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Understanding the Bad Faith Failure to Pay Penalty in Tennessee Insurance Cases

Under Tennessee law, if an insurance company denies a claim, it can be subject to a bad faith failure to pay penalty. The maximum amount of the penalty is 25% of the claim amount which the insurance company should have paid.  Moreover, the penalty does not apply unless the refusal of the insurance company to pay the claim was not in good faith, or, in other words, in bad faith.

In bad faith failure to pay cases, whether or not there was bad faith is a jury question so long as there is any evidence of bad faith. Even though it is the province of the jury to decide whether the insurance company has acted in bad faith, and, consequently, whether the insurance company should have to pay the bad faith penalty, it is not uncommon for the Court of Appeals of Tennessee to set aside a jury’s finding that an insurance company acted in bad faith.  Discussed below are three bad faith failure to pay cases where a judge’s or jury’s award of bad faith damages was upheld on appeal and one case where a jury’s finding of bad faith was reversed.

Palatine Ins. Co. v. E. K. Hardison Seed Co., (Tenn. Ct. App. 1957):  In this case, the court of appeals upheld the jury’s determination that the insurance company had acted in bad faith for failing to pay a claim for the theft of a truck.  The insurance company denied the claim on the grounds that the policy was not a fixed value policy, but an actual cash value policy which required an appraisal. Several months after the loss, and after the plaintiff had reported it, the plaintiff wrote the insurance company asking for payment. Several weeks after that, the insurance company wrote the plaintiff demanding an appraisal and stating that it could not accept the plaintiff’s proof of loss because of Plaintiff’s failure to provide minor details related to the claim and of which the insurance company should have been aware.  The court of appeals upheld the jury’s imposition of the bad faith penalty finding that the policy was a fixed value policy and because there “was substantial evidence” on which a jury could find bad faith.

Minton v. Tenn. Farmers Mut. Ins. Co., (Tenn. Ct. App. 1992): In this bad faith failure to pay case, the court of appeals upheld the trial court’s finding of bad faith where a diamond ring was lost in the mail when its owner, the plaintiff, mailed it to be repaired.  The insurance company denied the claim based on an exclusion in the policy for losses resulting from neglect of the insured.  The plaintiff admitted that she did not mail the ring by certified mail or purchase postal insurance.  The trial court found bad faith because the policy did not contain any prohibition against mailing the ring as the plaintiff had done.

              Riad v. Erie Ins. Exchange, (Tenn. Ct. App. 2013):  In this case, the court of appeals upheld the award of bad faith damages by the jury in a claim made by the plaintiff for vandalism to an apartment complex he owned.  In this case, the insurance company delayed making any decision on the claim, failed to return calls, provided conflicting information and took the position that it could not decide the claim because it could not determine when the damage occurred.

Palmer v. Nationwide Mut. Fire Ins. Co., (Tenn. Ct. App. 1986):  In this case, the court of appeals reversed the finding of a jury (which obviously despised insurance companies) of bad faith in a claim for the loss of a home due to fire.  There was ample evidence in the record that the plaintiffs, the insureds, had started the fire.  As one credible witness put it at trial: “This is the most obvious case of arson I’ve ever seen.”