as if the policy never existed at all. As for misrepresentations that occur after the loss during the claim process, the law is much more generous to the insured. In those cases, to avoid its obligations under the policy, the insurance company has the burden to show that the misrepresentation was intentional and designed to deceive. A simple mistake isn't enough. For example, if an insured fills out his proof of loss and makes a mistake in adding his personal property inventory and thus fills in the wrong number on the proof of loss, that would not be an intentional misrepresentation.

Another requirement is that the alleged post-loss misrepresentation be material in nature. So what is material? In Nix v. Sentry Ins., 668 S.W.2d 462 (Tenn. Ct. App. 1983), the Court of Appeals dealt with precisely that question. In that case, the issues at trial centered around whether the plaintiff had committed arson and whether the plaintiff had made material misrepresentations regarding what property was actually destroyed by the fire and its value. The trial court found that there was no arson, but that there had been misrepresentations concerning the value of the property destroyed in the fire. The judge therefore found that the insurance company had no liability for the loss. On appeal, the Tennessee Court of Appeals reversed, holding:

When the false swearing is in the application it forms the basis upon which the contract rests, and if fraud enters into it the policy would be voided even though the policy does not so provide. But after the loss occurs then voiding the policy is in the nature of a penalty or forfeiture; in other words, in such cases the holding is virtually that, although the insured has had a loss, and may be entitled to recover from it, yet, as he has been guilty of fraud in the proofs, he must have his policy vacated and set aside as a punishment for such fraud, or attempted fraud. In the latter case, as in all cases of forfeiture, a strict construction should be adopted, and the forfeiture not enforced except on the plainest grounds, if at all.

Nix, 666 S.W.2d at 463-64. Most importantly to the issue of materiality, the court also noted "that if rights are to be forfeited under the terms of this insurance policy, the concealment or misrepresentation made must be relative to the loss claimed." In that case, the insurance company pointed to alleged misrepresentations concerning the insured's financial condition which might have provided a motive for arson, but did not point to any specific misrepresentations in the proof of loss. Because the court found there was no arson, any misrepresentations concerning the insured's financial condition were not material to the issue of his valuation of certain personal property, and the policy could not be voided.

Nix is a very important case, and can be incredibly useful in insurance disputes. It obviously isn't a license to misrepresent material facts, but it does substantially limit an insurance company's ability to void a policy altogether when the alleged misrepresentations just don't have anything to do with the issues at hand.

Response to a Reader's Question - What Types of Post-Loss Misrepresentations Are Material?

Parks Chastain — Mon, 26 Sep 2011 16:54:36 -0600

Thanks to a reader who submitted this question – what types of misrepresentations are material in that the insurer would be entitled to deny coverage if these misrepresentations were made? I presume the question was posed because of provisions existing in most insurance policies which indicate the policy is void “if you or any other insured under this policy has intentionally concealed or misrepresented any material fact or circumstance relating to this insurance.” An insurance company may defend a suit for the proceeds of a fire insurance policy by proving that the insured(s) intentionally concealed and/or misrepresented a material fact during the claims process. Hendrix v. Insurance Co. of N. Am., 675 S.W.2d 476, 481 (Tenn. Ct. App.1984);Wilder v. Tennessee Farmers Mut. Ins. Co., 912 S.W.2d 722, 725-26 (Tenn. Ct. App. 1995).

The question then is – what is material? Also, note that it is not just a matter of telling the truth, as all attorneys tell their clients to do under oath, but its also a matter of concealment, as coverage can be denied where an insured intentionally withheld a full disclosure of the truth as to material issues relating to the insurance. Southern Guaranty Ins. Co. v. Dean, 252 Miss. 69, 172 So. 2d 553 (1965).

Under Tennessee law, in order to void an insurance policy based upon post-loss misrepresentations by the insured, the insurer must establish that the insured’s misrepresentations were material in nature and were “willfully and knowingly made with the intent to deceive or defraud the insurer.” Wassom v. State Farm Mut. Auto. Ins. Co., 173 S.W.3d 775, 783 (Tenn. Ct. App. 2005). Obviously, if the insured knows that the fire was of incendiary origin and swears that the origin is unknown, he or she commits fraud and violates a stipulation against fraud and false swearing. Union Fire Ins. Co. of Paris, France, v. Ryals, 25 Ala. App. 300, 145 So. 503 (1932). But that’s an easy one, isn’t it? What else can be material?

Obviously, if the insured knows that the fire was of incendiary origin and swears that the origin is unknown, he or she commits fraud and violates a stipulation against fraud and false swearing. Union Fire Ins. Co. of Paris, France, v. Ryals, 25 Ala. App. 300, 145 So. 503 (1932). But that’s an easy one, isn’t it? What else can be material? What else is sufficient?

The Wassom case established at least five principles applicable to post-loss misrepresentation:

1. An insurer is entitled to accurate information to determine how the loss occurred. Wassom, at 784.

2. A misrepresentation is material when it impacts how a company investigates the claim. Id.

3. It does not matter that the insured later “decided to come clean and tell [the insurer] what really happened….” Id. at 785.

4. “In determining whether a misrepresentation was material, the misrepresentation must be viewed at the time it was made and not in hindsight.” Id.

5. “An insurance company need not establish that it relied to its prejudice upon false or fraudulent statements in a proof of loss in order to establish a breach of contract and void the policy.” Id.

Other courts have expressed the same sentiment that post-loss misrepresentations were material if any such statement “might have affected the attitude and action of the insurer.” Fine v. Bellefonte Underwriters Ins. Co., 725 F.2d 179, 183 (2d Cir. 1984). Likewise, the Second Circuit found materiality of post-loss misrepresentations to exist if the misrepresentations “may be said to have been calculated either to discourage, mislead or deflect the company's investigation in any area that might seem to the company, at that time, a relevant or productive area to investigate.” Id.

So, use these general rules to apply to your facts. I submit to the readers that Tennessee law no longer requires a misrepresentation as to value – anything that had the potential to affect the attitude and actions of the insurer, and was intended to mislead parts of the company’s investigation at the time made, can be material. It’s a case by case analysis.

Keep those reader’s questions coming!

The End of the Consumer Protection Act in Insurance Cases

Brandon McWherter — Sun, 31 Jul 2011 09:17:48 -0600

This will probably come as no surprise to most but my feelings concerning the legislature's recent removal of the insurance industry from the protection of the Tennessee Consumer Protection Act are pretty strong. I called every member of the legislature I knew, and some I didn't, in an attempt to stop the bill. But there is a very strong insurance lobby in this state, and the bill flew through both the House and the Senate with flying colors.

The saddest part about the new law is that it sends a clear signal that insurance companies are above the law, i.e., that ethical conduct is required of all businesses in this state except insurance companies who are free to act unfairly and deceptively without the threat of private recourse via the consumer protection statutes. A decision by an insurance company to deny a claim is a very calculated risk. Only a very small percentage of people whose claims have been denied will even pursue litigation. And without the protection of the Consumer Protection Act, things will only get worse. The consumer protection statutes helped even the playing field, and heightened the risk for insurance companies that wrongfully denied claims by exposing them to attorney's fees and treble damages in the event a judge decided that it intentionally acted unfairly or deceptively.

The new law only hurts the consumer and really created no benefit at all for the insurance companies out there that were already acting in a good faith fashion. On the other hand, it benefits greatly those insurance companies who treat their insureds unfairly. This was not an area of the law that needed reform. There was no risk of a runaway jury because the judge, not the jury, decided whether to award attorney's fees and treble damages under the Consumer Protection Act. But without those protections, insurance companies can freely fun roughshod over insureds with little recourse.

There is one positive about the new law, and that is that the language utilized in the new statute may have acknowledged the existence of a common law bad faith claim. More on that in future posts . . .

Tennessee Legislature Restricts Application of Consumer Protection Act, Overruling Myint v. Allstate

Parks Chastain — Wed, 08 Jun 2011 10:41:39 -0600

On April 29, 2011, the Tennessee legislature adopted House Bill 1189 was enacted into law and signed by Governor Haslam. Public Chapter No. 130 will be codified in Tennessee Code Annotated, Title 56, Chapter 8, Part 1. The signed law is available by clicking here.

The law amends Title 56 related to insurance business acts and practices. It provides that Titles 50 and Title 56 shall provide the sole and exclusive statutory remedies and sanctions available for the “alleged breach of, or for alleged unfair or deceptive acts and practices in connection with a contract of insurance.” . The law essentially overrules the case of Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn.1998), which had allowed recovery under the Tennessee Consumer Protection Act for unfair or deceptive acts or practices in the handling of an insurance claim, obviously after the consumer transaction which created the relationship between the insured and insurer. This brought with it exposure for attorney fees and the potential for trebled damages.

Prior to Myint, it had long been the rule that statutes such as T.C.A. § 56-7-105, provided for the sole and exclusive remedies available to insureds for a carrier’s failure to handle a claim in good faith. It appears this is now the case once again.

In other entries on this blog, reader can see how Tennessee Consumer Protection Act allegations have expanded in scope since the Myint decision. I have handled cases where the consumer protection act allegations against the carrier were based upon alleged actions of independent adjusters, and even independent expert witnesses. Because of the expansive scope of Myint, courts were reluctant to dismiss even those cases on summary judgment.

Morrison v. Allen, Part III

Brandon McWherter — Thu, 03 Mar 2011 22:02:29 -0600

This is the third installment of my recent discussion of the Morrison v. Allen decision. Assume these facts (a skeletal version of the facts in Morrison): John Doe requests life insurance from his insurance agent in the amount of $1,000,000. A policy is issued, but a claim by John's wife, Jane, for benefits under the policy is denied based on alleged misrepresentations in the insurance application. Jane claims that John's insurance agent failed to do his job and is liable to her on a failure to procure theory for the face amount of the insurance policy. Jane then settles with insurance company for $900,000, but moves forward with her suit against the agent for the full amount of the insurance policy, i.e., $1,000,000. And then Jane actually wins her case, resulting in her receiving $1.9 million on a $1 million policy. Double recovery, right? Wrong.

In Morrison, the plaintiff sued the insurance company on multiple theories, including violations of the TN Consumer Protection Act, negligence, breach of contract, etc. She also sued the defendant insurance agents for failure to procure the appropriate insurance policy. To decide whether the defendant agents were entitled to an offset as a result of the $900,000 payment by the insurance carrier in settlement of Ms. Morrison's claims against it, the Supremes were faced with the question of whether the claim against the insurance carrier was based in contract or some other theory. If liability was based in contract, then the agent would be entitled to an offset. But, if the claim was based in tort, then no offset is required.

The Morrison court ultimately found that the defendant agents were not entitled to an offset, which had the rather odd result that Ms. Morrison received $1.9 million on a $1 million policy. The key to this decision appears to be that the actual settlement documents between Ms. Morrison and the defendant insurance company did not specifically state that payment was being made on the breach of contract claim. On the contrary, the settlement settled all the claims, with no specific delineation as to what amount was being attributed to the various causes of action that had been alleged. Accordingly, no offset was required.

This is an extremely important part of this case that will come into play in almost every case in which the policyholder has sued both his insurance agent and his insurance company. It allows a plaintiff to settle with one, and still preserve his or her right to go after the other for the full amount of the alleged damages with no offset. All it requires is a little thought when drafting the settlement agreement.

Morrison v. Allen, Part II

Brandon McWherter — Tue, 01 Mar 2011 21:35:00 -0600

Yesterday I wrote about the February 2011 landmark decision of the Tennessee Supreme Court in Morrison v. Allen. There was one relatively minor point concerning an alleged misrepresentation in an application that grabbed my attention. In Morrison, the insurance company denied Ms. Morrison's claim for life insurance benefits based on alleged misrepresentations of her husband in his application for insurance. Specifically, the application asked, "In the past five years, have any proposed insureds been charged with or convicted of driving under the influence of alcohol or drugs or had any driving violations?" The insured answered, "No."

The alleged misrepresentation arose from the insured's conviction for driving while impaired ("DWI") a couple of years prior to the submission of the application. On first glance, it might appear clear that failure to disclose the DWI would constitute a material misrepresentation based on the language of the question in the application. But not so fast. The Supreme Court affirmed that the insured's response was technically correct because he was convicted of DWI, which is a separate offense from driving under the influence.

Although this particular issue was literally just a footnote in the very lengthy opinion, it might come in handy one of these days for the unfortunate soul who finds his claim denied as a result of an undisclosed DWI.

Tennessee Supreme Court Redefines the Law of Insurance Agent Liability

Brandon McWherter — Mon, 28 Feb 2011 20:31:07 -0600

On February 16, 2011, the Tennessee Supreme Court rendered a landmark decision concerning insured's rights to pursue claims against their insurance agents for failure to procure appropriate insurance. The case is Morrison v. Allen, and can be found here.

In Morrison, the basic facts were that Mr. and Mrs. Morrison obtained life insurance policies on each of their lives from their insurance agents, Roberts and Allen. The agents filled out the applications, and sent them to the Morrisons to sign with instructions on where to sign, which they did. Although the applications contained the typical warnings regarding misrepresentations and contained an affirmation that the statements therein had been read, neither of the Morrisons read the applications before signing them. Two months later, Mr. Morrison died. The insurance company then denied Ms. Morrison's claim for benefits under the policy, alleging misrepresentations in the application (failure to disclose a DWI). After filing suit, Ms. Morrison ultimately settled her claim with the insurance carrier for $900,000 ($100,000 less than policy limits), but proceeded to trial against the insurance agents, Roberts and Allen. After a bench trial, the trial court awarded a judgment to Ms. Morrison against the defendant agents for breach of contract and negligence and further found the defendants violated the Tennessee Consumer Protection Act.

The Supremes then totally revamped and redefined the law of agent liability in the State of Tennessee. A few broad principles emerge:

First, the Court adopted the following elements for a cause of action for failure to procure: (1) an undertaking or agreement by the agent or broker to procure insurance; (2) the agent's or broker's failure to use reasonable diligence in attempting to place the insurance and failure to notify the client promptly of any such failure; and (3) that the agent's or broker's actions warranted the client's assumption that he or she was properly insured.

Second, the Supreme Court held "that if an agent undertakes to obtain an insurance policy for an insured, and the policy obtained is contestable due to the acts or omissions of the agent, then the applicant has the same right to recover for failure to procure as he or she would have had if no policy had issued at all."

Third, a finding of liability does not require evidence that an insured specifically request an "immediate incontestability clause" or a promise by the agent that the policy would be incontestable. On the contrary, all that is required is that the insured show that he contracted with the agent to procure an insurance policy and then reasonably rely on the agent "to successfully complete the groundwork for procuring the policy." Accordingly, a cause of action arises "where coverage is denied by the insurer on a policy that is contestable as a result of the acts or omissions of the agent.

Fourth, and here's where it gets interesting, the Court held that an applicant's failure to read an application does not insulate agents from liability. "When an applicant applies for an insurance policy and the agent undertakes to fill out the application on his or her behalf, the applicant should be able to trust that the agent will ask the important questions and accurately record the answers to them so that the policy cannot later be successfully contested based on inaccuracies." Put simply, an insured's failure to proofread an application is inconsequential in a failure to procure case, and the signature of the applicant does not shield the agent from liability.

And that just covers 15 pages of the 27 page opinion. More to follow in the coming days on this case that is a huge win for policyholders in the State of Tennessee.

Should Contractors Be Named As Payees On Insurance Payment Drafts?

Parks Chastain — Wed, 26 Jan 2011 13:07:23 -0600

I write today to explain why insurance companies include the name of contractors on insurance payment drafts, sometimes to the chagrin of policyholders. Unfortunately, in many instances, the homeowner and his/her contractor have come to a disagreement by the time the insurance company is ready to issue the final dwelling payment, usually an amount of recoverable depreciation to be paid upon completion of repairs. When the draft is issued, and provided to the insured, we sometimes receive a request to reissue the draft without the contractor because the contractor will not sign the check because of the dispute with the homeowner.

Should the insurance company list the name of the contractor on the draft? The statute is actually not crystal clear. Tennessee Code Annotated TCA 56-7-111 provides:

Property or casualty insurance -- General contractor as a payee

When insured property losses in excess of one thousand dollars ($ 1,000) accrue to the owners of dwellings or other structures insured under policies of property or casualty insurance as defined in § 56-2-201, the insurance company shall name the general contractor, as defined in § 62-6-102, of any uncompleted construction or building contract as a payee on the draft to the owner covering payment for the loss. The insurance company shall name the general contractor as payee on such draft pursuant to this section regardless of whether the work which was performed or is yet to be performed is less than twenty-five thousand dollars ($ 25,000).

Some have tried to argue that this does not require the naming of a restoration contractor on the draft. They argue it only applies when there is building going on at the date and time of loss. I do not think such a construction of the statute in its entirety is correct. We have recently had the opportunity to look at the legislative history of this statute, and I think it supports the proposition that contractors working on repairs must be named if the statute otherwise applies.

In 1974, the Tennessee House addressed the Bill, which had passed the Senate’s consent calendar without opposition. The House gave only brief consideration to the Bill also. But, what happened in that short period of time gives us a glimpse into the legislative intent behind the statute. During the introduction, Representative Bowman explained that this bill allowed general contractors to be placed as payee on a check so there is “no hold up with payment to the general contractor when he is repairing houses.”

Then, in 1998, the statute was amended to include the language that appears in the last sentence of the statute “regardless of whether the work which was performed or is yet to be performed is less than twenty-five thousand dollars.” This amendment was brought by Senator Carter, who explained that the Vice Mayor of Jackson (who was a contractor) was repairing property damage as part of an insurance claim, which was valued at less than $25,000. The general contractor was not listed as a payee on the check from the insurance company, and the property owner for whom the repairs were made filed bankruptcy, and the contractor was never paid. His purpose in the amendment was to clarify that a contractor who performed work totaling any amount (even less than $25,000) was entitled to be named as a payee on a check from the insurance company. As the story of Jackson’s Vice Mayor indicates he was repairing a house that had incurred damage, the legislators clearly felt he deserved to have been paid for his work.

Thus, while the statute is not crystal clear, this history is supportive of the primary interpretation given to the statute. I hope this clears things up for both sides of the argument.

Should a Deductible Be Subtracted in the Case of a Total Loss?

Brandon McWherter — Mon, 15 Nov 2010 20:41:11 -0600

Consider this scenario - - Jane Doe insures her home for $100,000, with a $1,000 deductible. Unfortunately, Jane's house burns to the ground and is undeniably a "total loss" within the meaning of Tennessee's valued policy statute (click here for a prior post on when a loss should be considered a "total loss"). After months of investigation, the insurance company decides to pay the claim "in full" and sends a check to Jane for $99,000 (policy limits minus the deductible). Was Jane inappropriately shorted $1,000. In my opinion, yes.

Under Tennessee's valued policy statute (T.C.A. 56-7-803), an insurer is liable to the policyholder for the full policy limits if a total loss occurs. In my view, this statute effectively prohibits an insurance company from subtracting the deductible in total loss cases. My research reveals only one case addressing this precise issue, and that is Thurston Nat'l. Ins. Co. v. Dowling, 535 S.W.2d 63 (Ark. 1976). In Thurston, the Arkansas Supreme Court held that an insurance company may not enforce a deductible provision in the case of a total loss when it results in the insured receiving less than policy limits in violation of Arkansas' valued policy law. There is no logical reason why the same rule of law would not be true in Tennessee as well.