§10.3 Necessity of Giving Notice of Intention to Seek Penalty

The Case: PacTech, Inc. v. Auto-Owners Insurance Co. , 292 S.W.3d 1 (Tenn. Ct. App. Sept. 22, 2008), perm. appeal denied, (Apr. 27, 2009).

The Basic Facts: Plaintiff insured sued insurer for failure to pay claim in a timely manner.

The Bottom Line:

• "Auto-Owners contends that PacTech's claim under this statute should have been dismissed by the trial court upon Auto-Owners' motion for directed verdict. We agree." Id. at 9.
• "In Ginn v. American Heritage Life Insurance Co., 173 S.W.3d 433 (Tenn. Ct. App. 1977), we noted that a formal demand for payment by the insured is a prerequisite to recovery under the statute:

  In order to recover bad faith penalties under [Tenn. Code Ann. § 56-7-105], a 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 wait 60 days after making his demand before filing suit unless there is a refusal to pay prior to the expiration of the 60 days, (4) the refusal to pay must not have been in good faith.

  Id. at 443 (citation omitted) (emphasis added). In an earlier opinion, Walker v. Tenn. Farmers Mut. Ins. Co., 568 S.W.2d 103,106 (Tenn. Ct. App. 1977), observing the penal nature of the statue and the necessity that it be strictly construed, we further noted that, even though an insured has completed all forms required by the insurer, this is insufficient to meet the requirement of the statute that formal demand be made, and we concluded that such requirement shows that the insurer is 'entitled to notice of the claim for bad faith and a period in which to reflect upon the consequences of its failure to pay.' Id. at 106. There being no evidence that PacTech at any time made formal demand for payment such as would have apprised Auto-Owners of PacTech's bad faith claim, we believe Auto-Owners' motion for directed verdict at the close of proof was well taken and should have been granted." 292 S.W.3d 1.