Court of Appeals of Tennessee Sets Aside Punitive Damages Award Against Insurance Company
In a recent insurance policy case, Lance v. Owner’s Insurance Company, the Court of Appeals of Tennessee set aside a jury’s award of punitive damages in the amount of $267,500 against Owner’s Insurance Company (a subsidiary of Auto-Owner’s Insurance Company). The case involved the complete destruction of the Plaintiff business-owner’s building and inventory.
The Plaintiff owned a retail business which was operated out of a 14,000 square foot building in Polk County, Tennessee. The building and its inventory were completely destroyed by fire in April of 2011. The insurance company’s investigators, as well as the fire department and state officials, determined that the fire was intentionally set. The Plaintiff did not dispute that the fire was intentionally set but denied any involvement with it.
After the fire, the Plaintiff submitted a claim to the insurance company. The company requested additional information. The Plaintiff complied and also submitted a bad faith notice under Tennessee’s bad faith failure to pay statute. (That statute allows an insured to recover damages beyond the actual out-of-pocket loss in an amount up to 25% of the insured’s actual loss).
The insurance company never denied or approved the Plaintiff’s claim, and the Plaintiff filed a breach of contract lawsuit.
The insurance company never denied or approved the Plaintiff’s claim, and the Plaintiff filed a breach of contract lawsuit.
The business-owner’s policy in question, as most do, contained an exclusion for any loss caused by the dishonest or criminal acts of the insured, as well as for any criminal or dishonest acts caused by employees, partners, or anyone entrusted with the insured property. It was this exclusion upon which the insurance company in the Lance case relied.
There was significant proof about the cause of the fire, the Plaintiff’s possible motives to set the fire, and also her possible reasons not to do so. The evidence was clear that the Plaintiff was in personal and financial distress, and that her business was in severe financial trouble. For years, her profits had been falling, and her most recent tax return showed a net income of only $10,000 despite her working 50–60 hours per week.
On the other hand, there was no “smoking gun” evidence linking her to the fire. Several people testified about her devotion to her business, and she testified that her son had threatened to burn down the building during a dispute.
The jury returned a verdict for the Plaintiff of $800,000 in compensatory damages. It also awarded her $12,500 for bad faith failure to pay and $267,500 in punitive damages.
The Court of Appeals set aside both the bad faith damages and the punitive damages. It held that the trial court should have granted the insurance company’s motion for directed verdict on both issues.
The Court of Appeals observed that, under Tennessee law, an insurance company cannot have acted in bad faith if there were “substantial legal grounds” that the policy did not provide coverage. It concluded that, considering the circumstances of the fire, the insurance company had valid reasons to question the loss.
It also set aside the award of punitive damages on the grounds that, in order to recover punitive damages in Tennessee, a plaintiff must prove that the breach of contract was done “intentionally, fraudulently, maliciously, or recklessly.” The Plaintiff had not proven any of those conditions.
Lawyers who handle bad faith insurance claims and cases where punitive damages against an insurance company might be warranted will find the Lance decision more than a little disconcerting. The questions of bad faith and whether or not punitive damages should be awarded are both jury questions. Moreover, the standard for granting a directed verdict, which is what the Court of Appeals held the trial court should have done, is very much tilted in favor of the non-moving party - in the Lance case, the Plaintiff.