Tennessee Business Litigation Law Blog

John Day posted this morning on an important case just decided by the Tennessee Supreme Court.   The case, Johnson v. Tennessee Farmers Mutual Insurance Company, No. E2004-00250-SC-R11-CV  (August 28, 2006), involves the standard for proving bad faith claims brought against insurance carriers.  In overturning the decision of the Court of Appeals, the TSC ruled, among other things, that the trial court did not err in giving the following charge:

[a] mere mistake in judgment by the insurance company does not constitute quote “bad faith” end quote. Quote “bad faith” by the insurance company is, one, failure to investigate a claim to such an extent that it would be in a position to exercise honest judgment as to whether a claim should be settled, or two, failure to fairly consider the facts relative to the accident and a claimant’s injuries known to it whether they are the actual facts or not and deciding whether the insured should or should not settle, or three, failure of the insured [sic] with the right to control the litigation and settlement to fairly consider the rights and interest of the insured as compared to the interest of the insurance company.

This opinion is a must read for those attorneys whose practice involves insurance law (which, at one time or another, is basically everyone).  Find the full opinion here and John Day's commentary here.

There's a great post over on the Insurance Scrawl blog about discovering other claim files with related insurance coverage issues. From the post:

Often judges seem to take the position that they understand what a particular policy provision must mean when they see it. But that is not the relevant legal question; the task for the judge is not to pick the best construction or the one he or she thinks makes the most sense. Rather, the hermeneutical task is: what construction does the language admit and is the construction being offered a reasonable one? To this end, evidence from claim files and other materials from insurers sheds light – and thus is discoverable and potentially admissible on motions for summary judgment and at trial.

The post has enough substantive information and case cites to make it worth printing and keeping around for any future insurance coverage or bad faith cases.

Here's news of a federal case from the District of Arizona demonstrating the pains that an insured may go through en route to getting their insurance company to actually pay. A corporate officer was criminally accused of a $550 million fraud that bankrupted the corporation. The officer successfully defended himself against the criminal charges, then sought reimbursement from his D&O insurer. After (some presumably contentious) litigation, the corporate officer won a $2.5 million judgment against the insurer. After apparently three years of litigation, the insurer paid the $2.5 million judgment and settled with respect to appellate fees and costs.

Then, the insured filed a federal lawsuit against the insurer based on its tactics in the coverage dispute. The insured sued the insurer under both abuse of process and bad faith theories. The District Judge dismissed all counts, saying that the insurer's litigation tactics were not sufficient to support the insured's claims, even if partially based on an ulterior motive of delaying the plaintiff's ultimate recovery. "Rather, the process must be used primarily to accomplish a purpose for which [it] was not designed.'" The claimant must show that the use of process 'could not logically be explained without reference to ··· improper motives.'" "Where a lawful end is pursued by appropriate process, incidental motives of spite or greed are not actionable."

A tough victory in the underlying case for the insured.

There's an article up at The Globe and Mail on a new wave of insurance designed to cover data losses. The article questions whether standard commercial property insurance extends to data loss, whether caused by a physical catastrophe such as a fire, or by a purely electronic catastrophe such as a computer virus. It's worth checking your company's insurance policies to see if you are covered before disaster strikes. It's definitely worth checking your policies if you've already had a major event and need to offset the costs of recovering the data or compensating your customers for the loss of their data. (Found via the Inhouse Blog.)

A man calling himself "Colonel West" contacted a technology company. Colonel West "told [the company] that he was in charge of a covert NATO procurement project that would involve the purchase of sophisticated electronic equipment with expenditures of eighty to one hundred billion dollars...." The technology company contacted two others to actually produce the goods. As part of the deal, they agreed to ship samples for destructive testing to see if the products would meet the rigors of the covert NATO project.

"Colonel West," however, was not actually involved with NATO or any other military organization. Instead, he used or sold the products himself. Read the case, Federal Ins. Co. v. Ace Prop. & Cas. Co., to see who was left holding the bag.

The Fourth Circuit Court of Appeals’ recent decision in Resource Bankshares Corp. v. St. Paul Mercury Ins. Co. provides two good examples of the Court interpreting insurance policy provisions using classic contract principles. The case is a declaratory judgment action seeking a determination that sending unsolicited “junk faxes” in violation of federal law is covered by the insured’s general commercial liability policy.

There are several federally funded and regulated types of insurance. One of those is crop insurance, regulated by the Federal Crop Insurance Corporation (the FCIC). Because the federal government is ultimately on the hook for part of any claim, the government puts limits on what an insurer can and cannot agree to cover. Generally speaking, the insurer cannot waive those federal requirements.

On the other hand, a recent case out of the Eastern Section Court of Appeals, Simms v. Insurance Co. of North Am., demonstrates the kind of insurance requirements that the insurer can waive. In that case, the insured submitted a claim on his crops, then told his insurance agent that he was planning to bush hog the field. The agent apparently gave him permission to do so. The insurance policy, however, required him to preserve the fields so that the insurance company could perform an investigation. Because the fields were destroyed before the company inspected them, the company denied the insurance claim.

The Eastern Section ruled that the insurance agent could waive the policy provisions, even though it was federally funded and regulated insurance. The key is that the agent waived a provision of the policy, not a federal law or regulation. In other words, the insurance company can waive its own requirements for coverage, but not the federal governments requirements for coverage.

For an example where the agent waived a federal requirement, take a look at my earlier post on waiver of FEMA requirements for flood insurance.

The humanitarian losses due to Hurricane Katrina are staggering. The economic effects to businesses are still being explored. Via the In House Counsel Blog:

"Businesses lucky enough to be located outside of Katrina's wrath still are exposed to losses from the hurricane: while they may not have suffered physical losses to their assets, their suppliers or customers, or both, may have been damaged. As a result, these "unaffected" businesses may have coverage for their own economic losses stemming from Katrina.

An increasingly common add-on to coverage in recent years has been "contingent" business-interruption coverage (or contingent business-income coverage). These policies are limited in what types of event triggers their coverage: typically, only those hazards that are insured against with respect to the insured's own assets qualify as covered events when they befall the insured's supplier or the insured's customer."

Old Line Life Ins. Co. of Amer. v. Garcia is another case that suggests a "misrepresentation" on an insurance application should be glaring if the insurance company is going to rescind based on it. In Garcia, a life insurance applicant wrote and told a medical examiner that she was buying the policy to replace her three existing ones. The policy was issued, and the insured passed away from lung cancer a short time later. The insurance company argued that the court should rescind the contract because the applicant misrepresented that she was going to replace the existing policies, and the insurance company would not have issued the policy had it known she was not going to terminate the existing policies. The District Court granted summary judgment for the insurance company. The Sixth Circuit Court of Appeals vacated the decision and remanded.

The key part of the case is that a statement on an insurance application that the applicant will replace existing insurance policies for a new one is a future promise, so it cannot be a misrepresentation of past or present fact. Tennessee law also says that a promise to do something in the future cannot be the basis for a misrepresentation. This case should be applicable to Tennessee insurance policies as well, then. On the other hand, a strong enough statement that the insurance applicant will do something specific, including replace an existing policy, could be a condition precedent to coverage. Something to watch out for in insurance coverage disputes.

Have you ever got the feeling that the insurance company trying to sell you life insurance did not want you to tell the truth? Have you ever had an agent say "you don't have to put that down?"

The questions on many applications are very difficult to understand. For instance, "Do you smoke?" I don't consider myself a smoker in any shape, form or fashion, and no other sane person would. ( I have plenty of other vices, to be sure, but not this one.)

Nevertheless, I made the mistake of answering that question "Yes" 6 years ago because 2 or 3 times a year I used to smoke a cigar with the guys. I use the term "smoke" lightly - it would be more accurate to say that I allowed the cigar to burn between the index and middle finger of my hand while using my right hand to raise a Bombay Saffire on the rocks (two olives) to my parched lips.

My candor raised the premium on my policy dramatically - and I learned a lesson. No - not a lesson to lie - a lesson that smoking an occasionally stoggie with my brothers or friends was not worth $12.87 per uninhaled puff.

Here is a decision about a woman who died of breast cancer. When her husband tried to collect on her life insurance policy, the insurance company denied the claim, saying that she had lied about her smoking history. The California Supreme Court does a great job explaining why there was a genuine issue of material fact and remanded the case for trial.

Be careful out there.

Take a look at the unusual factual scenario in Travelers Indem. Co. of Ill. v. Western Am. Spec. Trans. Servs., Inc. Weeding through some complex facts, the insured held a $4 million policy. The policy contained two unique provisions: (1) granting any claimant the right to sue the insurer directly for payment under the policy; and (2) granting the insurer the right to reimbursement from the insured for any payment under the policy. The insurer paid a claim under the policy. Then the insurer filed a lawsuit on behalf of the insured, asserting a subrogation interest in the rights of the insured.

The Court of Appeals disagreed based on the unique policy. In a normal policy, a claimant files suit against the insured. If the insurer pays off the claim, then the insurer has stepped into the shoes of the insured and gains a subrogation interest.

Under the Travelers policy, however, the claimant files suit directly against the insurer. The insurer is paying off its own debt. The insured is not off the hook at this point; it still owes reimbursement to the insurer. Thus, the insurer has actually paid to step into the shoes of the claimant. Essentially, it's the exact reverse of a normal subrogation interest.

The moral of the story? Check to see whether the insurer can be sued directly. Then check whether the insurer has a right of reimbursement against its own insured. If so, there's a strong challenge to the insurer making any claim for subrogation.

The doctrine of equitable subrogation applies when one person makes payment on behalf of another. There need not be a contractual duty to make the payment. Howevever, equitable subrogation will not apply if the payment is made as a "volunteer." So what is a volunteer? The Sixth Circuit Court of Appeals looked at that question this month, at least under Michigan law, in Fed. Ins. Co. v. Hartford Steam Boiler Inspection and Ins. Co.:

A “volunteer” has been defined as “one who intrudes himself into a matter which does not concern him, or one who pays the debt of another without request, when he is not legally or morally bound to do so, and when he has no interest to protect in making such payment.” Further, a “payment is not voluntary when made under compulsion, under a moral obligation, in ignorance of the real state of facts, or under an erroneous impression of one’s legal duty.”

The part worth noting is that last bit: if a person pays because of their own subjective mistake of fact or law, they may rely on equitable subrogation to recover their payment. The Court's opinion says nothing about requiring the mistake to be objectively reasonable.

Wright v. Allstate Ins. Co. highlights a harsh result for insureds who have federally funded insurance policies. The insured filed a claim form under its flood insurance policy, but did not provide all of the information required under FEMA regulations. The insurance adjuster wrote back that the insurance company was accepting the claim form as complying with the policy. After the deadline for filing a claim form had passed, however, the insurance company rejected the claim because the form was incomplete.

Not surprisingly, the insured argued that the insurance company should be estopped from relying on the incomplete claim form since its own adjuster had accepted the form. The Fifth Circuit Court of Appeals did not agree. The policy was a Standard Flood Insurance Policy, with payouts on the policy coming from the federal treasury via FEMA. The insured was responsible for being aware of the applicable FEMA regulations, including filing of a complete form. Where federal funds are implicated, there cannot be a claim based on estoppel.

Robert Williamson at the Construction Owners & Builders Law Blog posts on an interesting topic. In a liability policy, you may not be able to tell if coverage is provided for an event until several months down the road. The insurer should offer to defend the insured while reserving the right to deny coverage later. If it later turns out that the insurance policy does not cover the specific event, the insurance company can stop defending its insured. What about the legal fees and other defense costs that the insurance company paid for in the meantime, though? Can an insurance company recover the legal fees and other defense costs from the insured if it turns out that none of the claims are covered by the insurance policy? Apparently, there is a split of authority.

I can't think of a better illustration of the rule that ambiguities in insurance contracts are construed in favor of the insured that this one. The insured in the case was not only a sophisticated business, but it was actually an insurance company. The rule still applies because the insurer had the chance to clean up any vague provisions.

The insured in a new case from the Eighth Circuit Court of Appeals got the short end of the stick every time. Highwood Properties Inc. v. Executive Risk Identity, Inc. The insured reported a claim under a claims made policy, and it was rejected for no coverage. The insured reworked its next policy to provide coverage for the same type of claims. When a similar claim came in, the insured again reported it. The insured's new policy would have covered it - but the insured lost anyway. The Court of Appeals decided that it was related to the same facts as the first reported claim, under the old policy which did not provide coverage.

This is a fact-intensive case with tough arguments on both sides. It's also not uncommon - an insurance policy changes in a renewal year, and whether it covers a claim depends on which policy year applies. One wrinkle that might have changed the result in this case: if the insured had a paper trail indicating that the insured and insurer intended for any new claims out of the same set of facts to be covered. The intention of the parties should control, and the renewal policy would cover the second claim.

Say a defendant loses the case, but has enough insurance to pay off the damages. When prejudgment interest is added in, though, the judgment is more than the defendant's insurance policy limits. Who owes the excess amount, the defendant or the insurance company? The Court of Appeals in Thurman v. Harkins said that a policy limit for "all damages" includes the prejudgment interest aspect.

I see two things that could change this if you end up in a similar case. First, if your insurance policy reads differently, something vague enough like "all damages and consequences." Second, if your insurance company can let you out of the case within policy limits, but defends its own money so hard that you owe prejudgment interest because of it, you might want to look at bad faith.

According to the Eighth Circuit Court of Appeals, an insurer may be estopped from denying coverage under Minnesota law if the insurer defends the insured in the underlying litigation without reserving its right to deny coverage. Minnesota Comm. Rwy. Co. v. General Star Indem. Co. The Eighth Circuit defines this as “assumption-of-defense estoppel,” and reads it narrowly to the circumstance where the insurer has full knowledge of the facts and controls the underlying litigation. Note that Tennessee law is similar, in that estoppel generally may not be used to create insurance coverage where none exists.
The Eighth Circuit indicates that Minnesota law requires an insured to prove five elements in order to invoke the doctrine of estoppel, including that the insurer misrepresented a material fact to the insured. Tennessee does not restrict the application of estoppel to such limited circumstances. Under Tennessee law, estoppel or waiver may apply to prevent an insurer from relying on a policy exclusion based on the insurer’s knowledge of the insured’s risks at the time the policy was issued. See Dallas Glass of Hendersonville, Inc. v. Bituminous Fire & Marine Ins. Co., 544 S.W.2d 351 (Tenn. 1976); Insurance Co. of North America v. Federated Mut. Ins. Co., 518 F.2d 101 (6th Cir. 1975).

In Meridian Leasing, Inc. v. Associated Aviation Underwriters, an all-risk insurance policy contained a definitions section and specified that phrases in boldface were given special meaning under the policy. The phrase “wear and tear” was not listed in the definitions section. It was used in an exclusionary clause without boldface, quotation marks, capitalization, or anything else to indicate it should be treated as a defined term. Two pages later, the policy stated (outside of the definitions section) that damage from certain specified causes was to be considered “wear and tear.” The Sixth Circuit Court of Appeals applied California law and found that the policy was ambiguous so the ordinary and normal meaning of “wear and tear” should be applied. The Sixth Circuit affirmed partial summary judgment for the insured.

The Third Circuit Court of Appeals recently touched on a question that is frequently encountered (and answered differently) by courts in all jurisdictions. In Tran v. Metropolitan Life Ins. Co., the Court applied Pennsylvania law to determine whether an insured’s failure to read a policy warranted summary judgment against him in a case against the insurer. The Third Circuit reversed the District Court’s summary judgment, stating that the insured has no duty to read a policy in a case alleging misrepresentation or fraud by the insurer or the insurer’s agent.
There is a virtual snake’s nest of issues surrounding defenses based on an insured’s failure to read a policy. Is it sufficient if the insured reads the policy, but does not recognize the practical importance of a particular provision? Must the policy unambiguously address the insured’s concern, or if vague, does the insured have a duty to further inquire? Is the insured’s business savvy relevant? What if the insurance agent affirmatively tells the insured that the policy is what the insured requested? Assuming the insured did breach a duty to read the policy, what effect does that have in a suit to enforce coverage – a comparative fault reduction, an absolute bar to recovery, or equitable consideration?
A good rule of thumb for insurance purchasers: read your policy when it arrives, and ask questions immediately. A good rule of thumb for insurance companies: keep policies as clear and unambiguous as possible, and don’t count on policy language to save you if your agent oversells the policy.

Skip to the final paragraph of Ralph v. Pipkin to see what the case stands for. In the last paragraph, the Court of Appeals notes that in a case against an agent or broker for negligent procurement, as in any negligence case, the plaintiff must establish the foreseeability of harm. In a negligent procurement case, that means that the insured’s loss must have been a foreseeable risk at the time that the insured was seeking coverage. If the loss was not foreseeable, then the agent or broker had no duty to obtain coverage for that loss.

Note that other Tennessee cases state that a defendant only needs to be capable of foreseeing “a harm of a like general character,” not the specific injury that the plaintiff suffered. Moon v. St. Thomas Hosp., 983 S.W.2d 225 (Tenn. 1998). That does not change the result in Ralph, because the plaintiff would still have to prove that the insurance agent should have foreseen by 1998 that a farmer needed coverage for something akin to patent infringement.

A recent Tennessee Court of Appeals case reminds us that an insured can assign its contract rights without the insurer’s consent even if the insurance contract contains an anti-assignment clause. In Manley v. The Automobile Ins. Co., the insured held an insurance policy on a home was damaged by a tornado. The insured then sold the home and assigned the policy to another individual, who made a claim for the damage against the insurer. The Court ruled that the assignment was valid because it took place after the insurable loss occurred. An important note: the assignee must comply with the terms and conditions of the policy, as the assignee merely stands in the shoes of the assignor.
Also, note the Court’s discussion of defective verdicts, either due to inconsistent findings of fact or a faulty verdict form. In any case, the attorneys should do as much as they can to avoid a problematic verdict by raising the issue to the trial judge. Even if unsuccessful in changing the instruction or verdict form at the time, it is far better to preserve the issue than to have it waived on appeal for failure to timely object.