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Lessons About Tennessee Bad Faith Insurance Law

Tennessee has a statute, which, provided certain conditions are met, allows an insured to recover “bad faith” damages against the insured’s insurance company. The United States Court of Appeals for the Sixth Circuit, which is the federal appeals court with jurisdiction over federal cases tried in Tennessee (and several other states), in the case of Heil v. Evanston Insurance Company, reversed a jury verdict for two million dollars in punitive damages in a bad faith case. The court’s explanation and application of the Tennessee bad faith failure to pay statute in that case is informative for anyone with a bad faith claim against an insurance company.

Before discussing the case, a couple of common misconceptions about the Tennessee bad faith failure to pay law should be discussed. First, the bad faith statute only allows an insured to recover up to 25% of the loss of the insured. For that reason, the Tennessee bad faith statute has been rightly criticized as being pretty toothless. Second, the bad faith penalty allowed in Tennessee can only be recovered by someone who was insured by the insurance company which acted in bad faith. In other words, if you have a claim against someone else for damages, and that person’s insurance company acts in bad faith in failing to pay you, you cannot make a claim under the Tennessee bad faith statute against that “third party” insurance company.

In the Heil case, the plaintiff was a company which manufactured dump truck bodies. One of its dump truck bodies lowered onto someone and killed him. Heil was sued for wrongful death. Heil was insured by Evanston Insurance Company (“Insurance Company”) under a commercial general liability policy (the “Policy”).

The Policy required Heil to pay its own legal fees to defend the wrongful death case, but allowed the Insurance Company to assume charge of the defense and settlement of the case. Under the Policy, the Insurance Company agreed to pay the first one million dollars in loss suffered by Heil in excess of the self-insured retention (“SIR”) of $500,000.00.

After a couple of years of litigation in a Tennessee federal district court, the Insurance Company decided to hire its own lawyer to defend the wrongful death case. It agreed that the lawyer hired by Heil could continue to defend Heil also. It also agreed that Heil’s lawyer’s fees could count toward exhaustion of the SIR, and that it would pay any of Heil’s lawyer’s fees in excess of the SIR.

The wrongful death case against Heil was settled for in excess of five million dollars. The Insurance Company pitched in one million dollars, but refused to pay Heil for $63,000 of attorneys’ fees Heil had paid to its lawyer.

Heil sued the Insurance Company in a federal district court in East Tennessee. Heil sued on three separate grounds: (1) breach of contract for failure to pay the $63,000 in attorneys’ fees; (2) violation of Tennessee Code Annotated section 56-7-105 (the Tennessee bad faith statute); and (3) bad faith failure to settle the wrongful death claim. The jury found that the Insurance Company had not failed to settle the wrongful death claim in bad faith, but that it was liable for breach of contract for failure to pay the $63,000 in attorneys’ fees, and was liable for $16,000 in bad faith damages. It also awarded Heil two million dollars in punitive damages.

The Sixth Circuit reversed the jury verdict, and remanded the case for a new trial. Why? Because, under Tennessee law, a plaintiff cannot recover both punitive damages and bad faith failure to pay damages on a bad faith claim. In Tennessee, the bad faith failure to pay statute is the exclusive remedy for an insurance company’s bad faith failure to pay. (Which makes it more unfortunate that the Tennessee bad faith statute doesn’t have more teeth.)

Since there was no basis for the jury to award bad faith damages and punitive damages, and considering the jury instructions and verdict form given to the jury, the Sixth Circuit concluded that the jury may have been confused. It may have intended, surmised the Sixth Circuit, to award compensatory damages on Heil’s claim that the Insurance Company had failed to settle the wrongful death case in bad faith.

Always remember, at least until Tennessee law changes that, if you fail to make the proper type of written demand prior to filing a bad faith lawsuit, your bad faith claims may be completely barred. The question of whether Heil had given proper notice of its bad faith claim before filing its breach of contract and bad faith lawsuit came up in the case, and is discussed in the opinion.