A recent Court of Appeals decision on an insurance contract claim brought to light several issues that come up in first-party bad faith claims against insurers. The Court of Appeals recently affirmed a trial court decision of an insurance case in John Riad v. Erie Insurance Exchange, E2013-00288-COA-R3CV, (Tenn. Ct. App. Oct. 31, 2013). Though it affirmed the decision of the trial court, it included a few interesting tidbits related to first-party bad faith claims. One such issue concerned the admissibility of evidence that would ordinarily amount to hearsay and excluded from introduction at trial.
In this case, the trial court excluded testimony offered by Erie Insurance Exchange (“Erie”) concerning denial of the insured’s claim. Erie sought to admit statements made by others along with a letter and attached photographs from a realtor. Both the statements and the letter Erie sought to introduce at trial concerned the property’s condition and were excluded by the trial court as hearsay. Id.
Erie, however, argued the “statements were admissible as non-hearsay statements because they were not offered to establish the truth of the matter asserted but were offered to provide reasoning as to why Erie denied the claim.” Id. The Court of Appeals agreed and noted “[t]he offered evidence should not have been excluded because it was relevant and admissible to establish Erie’s good faith reasoning for denying the claim” though the Court declined to grant a new trial. Id. The evidence to be admitted centered upon Erie’s inability to determine when the damage occurred – an important issue in determining coverage under the policy.
Though the Court of Appeals in Riad did not grant Erie a new trial on the improper exclusion of the statements, it did point out the relevance in a first-party bad faith case of what would ordinarily be excluded as hearsay. In a first-party bad faith case such as in Riad, a plaintiff would necessarily need to demonstrate the insurer’s state of mind at the time of the denial. See Phillips v. N. River Ins. Co., 14 Tenn. App. 356, 365 (Ct. App. 1931); Independent. Life Ins. Co. v. Knight, 2 Tenn. App. 259, 265-66 (Ct. App. 1926); Tennessee Farmers Mut. Ins. Co. v. Hammond, 43 Tenn. App. 62, 121-22, 306 S.W.2d 13, 38-39 (Ct. App. 1957). The Riad case points out that statements are non-hearsay and relevant when provided to demonstrate why the insurer denied the claim as opposed to the truth of the matter asserted, and courts should admit such statements for that purpose in a bad-faith claim against insurance companies.