Articles Posted in Insurance Litigation

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.

In a recent Tennessee case, the beneficiary of a life insurance policy prevailed over the insurance company which denied coverage under the policy at issue based on alleged misrepresentations by the insured in the application for the policy. The case discusses some basic law that is applicable in Tennessee when an insurance company denies coverage because of an alleged misrepresentation on an insurance policy application. Although the case involved a term life insurance policy, many of the rules discussed by the Court of Appeals of Tennessee in the opinion are applicable to other types of insurance policies, e.g., whole life insurance policies, disability insurance policies, health insurance policies, and even liability policies.

The case involved a woman (the “Insured”) who purchased a twenty-year term life insurance policy from Tennessee Farmers. The life insurance policy was issued, but only after the Insured had completed and signed an application. In her application, the Insured identified a number of health and medical problems including a nervous disorder, sleep disorder, arthritis, and a partial disability resulting from a car accident. The Insured disclosed that she smoked half a pack a day of cigarettes, and that she was taking Percocet for pain and Xanax for sleep assistance. As part of the application process, Tennessee Farmers did a drug screen of the Insured which was negative.

Because of the numerous health issues of the Insured, Tennessee Farmers charged a premium which was 50% more than the basic policy premium. Following the issuance of the life insurance policy, the Insured died from acute methadone intoxication. Her death occurred before the contestability period in the policy, which was two years, expired. (Many life insurance and disability policies have non-contestability provisions which, generally, prevent an insurance company from denying coverage for any statement made in the application after a certain period of time—typically around two years after the issuance of the policy).

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”).

Frequently, as part of a divorce, a spouse is required to maintain life insurance for the benefit of the other spouse or for children. In our practice, we have been involved in several cases where, in spite of a requirement in a divorce decree or marital dissolution agreement, a spouse has either changed the designated beneficiary of a life insurance policy, or let the life insurance policy lapse. Under Tennessee law, a former spouse or child who has been wronged by such conduct has the law on his or her side, as evidenced by the Tennessee cases discussed in this blog.

In Dossett v. Dossett, a decision of the Supreme Court of Tennessee, the plaintiffs were children of an insured (the father) who was divorced from the children’s mother prior to his (the insured father’s) death. The divorce decree between the father of the children and their mother required the father to maintain a policy of life insurance upon his life with the children designated as beneficiaries. Specifically, the marital dissolution agreement in that case stated:

“That the Defendant [the father] is required to maintain a $20,000.00 life insurance policy upon his life and with the minor children of the marriage designated as the beneficiaries of said policy.”

In Tennessee, as in many other states, the law is not so technical as to deny a party a right to recover on a breach of contract claim just because the party’s contract was not expressed adequately either in writing or verbally. Where the facts make it clear that parties had an agreement (which is supported by mutual consideration and sufficiently definite), a party to that agreement might be able to recover– even without an express contract.

It is always best to have an express written contract. If you don’t have an express written contract, the next best thing to have is an express oral contract with someone who is truthful, and who will not deny the terms of your agreement. If you have neither an express oral nor a written contract, your only chance of recovery, in a breach of contract case, may depend on Tennessee common law regarding implied contracts.

Tennessee law recognizes two types of implied contracts: contracts implied in fact, and contracts implied in law. What is the difference? Contracts implied in fact arise when the court determines that the parties’ conduct shows mutual assent to a contract even though they never expressly agreed (either verbally, or in writing). Contracts implied in law can be created by a court to avoid an injustice even where there was neither an express agreement between the parties, nor conduct of the parties upon which the court can base an implied contract.

In a case decided by a 3-2 vote which involved coverage under a commercial liability insurance policy issued by Allstate, the Supreme Court of Tennessee held in favor of an insured finding that the insurance company was responsible for a mistake by one of its agents in Tennessee. The case falls in the category of an insurance agent mistake case, many of which type cases end up in Tennessee courts.

Here are the key facts of the case:

• The Plaintiff in the case was a customer of Allstate Insurance Company who owned and insured six vehicles under a commercial policy with Allstate