§10.1 Generally

The Case: Ginn v. American Heritage Life Ins. Co ., 173 S.W.3d 433 (Tenn. Ct. App. 2004), perm. appeal denied (Dec. 29, 2004).

The Basic Facts: Plaintiff bought a life insurance policy from a salesman who came to her work place, asking her only a few questions about Plaintiff's and Plaintiff's husband's health before selling coverage. Plaintiff's husband - who had a history of health problems - died shortly thereafter, and the insurance company refused to pay on the policy. Plaintiff then brought an action for breach of contract, bad faith refusal to pay, and Consumer Protection Act against insurer.

The Bottom Line:

• "The statute upon which Plaintiff was awarded a 25% bad faith penalty is Tenn. Code Ann. § 56-7-105(a), which provides as follows:

  The insurance companies of this state ¼ in all cases when a loss occurs and they refuse to pay the loss within sixty (60) days after a demand has been made by the holder of the policy or fidelity bond on which the loss occurred, shall be liable to pay the holder of the policy or fidelity bond, in addition to the loss and interest thereon, a sum not exceeding twenty‑five percent (25%) on the liability for the loss; provided, that it is made to appear to the court or jury trying the case that the refusal to pay the loss was not in good faith, and that such failure to pay inflicted additional expense, loss, or injury including attorney fees upon the holder of the policy or fidelity bond; and provided further, that such additional liability, within the limit prescribed, shall, in the discretion of the court or jury trying the case, be measured by the additional expense, loss, and injury including attorney fees thus entailed."

  173 S.W.3d at 442-43.
• "Tenn. Code Ann. § 56-7-105(a) is penal in nature and must be strictly construed. See Stooksbury, 126 S.W.3d at 519 (citing Minton v. Tennessee Farmers Mut. Ins. Co., 832 S.W.2d 35, 38 (Tenn. Ct. App. 1992)). In order to recover bad faith penalties under this statute, 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 have waited 60 days after making 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.' Stooksbury, 126 S.W.3d at 519. The burden of proving that an insurance company acted in bad faith in refusing to pay a claim lies with Plaintiff herein. Id; see also Nelms v. Tennessee Farmers Mut. Ins. Co., 613 S.W.2d 481, 484 (Tenn. Ct. App. 1978). In Sisk v. Valley Forge Ins. Co., 640 S.W.2d 844 (Tenn. Ct. App. 1982), this Court explained that:

  The bad faith penalty is not recoverable in every refusal of an insurance company to pay a loss. An insurance company is entitled to rely upon available defenses and refuse payment if there is substantial legal grounds that the policy does not afford coverage for the alleged loss. If an insurance company unsuccessfully asserts a defense and the defense was made in good faith, the statute does not permit the (sic) imposing of the bad faith penalty.

  Sisk , 640 S.W.2d at 852 (emphasis in original) (quoting Nelms v. Tennessee Farmers Mutual Ins. Co., 613 S.W.2d 481, 484 (Tenn. Ct. App. 1978))." Id. at 443.
• "In our opinion, Defendants had substantial legal grounds supporting their position that Plaintiff materially misrepresented her husband to be in 'basic good health' when applying for the life insurance. This is readily apparent given Mr. Ginn's troubled medical history. Defendants simply unsuccessfully asserted the misrepresentation defense. We find no material evidence whatsoever to support the jury's conclusion that this defense was asserted in bad faith. Accordingly, we reverse the judgment of the Trial Court insofar as it awards Plaintiff a bad faith penalty of 25%. See Stooksbury, 126 S.W.3d at 519 (reversing a 25% bad faith penalty after concluding the defendant had substantial legal grounds supporting its position that the plaintiffs' insurance coverage had been cancelled prior to the date of loss). See also Sisk v. Valley Forge Ins. Co., 640 S.W.2d 844, 852 (Tenn. Ct. App. 1982) ("There were substantial legal grounds, though not sustained, for the insurer to defend herein. Therefore, we believe the finding of bad faith must be overturned."); Nelms v. Tennessee Farmers Mutual Ins. Co, 613 S.W.2d 481, 484 (Tenn. Ct. App. 1978) (reversing the jury's award of a 25% bad faith penalty after concluding there were "valid reasons for the insurance company to question the loss. Further, we think the insurance company honestly and in good faith believed ¼ its policy was not liable for the loss. For the above reasons we think there is no material evidence to support a finding of bad faith and the invoking of the statutory penalty.")." Id. at 443-44.

Other Sources of Note: Gaston v. Tennessee Farmers Mutual Insurance Company , 120 S.W.3d 815 (Tenn. 2003), reh'g denied, (Jan. 5, 2004) (concluding that policy holder may pursue cause of action against his/her insurance company under the Tennessee Consumer Protection Act for unfair or deceptive conduct).

Recent Cases:

PacTech, Inc. v. Auto-Owners Insurance Co. , 292 S.W.3d 1 (Tenn. Ct. App. Sept. 22, 2008), perm. appeal denied, (Apr. 27, 2009) (holding statutory bad faith penalty not recoverable absent a formal demand for payment).

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