Tennessee Legislature Repairs the Sinkhole Problem

The Tennessee Legislature recently amended T.C.A. § 56-7-130, the statute requiring insurance carriers offering homeowner’s insurance in the state to “make available” sinkhole coverage to their insureds.  The new statute clarifies sinkhole coverage is optional and available upon request by the insured.  This is important because while the prior statute required insurance companies to “make available” sinkhole coverage, disputes arose over whether carriers were required to affirmatively “offer” sinkhole coverage to their insureds.  The statute now makes it clear sinkhole coverage is not mandated to be included in homeowner property insurance policies – only that such coverage be available for optional purchase on request by policyholders.

The new statute also adds several helpful definitions such as “building stabilization or foundation repairs”, “covered building”, “homeowner property insurance”, “land stabilization”, “primary structural member”, “primary structural system”, and “structural damage” helpful in interpreting the law.  According to the new statute, “sinkhole loss” is further clarified to require coverage for “structural damage” and does not include land stabilization.  Without “structural damage”, as defined by the statute, any other cracking, shrinking, and/or expansion damage would not be covered even if actually caused by a sinkhole unless otherwise covered under the terms of the policy.

The statute requires insurers to follow the statute’s investigation standards only if the insured’s policy contained the sinkhole coverage, something that was less than clear in the previous version of the law.  If sinkhole coverage is provided, upon a claim for sinkhole loss, the carrier must inspect the property.  If structural damage possibly caused by sinkhole activity is present, before a sinkhole claim may be denied, written certification must still be obtained from an engineer or other qualified professional that sinkhole activity did not cause the observed structural damage.

If a loss is covered and determined to be the result of sinkhole activity, the statute speaks directly to how the claim is to be paid.  The carriers, through the terms of their policies, may limit recovery to the Actual Cash Value of the loss, excluding the costs for building stabilization or foundation repair, until the insured actually enters a contract for such building stabilization or foundation repair.  To receive payment in excess of the aforementioned Actual Cash Value:

– The insured must actually repair the damage in accordance with a repair plan approved by the insurer;  and
– The policyholder is required to enter into a contract for foundation and building stabilization repairs within ninety (90) days after the insurer confirms coverage for the loss.

The carrier is required to pay the amounts necessary to begin the repairs and may not require the insured to advance payment for the necessary repairs.  Such repairs are required to be completed within twelve (12) months unless there is mutual agreement; the matter is in litigation, appraisal or litigation; or circumstances beyond the control of the insured.

 The new law takes effect July 1, 2014.  It is a substantial improvement over the previous statute as it provides much needed clarity as to the requirements of insurers in making the coverage available as well as the specific steps required in the event of a covered sinkhole loss.

Tennessee Spoliation of Evidence – Intentionality and Prejudice

The doctrine of spoliation of evidence can cause major problems for both plaintiffs and defendants in civil litigation.  Often times, months or years pass before the defendant is notified of a claim.  As a result, defendants may have no notice that there is a duty to preserve evidence relevant to future litigation until after the evidence is discarded, lost or destroyed during the normal course of business.  It is paramount, therefore, that businesses understand the rules associated with spoliation of evidence and adopt sound policies and procedures to (a) identify a potential claim; and (b) take reasonable steps to preserve evidence material to the claim.

As a general matter, spoliation of evidence permits a court to draw a negative inference against a party that has intentionally, and for improper purpose, destroyed, mutilated, lost, altered or concealed evidence.  Bronson v. Umphries, 138 S.W.3d 844, 854 (Tenn. Ct. App. 2003); Leatherwood v. Wadley, 121 S.W.3d 682, 703 (Tenn. Ct. App. 2003); Foley v. St. Thomas Hospital, 906 S.W.2d 448, 453-54 (Tenn. Ct. App. 1995)).  Federal courts in the Sixth Circuit also require some showing of intentional destruction of evidence before a spoliation sanction is appropriate.  Atkins v. Wolever, 554 F.3d 65 (6th Cir. 2012); Beaven v. U.S. Dept. of J., 622 F.3d 540 (6th Cir. 2010).

However, amendments to the Tennessee Rules of Procedure, as well as several unreported Tennessee cases, began calling into question the type of proof required before a court may impose a spoliation sanction.  Rule 37A.02 of the Tennessee Rules of Civil Procedure states that a sanction “… may be imposed upon a party or an agent of a party who discards, destroys, mutilates, alters, or conceals evidence.”  Tenn. R. Civ. Pro. 34A.02.  There is no culpable mind state included in this rule.  In Cincinnati Ins. Co. v. Mid-S. Drillers Supply, Inc., 2008 WL 220287 (Tenn. Ct. App., Jan. 25, 2008), the Tennessee Court of Appeals pointed out that “nowhere in Rule 34A does it state that a finding of intentional destruction of evidence is permitted before a trial can order sanctions under Rule 37.”  Id. at *4.  The court held “. . . the trial court has discretion to sanction a party by dismissal of its case where the party’s destruction of evidence severely prejudices an adverse party’s defense irrespective of whether the destruction was inadvertent or intentional.”  Id. at *1.

But, following the Cincinnati case, the Court of Appeals has repeatedly held that the doctrine of spoliation only permits a court to draw a negative inference against a party who has intentionally, and for improper purpose, destroyed, mutilated, lost, altered, or concealed evidence.  Fuller v. City of Memphis, 2012 WL 3201937, at *5 (Tenn. Ct. App., August 8, 2012); Hensley v. Duke, 2010 WL 845385, at *9 (Tenn. Ct. App., March 10, 2010); Kincade v. Jiffy Lube, 2008 WL 1970348, at *4 (Tenn. Ct. App., May 8, 2008).  In Fuller v. City of Memphis, the court reiterated that the negative inference only arises “… when the spoliation occurs in circumstances indicating fraud and a desire to suppress the truth.  It does not arise when the destruction was a matter of routine with no fraudulent intent.”  Id. at *5.

Accordingly, although the current status quo appears to require a showing of intent, it is clear that trial courts have wide discretion in determining the appropriate sanction to be imposed for discovery violations and that such discretion will only be set aside on appeal when the court has misconstrued or misapplied the controlling legal principal.  Mercer v. Vanderbilt University, Inc., 134 S.W.3d 121, 133 (Tenn. 2004).  Hopefully, the Tennessee Supreme Court will clarify what standard applies in determining whether or not a spoliation sanction is appropriate.  In the meantime, it is incredibly important for businesses to use due diligence to protect and preserve any evidence that may relate to civil litigation, including standardization of incident reports for all incidents involving injury on premises.  It is equally important that any incident reports be communicated to the appropriate risk managers for evaluation and appropriate action.

If your business needs advise concerning risk management or evidence preservation, please do not hesitate to contact me.