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News Release

DENIAL OF COVERAGE LEADS TO MILLION DOLLAR AWARD…Even in the Absence of Bad Faith

A look at Leverette v. Tennessee Farmers Mutual Ins. Co.  

By:      Janet Strevel Hayes

         “Bad faith.”  Two words that no insurance carrier wants to hear.  For years, hefty awards and penalties against insurance carriers have almost always been linked to those two horrific words.  However, in a recent decision by the Tennessee Court of Appeals, Leverette v. Tennessee Farmers Mutual Insurance, “bad faith” was not the headline for a seven figure award against Tennessee Farmers Mutual (TFM).  Carriers beware, the court has adopted a new weapon to punish insurer foul play:  The Tennessee Consumer Protection Act (TCPA).  Let’s take a look at what happened in this significant case:
The Thirteen-Year-Old Driver…
            On December 21, 2008, thirteen-year-old Claire Sanders was at the home of her friend, Beth Neeley.  Beth’s mother, Tracy Neeley, asked Beth to drive another guest home, even though Beth Neeley was not a licensed driver.  Beth took her mother’s keys; however, when they reached the driveway, young Claire assumed the driver’s seat.  The thirteen-year-old then drove the vehicle until she was unable to navigate a sharp curve, and collided head-on with a car driven by Wendy Leverette.  Ms. Leverette’s injuries were severe, ultimately leading to the amputation of her foot.
The Denial of Coverage…
            TFM was the insurance carrier for Claire Sander’s parents.  Upon receipt of the claim, the TFM adjuster took telephone statements from Claire Sanders and Tracy Neeley.  Based on those statements alone, TFM denied coverage, relying on an exclusion in the policy that eliminated coverage for an automobile not owned by the policy holders and used “without the permission of the owner or person or entity in lawful possession of the auto.”
            The Original Lawsuit…
           Wendy Leverette ultimately sued Claire Sanders. TFM refused to offer a defense, and Ms. Leverette obtained a $1 Million Dollar default judgment against the minor.
            The First Judgment Against Tennessee Farmers…
            Wendy Leverette then joined the minor’s parents in a lawsuit alleging numerous claims against the insurance company.  The trial court ruled, as a matter of law, that the minor was entitled to insurance coverage under her parents’ policy at the time of the accident.  The trial court directed a verdict for breach of contract and the jury awarded damages for everything from bad faith to emotional distress to violations of the TCPA.  After damages were trebled under the TCPA and punitives were assessed, the trial court judgment exceeded $3 Million.
The Court of Appeals Analysis…
           Several issues were raised on appeal and the 51 page decision is packed full of analysis and conclusions that are significant for insurance carriers.  In particular, the appellate court concluded:
1.         Coverage exists, and there was a breach of contract.
The appellate court analyzed the policy language excluding coverage “for the use, operation or occupation of any auto that you do not own without the permission of the owner or person or entity in lawful possession of the auto.”  The court concluded that Tracy Neeley, the owner of the automobile gave her daughter, Beth Neeley, “lawful possession” of the car, even though Beth Neeley had no license.  The court went on to find that Beth Neeley, as a lawful possessor, gave thirteen-year-old Claire permission to drive the vehicle.  Recognizing that ambiguities in policy language must be construed against the insurer and in favor of the insured, the court found coverage and, accordingly, ruled that TFM’s denial was a breach of contract.
2.         There was no bad faith.
The Tennessee Court of Appeals conducted an exhaustive analysis of bad faith claims in Tennessee.  First, the court held that no privateright of action for bad faith exists under the Insurance Trade Practices Act, Tenn. Code Ann. §§ 56-8-101 et seq.  Accordingly, to the extent plaintiffs intended to bring a claim under that Act, the court concluded that the claim must be dismissed.
The court went on to analyze the Tennessee statute traditionally known as the “bad faith penalty” (Tenn. Code Ann. § 56-7-105) which provides for a 25% penalty where refusal to pay the claim is not made in good faith.  The court noted, however, that the plaintiffs’ complaint did not specifically allege liability under the bad faith penalty statute, and there was no specific indication that the trial court’s finding of bad faith was based on the statute.  Accordingly, the court determined there was no basis for an award under the traditional “bad faith penalty” statute.
Finally, the court looked at the tort of bad faith and recognized long-standingTennesseelaw holding that there is no tort of bad faith if the insurer’s actions would otherwise fall under the bad faith penalty statute.  The court specifically rejected plaintiffs’ argument that the Tennessee Supreme Court has recognized the tort of bad faith, reasoning that the tort only exists in cases arising outside the context of the bad faith statute.
3.         TFM violated the Tennessee Consumer Protection Act.
The court of appeals confirmed that insurance companies are subject to the application of the TCPA (statute generally prohibiting “unfair or deceptive” trade practices), and the same conduct may be found to violate both the bad faith penalty statute and the TCPA.  The court very clearly pointed out that breach of an insurance contract does not establish a per se violation of the TCPA.  However, the court found that the insurer’s violation of other statutes regulating the insurance industry could be viewed as evidence of an “unfair or deceptive act” under the TCPA.  Specifically, the court acknowledged that TFM’s failure to acknowledge with reasonable promptness “communications from the insured” and failure to “adopt and implement reasonable standards for prompt investigation and settlement of claims under the policy” were violations of Tennessee laws regulating the insurance industry.  (Tenn. Code Ann. § 56-8-105).  These violations coupled with what the jury found to be an incomplete investigation were sufficient evidence of an “unfair act” to violate the TCPA.  However, the court declined to award treble damages, reasoning that TFM’s violations were not necessarily “knowing” as there was no evidence of actual deceit.
Lessons Learned…
            This case makes clear that Tennessee courts will find a way to punish what they perceive to be insurer foul play, even if the plaintiff fails to properly allege bad faith.  Carriers should make sure that all of their practices are in compliance with Tenn. Code Ann. § 56-8-105, the Tennessee law regulating the insurance industry, since the court has now evidenced a willingness to use those technical violations as evidence of “unfair or deceptive acts” to invoke the TCPA.  However, the bottom line is that a prompt, comprehensive investigation with documented analysis and communication with interested parties remains the best defense against claims of foul play, regardless of what the claim is called.
If you have questions or would like to discuss this article further, please contact the author or any other attorney at Lewis, King, Krieg & Waldrop, P.C.

Lewis King was founded in 1960 and today has 55 attorneys in its three offices in Nashville, Knoxville and Sevierville.