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Tennessee Bad Faith Law Regarding Insurance Policies

State and federal courts in Tennessee do not recognize a common law cause of action against an insurer for bad faith. [i] Tenn Code Ann. § 56-7-105, the “bad faith statute” is penal in nature, only applies to insureds under the policy and is to be strictly construed. [ii] “To recover, the plaintiff must prove: ‘(1) the policy of insurance must, by its terms, have become due and payable, (2) a formal demand for payment must have been made, (3) the insured must have waited 60 days after making his demand before filing suit (unless there was a refusal to pay prior to the expiration of the 60 days), and (4) the refusal to pay must not have been in good faith.’” [iii]

Several cases have held that the bad faith statute does not apply to some automobile liability insurance policies. [iv] However, one decision of the Tennessee Supreme Court has been argued by some to hold the insurer’s conduct in handling an underinsured motorist claim could trigger the statutory penalty. [v] Both the Tennessee Court of Appeals and the Middle District of Tennessee have weighed in recently on the issue.

The Tennessee Court of Appeals weighed in on the issue recently in Giles v. Geico. In Giles, the Court of Appeals held that the bad faith penalties in Tenn Code Ann. § 56-7-105 do not apply to auto insurance policies. [vi] The Giles Court conducted a detailed survey on Tenn Code Ann. § 56-7-105, another applicable statute and multiple other cases to come to its conclusion.

The Middle District also rendered a recent opinion which discussed which policies are generally subject to the bad faith failure to pay statutory penalty. Generally, Tenn Code Ann. § 56-7-105 “applies only ‘to that class of written contracts, which written contracts themselves, [bear] interest from the time they [become] due.’” [vii]

The Courts in both Giles and For Senior Help relied heavily on the 1964 opinion by the Tennessee Supreme Court in Tenn. Farmers Mut. Ins. Co. v. Cherry. The Middle District stated, “as explained in Cherry, [Tenn Code Ann. § 56-7-105] applies to ‘life insurance, fire insurance and accident insurance’ policies, ‘since these types of insurance policies would bear interest from the time they became due, regardless of whether a judgment was recovered on them or not.’” [viii] “It does not apply to liability insurance policies pursuant to which an insurance company ‘agrees to pay, on behalf of the insured and within specified limits, all sums which the insured shall become legally obligated to pay as such damages’ to a third party.” [ix]

[i] Chandler v. Prudential Ins. Co., 715 S.W.2d 615, 620 (Tenn. Ct. App. 1986) (the bad faith penalty statute is the exclusive remedy); see also Wynne v. Stonebridge Life Ins. Co., 694 F. Supp. 2d 871, 879 (W.D. Tenn. 2010).

[ii] Ginn v. Am. Heritage Life Ins. Co., 173 S.W.3d 433, 443 (Tenn. Ct. App. 2004); See also Minton v. Tenn. Farmers Mut. Ins. Co., 832 S.W.2d 35, 38 (Tenn. Ct. App. 1992).

[iii] Burge v. Farmers Mut. of Tenn., No. M2016-01604-COA-R3-CV, 2017 Tenn. App. LEXIS 235, at *29 (Tenn. Ct. App. Apr. 13, 2017).

[iv] See Medley v. Cimmaron Ins. Co., Inc., 514 S.W.2d 426 (Tenn. 1974); see also Tenn. Farmers Mut. Ins. Co. v. Cherry, 374 S.W.2d 371 (Tenn. 1964); Manns v. Ind. Lumbermen’s Mut. Ins. Co. of Indianapolis, 482 S.W.2d 557 (Tenn. Ct. App. 1971).

[v] Gaston v. Tenn. Farmers Mut. Ins. Co., 120 S.W.3d 815 (Tenn. 2003).

[vi] Giles v. Geico General Insurance Co., No. M2021-00165-COA-R3-CV, 2021 Tenn. App. WL 5013746 (Tenn. Ct. App. Sep. 15, 2021).

[vii] For Senior Help, LLC v. Westchester Fire Ins. Co., 515 F. Supp. 3d 787, 800 (M.D. Tenn. 2021) (quoting St. Paul Fire & Marine Ins. Co. v. Smith, 767 F.2d 921, 1985 WL 13383, at *5 (6th Cir. June 26, 1985) (table op.); see Tenn. Farmers Mut. Ins. Co. v. Cherry, 374 S.W.2d 371, 372 (Tenn. 1964).

[viii] Id. (quoting Cherry, 374 S.W.2d at 372).

[ix] Id.

Brad A. Fraser, a member of Leitner, Williams, Dooley & Napolitan, PLLC, has provided many years of defense litigation in various areas, including construction litigation, premises and products liability, employment, insurance disputes, and professional errors and omissions claims. He has been recognized by Best Lawyers in America for Construction Law, and is AV rated by Martindale Hubbell. He is a Rule 31 Listed Mediator, and can be reached at 865-342-4904, or brad.fraser@leitnerfirm.com.