In Am. Nat’l Prop. & Cas. Co. v. Stutte, 2015 U.S. Dist. LEXIS 55280 (E.D. Tenn. Apr. 28, 2015), a federal court in Tennessee recently ruled that a finding of bad faith can be based on decisions made by the insurer after a declaratory action has been filed.
The claim at issue in this litigation related to the loss of the insured’s home in a fire. The insured made a claim on their policy and the subsequent investigation into the circumstances of the fire led to the insurer finding that the fire had been started deliberately by the insured. Coverage was therefore denied and the insurer filed a declaratory action to clear its obligations under the policy.
Counterclaims against the insurer were subsequently filed by the insured for breach of contract and, having received no response, they amended their pleading to include an allegation of bad faith against the insurer. The allegations were that the insurer breached its duty of good faith not only during the initial investigation, but also over the course of the litigation.
Like in most jurisdictions in the United States, under the laws of Tennessee insurance companies owe a duty of good faith to the persons they insure. While there is no separate tort in Tennessee for a breach of good faith, statutory law allows the insured to seek a penalty of up to 25 percent of the total liability where a claim is denied in bad faith. The question before the court in this action was whether the bad faith finding must be based on the decision to refuse the claim, or whether subsequent decisions made by the insurer to stand by its refusal to cover the loss can be the basis of the determination.
In coming to its decision, the court stated that it did not believe that the legislature meant to sever the insurer’s bad faith obligation at the time that they refuse coverage. It was held that while conduct or strategy relating to the litigation process is not a proper basis for a finding of bad faith, the post-litigation conduct of the insurer, insofar as it relates to the claim or refusal to pay, is relevant as to whether its decision to deny the claim was made in bad faith. If relevant evidence comes to light after the litigations had begun which was relevant to the decision to refuse coverage, the insurer has a duty to consider that evidence and its refusal to do so can be the basis of a bad faith finding.
This case is scheduled for trial on June 16, 2015.