Insurer’s Refusal to Provide Explanation for Claim Denial Until Litigation Supports Bad Faith Award

The Court of Appeals of Tennessee recently affirmed an award which included bad faith damages against Farmers Mutual of Tennessee where the insurer repeatedly failed to explain to the insured what the basis for the denial of the claim was until the insurer answered certain requests during litigation.

In Burge v. Farmers Mutual of Tennessee,¹ the insureds had applied for insurance coverage on their mobile home and identified one mortgage holder. Following a fire, the insurer denied their claim and the insureds sought information from Farmers as to the basis for the denial. Farmers provided no reason or explanation to the insureds—in fact the insureds were forced to file suit and then figure out the basis of the denial from information provided in the insurer’s discovery responses.

Farmers filed a response to the insured’s summary judgment motion, stating as its basis for denying the claim that the insured property was encumbered by two mortgages when the application was submitted, so there had been a material misrepresentation. The trial court found there was one lien holder—who was listed on the insurance application—and consequently there was no misrepresentation by the insured.

The trial court awarded prejudgment interest and imposed a statutory bad faith penalty of 15%, noting the insurer’s delays, its failure to pursue its claimed defense in an efficient manner, and the “harsh and rude treatment” the insured received from the insurance company adjuster and representatives when they sought information.

The appellate court affirmed the trial court’s award of bad faith damages, noting that the insurer had no substantial legal grounds for failing to pay the claim. The appellate court stated that a simple inquiry would have disclosed that only one mortgage encumbered the property. Specifically, the appellate court indicated that had the insurer explained its position to the insured during the months after the fire, additional documentation could have been provided and any confusion about the mortgage could have been clarified. The appellate court agreed with the trial court’s conclusion that the insurer’s refusal to pay the loss was not in good faith and the penalty awarded matched the attorney’s fees incurred by the insured.
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¹ Burge v. Farmers Mut. of Tennessee, No. M2016-01604, 2017 WL 1372864 (Tenn. App. Apr. 13, 2017).