Bad Faith Failure to Pay and Insurance Policies

If an insurance company refuses to pay a claim, can it be held liable for an amount of money in excess of the amount of the claim itself? If an insurance company was entitled to deny a claim, then, obviously, it is not liable for anything. In Tennessee, if an insurance company was obligated to pay a claim, but refused to pay it, under certain circumstances, the insurance company can be liable for a penalty, in addition to the claim amount. In Tennessee, if an insurance company did not act in good faith (if it acted in bad faith) in refusing to pay a payable claim, it can be held liable for a penalty.

Under what circumstances is an insurer liable for bad faith? First, bad faith law only applies in “first party” insurance contracts. “First party” insurance refers to an insurance contract between an insurance company and its insured. If an insurance company fails to pay a claim for which you believe it is responsible to you, you can never recover a bad faith penalty unless you are the holder of the policy of insurance under which payment by the insurance company should be made. In other words, you can never recover a bad faith penalty against an insurance company that insured another person even if that person is responsible to you. For example, if someone causes you damages as the result of some type of conduct, and that person’s insurance company fails to pay you, you cannot recover a bad faith penalty from that insurance company. On the other hand, if your house is damaged, and your insurance company fails to pay a claim made by you, its policyholder, if it is determined that the insurance company acted in bad faith, you may be able to recover a bad faith penalty.

In Tennessee, to recover a bad faith penalty against an insurance company, the policyholder must make a formal demand for payment on the insurance company. In the formal demand, the policyholder must declare the intention to seek the bad faith penalty. Then, the policyholder must allow the insurance company sixty days from the date of the formal demand to pay the claim. If, sixty days after the demand for payment and notice of intent to seek bad faith damages was made, the insurance company does not pay the claim, the insurance company may be held liable for the penalty if the claim should have been paid, and if it is determined that the failure to pay was not in good faith (if it was determined that it was in bad faith).

How much of a penalty may an insurance company which has acted in bad faith be liable to pay? In Tennessee, an insurance company may be held liable for no more than twenty-five percent (25%) of the amount of the claim (which it refused to pay) including any interest due on the claim. The policyholder has the burden of proving that the insurance company did not act in good faith (that it acted in bad faith). Whether or not the insurance company acted in bad faith is a question for the jury unless the case is a non-jury case, in which event, that determination is made by the trial judge.