Articles Posted in Insurance Litigation

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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.

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Many Tennessee businesses have commercial general liability policies, and many other types of policies and endorsements, which contain exclusions for any loss resulting from dishonest or criminal acts. These exclusions will most likely apply to employees, partners and directors of the business.

Sometimes, in insurance policy litigation, there is no way to defeat a policy exclusion for dishonest or criminal acts. For example, if the insurance company can prove that the loss resulted solely and exclusively as a result of the theft or other illegal conduct by an employee of the insured business, the insurance company will not have to pay the claim. Where, however, the loss could have resulted from both the dishonest or criminal act of an employee and some other concurrent cause, the insurance company may not be able to rely successfully on the exclusion.

While no published Tennessee opinion addresses a fact situation where there was a dishonest or criminal acts exclusion in an insurance policy along with concurrent causation (causation of a loss resulting from an employee’s dishonest or criminal conduct and some other cause), the opinion of the Supreme Court of Tennessee in Allstate Insurance Company v. Watts, 811 S.W.2d 883 (1991) would apply directly to such a case.

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Can you recover punitive damages in Tennessee for breach of contract? It is difficult, but not impossible.  Moreover, there is little published case law on the subject, and, as discussed below, there is one major question about punitive damages in breach of contract cases which has yet to be fully explored and answered by Tennessee courts.

A good place to start is a summary of some Tennessee cases where punitive damages were requested for breach of contract.

Riad v. Erie Insurance Exchange (Tenn. Ct. App. 2013):  In this case, the plaintiff alleged the defendant insurance company was liable for breach of contract, bad faith failure to pay and for violating the Tennessee Consumer Protection Act.  After a trial, the jury assessed punitive damages against the defendant of $1.5 million dollars.  (It assessed compensatory damages of $343,430).

While regurgitating the same phrase used in previous Tennessee cases that punitive damages are “generally not available in breach of contract cases,” the court upheld the award of punitive damages. It did so by pointing to the seminal punitive damages case in Tennessee, Hodges v. S.C. Toof & Co. (Tenn. 1992).  In Hodges, the Supreme Court of Tennessee held that, to recover punitive damages, the defendant must have acted intentionally, fraudulently, maliciously, or recklessly.  Notably, Hodges was not a breach of contract case.

Dog House Investments, LLC v. Teal Properties, Inc. (Tenn. Ct. App. 2014): In this case, the plaintiff alleged breach of contract and promissory fraud.  (A defendant is liable for promissory fraud if it can be proven that, at the time the defendant made a promise, it had no present intent to fulfill that promise.)  The Court of Appeals of Tennessee held that the breach of contract in this case did not rise to a level of egregiousness warranting an award of punitive damages.  I think most people would agree that the conduct of the defendant in this case was every bit as egregious as the conduct of the defendant in the Riad case.  In the Dog House case, the court seemed to say that, in order to receive punitive damages for breach of contract, there must be some fraud in addition to a breach of contract. Notably, in this case, the court allowed the punitive damages verdict to stand because the trial judge had found that the defendant not only breached the contract, but also, committed promissory fraud. Continue reading →

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In a recent insurance policy case, Lance. v. Owner’s Insurance Company, the Court of Appeals of Tennessee set aside a jury’s award of punitive damages in the amount of $267,500 against Owner’s Insurance Company (a subsidiary of Auto-Owner’s Insurance Company).  The case involved the complete destruction of the Plaintiff business-owner’s building and inventory.

The Plaintiff owned a retail business which was operated out of a 14,000 square foot building in Polk County, Tennessee. The building and inventory within it were completely destroyed by fire in April of 2011.  The insurance company’s investigators, as well as the fire department and state officials, determined that the fire was intentionally set. The Plaintiff did not challenge that the fire was intentionally set, but denied any involvement with it.

After the fire, the Plaintiff submitted a claim to the insurance company. The insurance company requested additional information. The Plaintiff submitted the additional information requested by the insurance company along with a bad faith notice under Tennessee’s bad faith failure to pay statute.  (That statute allows an insured to recover damages beyond the insured’s actual out-of-pocket loss in an amount up to 25% of the insured’s actual loss).

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Many people who are entitled to benefits under a life insurance policy are denied the benefits by the insurance company on the basis that the insured (the person whose life was covered) made a misrepresentation. In life insurance cases where the insurance company denies payment on the basis of misrepresentation, a statute that is weighted in favor of life insurance companies will apply. That statute is T.C.A. §56-7-103.

In a nutshell, that statute provides that a life insurance company may deny the payment of benefits under a life insurance policy if it can prove either of two things: (1) that the insured made a misrepresentation with “actual intent to deceive”; or (2) that the misrepresentation increased the risk of loss to the life insurance company.

The statute is unfair for a couple of reasons. First, it permits the life insurance company to deny benefits if the misrepresentation increased its risk of loss at all — it does not require that it materially increased its risk of loss. Second, it allows a life insurance company to deny benefits if its risk of loss was increased even where the misrepresentation had nothing to do with the insured’s cause of death.  For example, if the insured stated on his application that he had no history of heart disease, but did, and died later of skin cancer, nevertheless, the life insurance company can avoid paying if it can prove that the failure to identify a history of heart disease increased its risk of loss (which it will almost certainly be able to do).

A case that illustrates how the statute works in real life insurance litigation is Smith v. Tennessee Farmers (Tenn. Ct. App. 2006). Here is how I would summarize the procedural history of that case: The trial court reached a fair result, but to do so, pretty much had to ignore T.C.A. §56-7-103, and the Court of Appeals of Tennessee reversed the decision of the trial court based on the statute.  I think the Court of Appeals reached a reasoned and correct decision, which decision was, unfortunately, compelled by an unfair statute.

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Step One: Determining Which Statute of Limitations Applies

The Six Year Statute of Limitations Applies Most of the Time

Most breach of contract cases in Tennessee will be subject to the six (6) year statute of limitations codified at T.C.A. §28-3-109.  There is one (1) other possible statute of limitations which could apply in a breach of contract case which would require someone to file suit in less than six (6) years.  There is another statute of limitations which might allow a period longer than six (6) years.  Lastly, there is the possibility that none of the statutes of limitations codified in Tennessee apply because the parties have contractually agreed to a limitations period.

The Four Year Statute of Limitations for UCC Cases

If the breach of contract is for the sale of goods, the Uniform Commercial Code (“UCC”) will apply.  The statute of limitations for any contract for the sale of goods under the UCC is four (4) years. T.C.A. §47-2-725

The Ten Year Statute of Limitations for Demand Notes

In Tennessee, demand notes are subject to a ten (10) year statute of limitations. T.C.A. §28-3-109

Contractually Agreed to Limitations Periods May Be Shorter Than Four Years, Six Years, or Ten Years, and Are Enforceable in Tennessee

In many breach of contract cases, particularly insurance policy breach of contract cases and disability insurance policy cases, a statute of limitations placed in the parties’ contract will govern.  Even if the six (6) year statute of limitations might otherwise apply, a breach of contract case might have to be filed much sooner in order not to be barred by a shorter limitations period which was agreed to by the parties.  Such contractual statutes of limitations are fully enforceable in Tennessee, and trump the statutes of limitations in the Tennessee Code.  Under Tennessee law, a contractually agreed to limitations period for filing a lawsuit is enforceable so long as it provides a “reasonable time period” for filing a lawsuit.  One Tennessee court upheld a contractually agreed to limitations period of sixty (60) days.  See, Morgan v. Town of Tellico Plains (Tenn. Ct. App. 2002).  Another upheld a contractually agreed to limitations period of one (1) year.  See, Certain Underwriters at Lloyd’s of London v. Transcarriers, Inc. (Tenn. Ct. App. 2002). Continue reading →

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Pre-judgment interest is the interest which accrues from the date an obligation is due to the plaintiff until the day the judge or jury enters a verdict in favor of the plaintiff.

Given that a breach of contact case or other commercial litigation case may take a year or more to get to the point where a verdict is rendered once the case is filed, pre-judgment interest can be substantial in many cases. Consider also that, for various reasons, many cases are not filed until months, even years, after the debt was due to the plaintiff.

Where the parties in litigation do not have a contract about the amount of any interest due, as is often the case, T.C.A. §47-14-123 allows a judge or jury to award pre-judgment interest at any rate not in excess of ten percent (10%).  Under Tennessee case law, if you are relying on the statute for pre-judgment interest, you can never receive anything more than simple interest. You cannot compound statutorily awarded pre-judgment interest.

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In Tennessee, a bank account, certificate of deposit, money market account, or other type of financial account may be maintained as a joint account with a right of survivorship.  Such accounts may also be maintained as single owner accounts, but be made payable on death to a named beneficiary.  Payable on death designations are abbreviated as “POD.”

The difference between a single owner account, with no payable on death designation, and a joint account, with a right of survivorship, can have a major effect on relatives and beneficiaries under Wills.  The difference between a single owner account and a single owner account with a payable on death designation can also have a major effect on relatives and beneficiaries under Wills.

Let’s assume that I die with $200,000 in undisputed debt, and with $200,000 in a bank account which I own, but which has no payable on death beneficiary.  In that case, even if I bequeathed all of my assets to my wife in my Will,  and even if I specifically stated in my Will that I wanted her to have all of the money in my bank account, nevertheless, the $200,000 in my bank account at the time of my death would never become my surviving wife’s.  Why? The answer is because, at my death, it would become part of my probate estate. Once it became part of my probate estate, it would be subject to the claims of creditors.

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Daniel Kahneman’s bestseller, Thinking Fast and Slow, is not only a fascinating read, but also, it contains insights that can be an immense help to clients in making decisions about their cases, choosing lawyers, negotiating settlements, and evaluating the advice of their lawyers.  Here is what clients (and trial lawyers) can learn from the book:

Lesson One: Intuitions are not as Reliable as We Think

With objective evidence and data, Mr. Kahneman proves the point that many people are overconfident and place too much faith in their intuitions. I know from experience that lawyers are just as susceptible to this way of analysis as any other group. On many occasions, I have heard misguided advice from lawyers that was the result of their relying on some kind of intuitive impulse rather than spending time and effort evaluating a case from many angles (which takes time), bouncing the facts of the case off of several other people, including lawyers and non-lawyers (especially important where a jury trial is involved), and seeking and studying objective data (like published case law).

Lesson Two: Jury Outcomes are Unpredictable

When I first became a trial lawyer 25 years ago, I participated in the National Institute of Trial Advocacy and read extensively about the decision making process of juries.  What I learned, and was taught, by seasoned trial lawyers and psychologists, is that most juries will ignore the law, the jury instructions, to get to the result which they think is fair.  In my trial practice, I have found that to be true.

After reading Kahneman’s book, I realized that there is a whole other layer in the jury decision making process of which we have to be aware.  You can’t help but be persuaded by Kahneman that, even the people who make decisions, like jurors, do not understand fully why they decided something the way they did.  The point Kahneman makes, and makes well, is that we can all be primed to make decisions in a certain way without even knowing that we have been primed or what has primed us.

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There are, generally speaking, two types of long term disability insurance policies.  There are “private” policies which are not obtained through employment.  There are also long term disability policies which are obtained as the result of employment.

If you have a long term disability policy through your employer’s group long term disability insurance, the odds are that it is considered an “employee benefit plan” which is subject to a federal law known as “ERISA.”  If you have a long term disability policy which is subject to ERISA, then the federal law known as ERISA, and the Department of Labor regulations applicable to ERISA, will apply to your claim.

If your initial claim for long term disability benefits was denied, you have certain rights under ERISA, including, but not limited to:

  • Filing an appeal of the denial with the plan administrator
  • Having at least 180 days after the denial to file an appeal
  • Obtaining all of the records and documents relied on by the plan administrator in denying the claim
  • Having an experienced disability insurance lawyer represent you in your appeal

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