“Reverse” Bad Faith – Insurers Can Actually Recover for an Insured’s Bad Faith in Bringing a Lawsuit

Those who have worked in the insurance industry are familiar with threats of lawsuits alleging bad faith, and many have actually been involved in such lawsuits seeking bad faith penalties.  What may be less-known is a provision in the Tennessee Code that actually allows insurance carriers to bring suit against the insured for bad faith.  That statute provides as follows:

In the event it is made to appear to the court or jury trying the cause that the action of the policyholder in bringing the suit was not in good faith, and recovery under the policy is not had, the policyholder shall be liable to the insurance company, corporation, firm, or person in a sum not exceeding twenty-five percent (25%) of the amount of the loss claimed under the policy; provided, that the liability, within the limits prescribed, shall, in the discretion of the court or jury trying the cause, be measured by the additional expense, loss, or injury inflicted upon the defendant by reason of the suit.

Tenn. Code Ann. § 56-7-106.  Based upon the plain language of the statute, if an insured brings an action against the carrier, deemed not to be in good faith, and the insured does not recover under the policy, the insured is instead liable to the insurance company.  Up to 25% of the amount of loss claimed by the insured may be recovered, but the amount is in the discretion of the court or jury.  Id.  Any award is measured by the additional expenses, loss or injury caused to the insurance company because of the suit.  Id.

The case of Harrison v. National Life & Accident Ins. Co., 145 S.W.2d 1023 (1940), makes it clear the insurer’s rights under T.C.A. § 56-7-106 are vested at the time of the insured’s action, and becomes an actual part of the controversy.  Id. at 1024.  No independent action by the insurance company is required.  Id.  Even if an insured’s claim is determined by a court to void, such a determination does not prevent the carrier from seeking the penalty, because the carrier’s right is vested at the moment the insured files his complaint.  Adams v. Tennessee Farmers Mut. Ins. Co., 898 S.W.2d 216, 219 (Tenn. Ct. App. 1994).

An example of conduct amounting to insured bad-faith can be found in the Harrison case noted above.  In that case, the insured:

at the time he instituted this suit knew that [insurance company] was not in any wise indebted to him; that he had some months previously been paid every cent that was due him upon any and all policies in which the plaintiff may have had an interest, and had no reasonable basis for expecting the obtaining of a judgment in his favor.

Harrison at 1025.  At least one court, however, found that officers of a corporation did not act in bad faith when acting on advice of counsel to bring suit.  World Secret Serv. Ass’n v. Travelers Indem. Co., 396 S.W.2d 848, 854 (Tenn. Ct. App. 1965). 

Awarding this “reverse” bad faith penalty is completely up to the judge or jury hearing the case.  The few cases where the penalty was discussed demonstrate the key to making the award is based upon the insured’s instituting an action with knowledge that there is no basis to recover under the policy.  While recovery is unavailable for an “honest” dispute, the penalty is a tool that can be used by insurers when faced with frivolous legal actions by insureds where there is absolutely no basis for an insured’s claim and results in the carrier incurring costs and expenses.  Because the carrier has no “reverse” bad faith claim until the insured actually files suit, this remedy is not available simply where the insured makes a frivolous claim under a policy of insurance.

Insured vs. Insurer – Who Bears the Burden in an Arson Case?

Consider a fire claim under a homeowner’s policy where the carrier believes the insured, or someone at their direction, burned their home.  When suit is eventually filed after denial of the claim, what burden does the insured bear?  What about the insurer?  Obviously, fire itself is typically a covered cause of loss, but it is certainly not covered when the insured intentionally burns the home to recover insurance proceeds.

Tennessee law clearly provides an insured has the initial burden to prove by a preponderance of the evidence that a loss comes within terms of the policy.  Se. Mental Health Ctr., Inc. v. Pac. Ins. Co., Ltd., 439 F. Supp. 2d 831, 835 (W.D. Tenn. 2006); Johnson v. Allstate Ins. Co., 2000 WL 1156642, *7 (Tenn. Ct. App. Aug. 16, 2000).  Most homeowner policies provide coverage pursuant to a provision requiring an “accidental direct physical loss” to covered property.  Thus, coverage would only apply in the event of an accidental loss – not an intentionally set fire.

So what must the insured prove?  In Tennessee, “there is a presumption that the burning of property is the result of an accidental cause.”  Johnson, at *7 (citing Ricketts v. State, 241 S.W.2d 604 (Tenn.1951)).  An insured meets this presumptive burden by simply testifying he did not set the fire and does not know who did it.  Id.  However, even though such a presumption exists, it can be extinguished if the insurance company comes forward with sufficient rebuttal evidence.  Much like a “bursting bubble,” if an adverse party comes forward with sufficient rebuttal evidence, any initial presumption disappears.  Farace v. Indep. Fire Ins. Co., 699 F.2d 204, n. 4 (5th Cir. 1983).   Thus, it is possible that the insurance company can come forward with sufficient rebuttal evidence to defeat any presumption that the fire was “accidental.”  In such a case, the insured should be required to otherwise prove they suffered an accidental physical loss by a preponderance of the evidence.  HCA, Inc. v. Am. Prot. Ins. Co., 174 S.W.3d 184, 188 (Tenn. Ct. App. 2005).

This burden may or may not be easily met by the insured, but it is nonetheless an initial burden of proof which is separate and apart from the carrier’s burden to prove the arson defense or an intentional act.  However, once the insured meets his burden, how can the insurer defend?

To succeed on an arson defense in Tennessee, an insurer “must show by a preponderance of the evidence that the loss was due to a fire of incendiary origin, that the insured had an opportunity to set the fire, and that he had a motive to do so.”  McReynolds v. Cherokee Ins. Co., 815 S.W.2d 208, 211 (Tenn.Ct.App.1991); see also Walters v. Tennessee Farmers Mut. Ins. Co., 873 S.W.2d 691, 693-94 (Tenn. Ct. App. 1993); Sowards v. Grange Mut. Cas. Co., 3:07-CV-0354, 2008 WL 3164523 (M.D. Tenn. Aug. 4, 2008).  “The rule as to admissibility of circumstantial evidence is liberal in such a case.”  Id.  Arson may be proved by simple preponderance of the evidence and may be by circumstantial evidence.  Id.  Tennessee law provides an insurer succeeds or “prevail[s]” in the arson defense by proving the above three elements by a preponderance of evidence.  Guess v. Grange Mut. Cas. Co., 4:05-CV-40, 2007 WL 2897892 (E.D. Tenn. Sept. 28, 2007) referencing McReynolds v. Cherokee Insurance Co ., 815 S.W.2d 208, 211 (Tenn.Ct.App.1991).