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Tennessee Jury Stings Insurance Company in Bad Faith Failure to Pay and Breach of Contract Case

A jury in Bradley County, Tennessee handed down substantial punitive damages award and compensatory damages award against Erie Insurance Exchange (“Erie”) in a case involving its failure to pay a claim for losses arising from vandalism and theft at apartment units which it insured. The case is a must read for lawyers who handle insurance policy cases and bad faith failure to pay cases. Why? First, the case is highly unusual because the jury in the case awarded punitive damages on a breach of contract claim.

In my experience, punitive damages are rarely, if ever, awarded by Tennessee juries merely for a party’s breach of a contract. In fact, for better or for worse, they are awarded much less often, even in cases involving fraud and intentional torts, than most lay people would expect.

The case is also important because it is sound authority for the position that an insured can receive more in compensatory damages for an insurance company’s failure to pay a claim than just the amount of the amount of the claim made by the insured, but not paid, plus the statutory 25% percent penalty for bad faith failure to pay.

Here are the pertinent facts of the case:

• Plaintiff owned three apartment buildings (“Apartments”) which he rented
• On June 8, 2009, Plaintiff sold the Apartments to the Perrys
• Plaintiff financed the sale to the Perry’s and remained liable on the note he had signed to buy the Apartments
• By October of 2009, the Perrys had given up running the Apartments and filed bankruptcy
• In November of 2009, Plaintiff discovered significant damage and appliance theft at the Apartments
• In December of 2009, Plaintiff submitted a claim for loss to Erie, which insured the Apartments
• The amount necessary to repair the damage and replace the stolen appliances was $92,600 – – – this was the claim amount
• Erie never denied the claim or paid it so Plaintiff filed suit in August of 2011
• At trial, the adjustor for Erie testified that the policy in question covered losses for theft and vandalism, but that Erie would not pay the claim because he was unable to determine when the damage and theft occurred (Erie was not responsible, under the policy at issue, for any vandalism or theft which did not occur within the policy period)

The jury found that Erie was liable for compensatory damages in the amount of $343,430 — more than a quarter of a million dollars more than the amount it would take to repair the damage and replace the stolen appliances (the claim amount). It also found Erie liable for $1,500,000 in punitive damages.

On appeal, Erie did not challenge the jury’s verdict, but requested a new trial on the basis of numerous evidentiary errors it alleged that the trial court made. The Court of Appeals of Tennessee affirmed the trial court’s verdict and denied Erie a new trial.

This case is rich with lessons for those involved in insurance policy litigation or cases where an insurance company has failed to pay a claim. Under the insurance policy at issue, Plaintiff was only entitled to receive compensation for the amount of his loss, $92,600 (the claim amount). If the jury determined that Erie was liable under the bad faith statute, which it did, then Erie was on the hook for an additional 25% of the loss, in this case $23,150 (25% of $92,600). So, how is it that Erie could be held liable for $343,430 in compensatory damages alone? That happened because the Plaintiff put on proof at trial that, in addition to the losses covered by the policy for damage repair and appliance replacement, he lost profits. How did he lose profits? He lost profits because, during the time that the losses which were covered by the policy were not paid (damage repair and appliance replacement), he could not rent the units.

On appeal, Erie also argued that Plaintiff’s losses should have been limited to his claimed loss, $92,600, plus an additional 25% of that amount (the bad faith penalty). Erie claimed that the language of the Tennessee bad faith failure to pay statute supported this limitation. The Court of Appeals disagreed, holding that Plaintiff was entitled to recover any damages which were recoverable under Tennessee law for breach of contract.