Court of Appeals of Tennessee Sets Aside Punitive Damages Award Against Insurance Company


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).

The insurance company never denied or approved the Plaintiff’s claim, and the Plaintiff filed a breach of contract lawsuit.

The business-owner’s policy in question, as all seem to, contained an exclusion for any loss caused by the dishonest or criminal acts of the person or business insured as well as for any criminal or dishonest acts caused by the insured’s employees, partners or anyone entrusted with the insured property. It was this exclusion upon which the insurance company in the Lance case relied.

There was quite a bit of proof about the cause of the fire, what motives Plaintiff might have had to set the fire, and what motives she might have had not to set the fire. The proof was clear and compelling that Plaintiff was in personal financial distress and that her business was in severe financial distress.  For years, the Plaintiff’s profits had been falling.  There was no dispute that her recent tax return showed that she had a net income from the business of only $10,000 despite her claim that she worked 50-60 hours per week.

On the other hand, there was no “smoking gun” type evidence that linked Plaintiff to the fire. As well, several people testified about her love of and devotion to the business.  Plaintiff also testified that her son had threatened to burn down the building as a result of a dispute in which they had been involved.

The jury returned a verdict for the Plaintiff for $800,000 in compensatory damages. It also awarded her damages for bad faith failure to pay in the amount of $12,500 and punitive damages of $267,500.

The Court of Appeals set aside the jury’s award of both bad faith failure to pay damages and punitive damages holding that the trial court should have granted the insurance company’s motion for directed verdict as to both the bad faith damages and the punitive damages.

The Court of Appeals observed that, under Tennessee law, an insurance company cannot have acted in bad faith if there were “substantial legal grounds” that the applicable policy did not provide coverage. It found that, considering all of the circumstances surrounding the fire, the insurance company had valid reasons to question the loss.

The Court of Appeals set aside the award of punitive damages on the grounds that, in order to recover punitive damages in Tennessee, a plaintiff had to prove that the breach of the contract in question was done “intentionally, fraudulently, maliciously, or recklessly,” and that the Plaintiff had not proven any of those conditions.

Lawyers who handle bad faith insurance claims and cases where punitive damages against an insurance company might be warranted will find the Lance decision more than a little disconcerting.  The questions of bad faith and whether or not punitive damages should be awarded are both jury questions.  Moreover, the standard for granting a directed verdict, which is what the Court of Appeals held the trial court should have done, is very much tilted in favor of the non-moving party —  in the Lance case, the Plaintiff.

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