Tennessee’s Insurance Bad-Faith Penalty: What It Takes to Recover the 25% Statutory Penalty

When hurricanes, tornadoes, storms, fires, and other disasters strike, property owners expect their insurance companies to investigate the claim and pay what the insurance policy requires. Prompt and accurate payment can be critical to securing damaged property, making repairs, or getting a business back up and running. What the insurer owes ultimately depends on the policy, the cause of loss, and the facts of the claim. At McWherter Scott & Bobbitt, we represent policyholders in first-party property insurance claims involving coverage, causation, scope, valuation, and claim-handling disputes. In addition to other remedies, Tennessee provides a statutory remedy for policyholders when insurance companies refuse to pay covered losses in bad faith. This statutory remedy provides a penalty of up to 25 percent of the insurer’s liability for the covered loss. This article focuses on that remedy in the context of first-party insurance claims.

What does it mean for an insurance company to refuse to pay in bad faith?

Conduct that may indicate a bad-faith refusal to pay includes the following:

• Failing to conduct a reasonable investigation before refusing payment
• Failing to pay covered amounts that are due and not reasonably disputed, including covered additional living expenses
• Misrepresenting the terms of your insurance policy
• Relying on exclusions or defenses that are not reasonably supported by the policy or the facts
• Failing to respond to pertinent claim communications in a timely manner
• Relying on an investigation or expert opinion that is not reasonably supported by the facts
• Failing to attempt in good faith to reach a fair settlement when the insurer’s liability has become reasonably clear

What is the Tennessee remedy for a bad-faith refusal to pay?

Tennessee’s bad faith statute is outlined in Tenn. Code Ann. § 56-7-105. The statute applies to Tennessee insurance companies and foreign insurance companies, including insurance companies that insure property damage and business interruption coverage in Tennessee.

What’s necessary to show a bad-faith refusal to pay in Tennessee?

To recover the statutory penalty, a policyholder generally must show that the insurance policy, by its terms, became due and payable; that a formal demand for payment was made; that the required 60-day period passed before suit was filed, unless the insurer refused payment before the period expired; and that the refusal to pay was not in good faith. The statute also requires proof that the failure to pay caused additional expense, loss, or injury, including attorney fees.

What remedies does the Tennessee bad-faith statute provide?

It is important to distinguish the underlying insurance claim from the statutory bad-faith penalty. The policyholder’s claim for benefits owed under the policy is contractual. If the additional requirements of Tenn. Code Ann. § 56-7-105 are satisfied, the statute permits an additional penalty. The statute provides the following remedies:

• The amount of the loss
• Any applicable interest on the covered loss
• A penalty of up to 25 percent of the insurer’s liability for the loss
  • Provided the refusal to pay was not in good faith
  • And where the failure to pay caused the policyholder additional expenses, loss, or injury (including legal fees or additional property damage)

The penalty is not imposed simply because the insurer ultimately turns out to be wrong. If the insurer had substantial factual or legal grounds for disputing coverage or the amount owed and asserted that position in good faith, the statutory penalty may not apply. The penalty may be up to 25 percent of the amount owed for the loss, as measured by the additional expense, loss, or injury caused by the insurer’s failure to pay, including attorney fees.

A coverage dispute is not necessarily bad faith

Tennessee courts strictly construe the bad-faith statute. A policyholder seeking the statutory penalty must prove that the insurance company’s refusal to pay was not in good faith. An insurer can be wrong about coverage or the amount owed without necessarily acting in bad faith. In Nashville Communications, Inc. v. Auto-Owners, the court enforced the policyholder’s appraisal award but found the evidence insufficient to establish statutory bad faith.

Tenn. Code Ann. § 56-7-105 provides the statutory bad-faith penalty described above.

Are there other unfair claim remedies in Tennessee?

Tennessee also identifies a number of unfair claims practices in Tenn. Code Ann. § 56-8-105. Those standards address such matters as misrepresenting relevant policy provisions, failing to respond reasonably promptly to claim communications, refusing payment without a reasonable investigation, and failing to reasonably explain a denial or compromise offer. The Unfair Trade Practices and Unfair Claims Settlement Act does not, however, itself create a private cause of action. Enforcement of that Act is assigned to the Tennessee Commissioner of Commerce and Insurance. Policyholders may also file a complaint with the Tennessee Department of Commerce and Insurance(opens in new tab). The department may investigate and mediate your complaint and discipline the insurance company, but it cannot award the statutory bad-faith penalty or other court damages.

How is the 25 percent penalty calculated?

The 25 percent figure is a maximum, not an automatic award. Before any statutory penalty can be imposed, the policyholder must satisfy the requirements of Tenn. Code Ann. § 56-7-105, including proving that the insurer’s refusal to pay was not in good faith and that the failure to pay caused additional expense, loss, or injury.

For example, if an insurer’s liability for a covered loss is ultimately determined to be $100,000, the statutory penalty could not exceed $25,000. That does not mean the policyholder is automatically entitled to $25,000. The court or jury determines whether the statutory requirements have been met and, if so, the amount of any penalty based on the additional expense, loss, or injury caused by the failure to pay, including attorney fees.

How do your Tennessee bad faith insurance penalty lawyers fight for policyholders?

Whether Tennessee’s statutory bad-faith penalty is available depends on the particular policy, claim history, demand, insurer’s stated reasons for its position, investigation, and resulting additional expense or loss. At McWherter Scott & Bobbitt, the issues we may evaluate include:

• The policy language and whether the claimed loss is covered and due
• The evidence concerning causation, scope of damage, and the amount of loss, including expert evidence where appropriate
• Whether the statutory demand and timing requirements have been satisfied
• Whether the insurer had substantial factual or legal grounds for its claim position
• Whether the claim history supports pursuing the contractual benefits owed and the additional statutory penalty
• Any other remedies or interest that may be available under the governing law

At McWherter Scott & Bobbitt, we fight to obtain the insurance proceeds you paid for promptly after the destruction of your property occurs. Our Nashville, Memphis, Knoxville, Chattanooga, and Jackson, TN insurance dispute lawyers evaluate whether Tennessee’s statutory bad-faith penalty may apply based on the policy, claim record, and governing law. Please call us or complete our contact form to schedule a consultation.