Agent and Insurer Liability Post Procurement of Policy in Tennessee

The Court of Appeals recently had an opportunity to revisit the issue of agent negligence when procuring the wrong coverage for an insured.  In Steven Barrick and Janice Barrick v. State Farm Automobile Insurance Company and Thomas Harry Jones No. M2013-01773-COA-R3-CV, (Tenn. Ct. App. 2014), the Barricks initially obtained automobile insurance through State Farm with Thomas Jones as their agent from 1985 until 2009.  Id.  The Barricks’ lawsuit alleged both State Farm and Jones had a duty of care to advise the Barricks of their need for increased coverage after the initial procurement of the policy.

While operating an insured vehicle, Mr. Barrick struck a motorcyclist who died at the scene of the collision.  The motorcyclist’s survivors filed a complaint against him which subsequently settled for $200,000.00.  However, the Barricks’ policy with State Farm had limits of $100,000.00 per person and $300,000.00 per occurrence.  Thus, the Barricks paid $100,000.00 more than their coverage allowed out of their own pocket.  Id.

The Barricks claimed State Farm and Jones were negligent.  A second amended complaint alleged Jones (the agent) was negligent because he had a special relationship with the Barricks where he not only recommended but also selected liability coverage and limits for the Barricks’ policies.  The Barricks claimed this created additional duties beyond those of the ordinary insurance agent.  The Barricks also argued State Farm was vicariously liable for Mr. Jones’ negligence.

The trial court granted summary judgment for the defendants and found both State Farm and Mr. Jones affirmatively negated the element of duty within the Barricks’ claim or that the established element of duty could not be proved at trial.  Further, the trial court specifically found Mr. Jones’ duty to the Barricks ended once he obtained the initial insurance coverage, and owed no further duty to the Barricks to select appropriate coverages or limits thereafter.

This particular case was governed by the summary judgment standard referenced in Hannan, et al v. Alltel Publishing Company, 270 S.W.3d 1, 8 (Tenn. 2008).  Under Hannan, it is not enough for a moving party to challenge another party to “put up or shut up”.  The Barricks alleged Mr. Jones’ assumed duties beyond those of an ordinary insurance agent.  Relying upon Bennett v. Trevecca Nazarene Univ., 216 S.W.3d 293 (Tenn. 2007), the court decided it can apply the principle of assumption of duty to this case.  In other words, if Jones regularly recommended and selected coverage for the Barricks, he had a duty to do so with reasonable care.  The court determined that under the Hannan standard, summary judgment was not appropriate because there could be facts to establish in assumption of duty.  Further, the court determined that State Farm could not be granted summary judgment for the same reasons in that he could still be found vicariously liable for its agent’s acts.

This case reiterates that neither an agent nor the insurance carrier has a duty to the insureds after the initial policy or coverages had been procured.  However, such a duty might exist if the agent continues to select or recommend coverages for the insured after the initial procurement of the policy.  The insurance carrier can be found vicariously liable for an agent’s breach of duty under both situations.

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.

Offer of Settlement Triggers Policy’s Suit Limitation Clause

Most homeowners’ policies and other commercial property insurance policies contain suit limitations clauses, also known as “Suit Against Us” clauses, limiting the time period upon which an insured may bring suit against the insurer.  Tennessee Courts have considered such clauses with respect to denials of claims, demands for proof of loss, etc.  However, the Court of Appeals recently considered the clause in light of an offer of settlement by an insurer in Donald Chill, et al. v. Tennessee Farmers Mutual Insurance Company, E2012-01675-COA-R3-CV, 2013 WL 3964272 (Tenn. Ct. App. 2013).  The Court held the insurance carrier’s offer of settlement triggered the suit limitation clause of the insurance carrier’s policy.  Id.

Tennessee Farmers Mutual Insurance Company (“Tennessee Farmers”) issued a homeowners policy to Donald Chill and his wife, Martha Chill, generally providing coverage for losses due to earthquake.  Such an earthquake struck the Tellico Village area of Loudon County on or about May 3, 2005 and allegedly caused damage to the Chills’ home.  Tennessee Farmers initially found the damage claimed was not the result of an earthquake, and thus, denied the claim.  Subsequently, however, Tennessee Farmers conducted additional investigation and found the property was damaged by an earthquake after all.  Tennessee Farmers offered $88,086.49 for the covered damages on or about September 28, 2008.  Id.

The Chills did not agree the amount tendered represented the actual amount of earthquake damage to their property and eventually filed suit against Tennessee Farmers.  Tennessee Farmers answered and admitted coverage applied to their claim, but filed a motion for judgment on the pleadings on the basis the Chills’ lawsuit was time-barred as brought beyond the contractual limitations period set forth in the “Suit Against Us” clause of the policy.  That particular clause required “[a]ny legal action against [Tennessee Farmers] must be brought within one year from the date of loss.”

Tennessee Courts generally enforce such contractual limitation periods in insurance policies.  Guthrie v. Conn. Indem. Ass’n, 49 S.W. 829, 830 (Tenn. 1899); Gagne v. State Farm Fire & Cas. Co., 2012 WL 691621 at *2 (Tenn. Ct. App.); Certain Underwriters at Lloyd’s of London v. Transcarriers Inc., 107 S.W.3d 496, 499 (Tenn. Ct. App. 2002).  However, rarely does a court hold that such limitations period begins to run as of the actual date of the loss.  Instead, such limitations period begin to run upon the accrual of a cause of action against the insurance carrier.  Phoenix Ins. Co. v. Fidelity & Deposit Co., 162 Tenn. 427, 37 S.W.2d 119 (1931); Federal Sav. & Loan Ins. Corp. v. Aetna Cas. & Sur. Co., 701 F.Supp. 1357, 1362 (E.D.Tenn.1988).  Such cause of action can begin to run after the end of an immunity period during which an insured may not bring suit, or upon denial of the claim by the insurer.  Boston Marine Ins. Co. v. Scales, 101 Tenn. 628, 49 S.W. 743, 747 (1898); Home Ins. Co. v. Hancock, 106 Tenn. 513, 62 S.W. 145, (1900).

Because of Tennessee Farmers’ original denial and subsequent settlement offer, the court considered the case of Das v. State Farm Fire & Cas. Co., 713 S.W.2d 318 (Tenn. Ct. App. 1986), where the insurance carrier initially denied an insured’s claim but later issued a subsequent denial four months and nine days after the initial denial.  Id.  In that case, the court held that an opportunity of the insured to bring a suit after the last denial is the most that the insured should expect to receive.  Id.

Here, the Chill loss occurred on May 3, 2005, but Tennessee Farmers tendered settlement offer on September 28, 2008.  The Chills’ own complaint alleged disagreement with the carrier’s damage assessment and their refusal to accept the settlement, but they waited until April 3, 2012 to file their suit – more than three years after the settlement offer was rejected.  Consequently, the court found their action was time-barred by the contractual “suit against us” clause contained in the policy as suit was file more than three years after the settlement offer.  Thus, where an offer of settlement is made to an insured forming the basis of dispute, such as in the Chill case, courts will likely apply the suit limitations clause from the date of the settlement offer absent any other circumstances or explanation for the late-filing of a suit.