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Chapter 11: Bad Faith Failure to Settle (Common Law Claim)

§11.1 Generally

The Case: Johnson v. Tennessee Farms Mut. Ins. Co., 205 S.W.3d 365 (Tenn. 2006).

The Basic Facts: Plaintiff was involved in an automobile collision with another motorist and was named as a defendant in a personal injury suit. Plaintiff brought a bad faith action against his insurance carrier after the insurer refused to settle for the policy limits with the other driver and the other driver won a judgment against Plaintiff for an amount substantially over the policy limit.

The Bottom Line:

  • "'It is well established that an insurer having exclusive control over the investigation and settlement of a claim may be held liable to its insured for an amount in excess of its policy limits if as a result of bad faith it fails to effect a settlement within the policy limits.' State Auto. Ins. Co. of Columbus, Ohio v. Rowland, 427 S.W.2d 30, 33 (Tenn. 1968). Bad faith refusal to settle is defined, in part, as an insurer's disregard or demonstrable indifference toward the interests of its insured. See S. Fire & Cas. Co. v. Norris, 250 S.W.2d 785, 790-91 (Tenn. Ct. App. 1952). This indifference may be proved circumstantially. Id. at 91. Bad faith on the part of the insurer can be proved by facts that tend to show 'a willingness on the part of the insurer to gamble with the insured's money in an attempt to save its own money or any intentional disregard of the financial interests of the plaintiff in the hope of escaping full liability imposed upon it by its policy.' Goings v. Aetna Cas. & Sur. Co., 491 S.W.2d 847, 849 (Tenn. Ct. App. 1972). If the claim exceeds the policy limits, then the insurer's conduct is subject to close scrutiny because there is a potential conflict of interest between the insurer and the insured. Tenn. Farmers Mut. Ins. Co. v. Wood, 277 F.2d 21, 35 (6th Cir. 1960)." 205 S.W.3d at 370.
  • "To discharge its duty to act in good faith, an insurer must exercise ordinary care and diligence in investigating the claim and the extent of damage for which the insured may be held liable. S. Fire & Cas. Co., 250 S.W.2d at 790‑91. The manner in which the insurer investigates the case 'has an important bearing upon the question of bad faith in refusing or failing to settle the claim.' Id. at 791. Ordinary care and diligence in investigation require the insurer to investigate the claim to such an extent that it can exercise an honest judgment regarding whether the claim should be settled. Perry v. U.S. Fid. & Guar. Co., 359 S.W.2d 1, 6‑7 (Tenn. Ct. App. 1962). Courts must review the facts that were known to the insurer and its agents and that should have been considered in deciding whether to settle. Id . at 7." Id. at 370-71.
  • "Mere negligence is not sufficient to impose liability for failure to settle. S. Fire & Cas. Co., 250 S.W.2d at 792. Moreover, an insurer's mistaken judgment is not bad faith if it was made honestly and followed an investigation performed with ordinary care and diligence. Perry, 359 S.W.2d at 7. However, negligence may be considered along with other circumstantial evidence to suggest an indifference toward an insured's interest. S. Fire & Cas. Co., 250 S.W.2d at 790‑91. The question of an insurance company's bad faith is for the jury if from all of the evidence it appears that there is a reasonable basis for disagreement among reasonable minds as to the bad faith of the insurance company in the handling of the claim. Id. at 790." Id. at 371.

  • "The fourth special jury instruction requested by Tennessee Farmers was as follows:
    Mere negligence on the part of an insurance company in failing to settle a claim against its insured is not sufficient to impose liability against the insurance company. Before an insurance company can be held liable for failing to compromise or settle a claim, the refusal to settle within the policy limit must be fraudulent or in bad faith."
    Id . at 372.
  • "The trial court's general charge instructed the jury that a mere mistake in judgment is not sufficient to impose liability for bad faith refusal to settle and stated that the failure to settle a case based upon a mistake in judgment is not bad faith if the company made an honest judgment based upon an adequate investigation. The trial court instructed the jury that
    [a] mere mistake in judgment by the insurance company does not constitute quote 'bad faith' end quote. Quote 'bad faith' by the insurance company is, one, failure to investigate a claim to such an extent that it would be in a position to exercise honest judgment as to whether a claim should be settled, or two, failure to fairly consider the facts relative to the accident and a claimant's injuries known to it whether they are the actual facts or not and deciding whether the insured should or should not settle, or three, failure of the insured [sic] with the right to control the litigation and settlement to fairly consider the rights and interest of the insured as compared to the interest of the insurance company."
    Id .
  • "The trial court further explained that
    [a] mere mistake in judgment will not constitute bad faith, that is, if the insurer dealt fairly with the insured and acted honestly and according to its best judgment, it is not liable as it owed its insured no duty to settle merely because a settlement could be made within the limits of the policy."
    Id .
  • "Finally, the trial court stated that
    [i]f Tennessee Farmers made an honest judgment and fair investigation of the claim against Robert Johnson and exercised reasonable judgment based upon that investigation, then a mistake in judgment is not bad faith and will not render it liable for failure to settle the claim. There's no duty to settle a claim merely because settlement could have been reached within the policy limits. If a failure to negotiate a settlement is a result of a reasonable business judgment made after weighing all of the interests, then there is no liability, even if the decision not to settle turns out to be quite wrong."
    Id . at 372-73.
  • "The trial court's charge is a correct statement of the law. The trial court, however, did not charge the jury that fraud could be an alternate basis for finding a bad faith refusal to settle. Because Johnson neither alleged nor sought to prove fraud, the trial court properly declined to give an instruction concerning fraudulent behavior." Id. at 373.
  • "The sixth special jury instruction requested by Tennessee Farmers was as follows:
    Bad faith embraces more than bad judgment or negligence and it imports a dishonest purpose, moral obliquity, conscious wrongdoing, breach of a known duty through some ulterior motive or ill will partaking of the nature of fraud, and it embraces an actual intent to mislead or deceive another.
    We are aware of no Tennessee cases holding that an insured must prove dishonest purpose, moral obliquity, conscious wrongdoing, breach of a known duty through some ulterior motive or ill will 'partaking of the nature of fraud,' or an actual intent to mislead or deceive another to obtain a judgment for bad faith refusal to settle. Although this requested instruction properly states that 'negligence' and 'bad judgment' are not enough to establish bad faith, this instruction was adequately covered in the trial court's jury charge. See id. We hold that the trial court properly declined to give this requested instruction." Id.
  • "The fourteenth special jury instruction requested by Tennessee Farmers was as follows:
    Bad faith on the part of an insurer is a frivolous or unfounded refusal to pay the proceeds of the insurance policy. Such conduct imports a dishonest purpose and means a breach of the duty of good faith and fair dealing through some motive of self‑interest or ill will. Mere negligence or bad judgment is not bad faith."
    Id .
  • "This requested instruction is similar to Special Jury Instruction Request No. 6 in suggesting that bad faith requires evidence that the insurer acted with dishonesty, ill will, or deceit. Tennessee law does not require such proof to prevail in an action for bad faith refusal to settle. The trial court did not err in declining to charge this requested instruction." Id.
  • "The twelfth special jury instruction requested by Tennessee Farmers was as follows:
    I charge you that Tennessee Farmers did not have any duty to settle or pay the uninsured motorist claims of either Christopher Moore or Robert Johnson unless or until they [sic] obtained a judgment against John Doe."
    Id .
  • "Johnson testified that Tennessee Farmers did not pay his UM policy limits in his suit against John Doe before he filed the bad faith suit against Tennessee Farmers. Tennessee Farmers presented undisputed proof that it was not legally obligated to make the UM payment prior to trial or to a jury determination of fault. Tennessee Farmers also argued in its defense that the pre-trial timing of the UM payments was evidence of its good faith. In permitting this evidence to be considered by the jury, the trial court stated:
    Ladies and gentlemen of the jury, I'm going to let this proof in for one very limited purpose . . . . I'm allowing this proof only for you to consider, along with everything else as it relates to circumstantial evidence, as to whether or not it was bad faith on failure to pay the liability claims. I want to make it clear. There can be no recovery, and whether you agree or disagree or whether [Tennessee Farmers] should or shouldn't have paid it quicker, sooner, or not at all, is irrelevant other than as to how this proof relates to whether or not [Tennessee Farmers is] guilty of bad faith on the liability claim."
    Id . at 374.
  • "In addition, the trial court correctly instructed the jury that '[w]hether or not Tennessee Farmers properly paid or improperly delayed payment of Mr. Johnson's uninsured motorist claim does not mean they [sic] are guilty of bad faith in failing to pay the claim of Mr. Moore on Mr. Johnson's liability coverage.' Both instructions informed the jury that it was not to consider whether Tennessee Farmers had a duty to pay the UM claims prior to trial in determining whether Tennessee Farmers had acted in bad faith. The jury is presumed to have followed the instructions of the trial court. State v. Reid, 164 S.W.3d 286, 346 (Tenn. 2005). In light of the proof and the instructions, we hold that the trial court's refusal to charge this special jury instruction was not prejudicial error." Id.

Other Sources of Note: Can Do, Inc. Pension and Profit Sharing Plan and Successor Plans v. Marrier, Herod , 922 S.W.2d 865, 866-867 (Tenn. 1996) (discussing assignability of choses in action); Dillingham v. Tri-State Ins. Co., 381 S.W.2d 914, 917-19 (Tenn. 1964) (cause of action against an insurer for alleged bad faith or negligence in refusing to settle an insurance claim within the policy limit is not assignable under Tennessee law); Southern Fire & Cas. Co. v. Norris, 250 S.W.2d 785, 790 (Tenn. Ct. App. 1952) (noting that "courts seem to be unanimous in holding an insurer liable in tort for an excess over the policy limit where … it has exclusive control over investigation and settlement of claims and its refusal to settle within the policy limit is fraudulent or in bad faith.").

After an accident, many injury victims and their families want more information on the accident and their legal rights. Consequently, many of them have found their way to these pages. While we are happy you are here, please understand Day on Torts: Leading Cases in Tennessee Tort Law was written to be a quick, invaluable reference for Tennessee tort lawyers. While the book provides the leading case for more than 300 tort law subjects and thousands of related case citations, it is not a substitute for personalized legal advice from a qualified lawyer.

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The foregoing is an excerpt from Day on Torts: Leading Cases in Tennessee Tort Law, published by John A. Day, Civil Trial Specialist, Fellow in the American College of Trial Lawyers, recipient of Best Lawyers in America recognition, Martindale-Hubbell AV® Preeminent™ rated attorney, and Top 100 Tennessee Mid-South Super Lawyers designee. Read John’s full bio here.

The book is now available electronically by subscription at The new format allows us to keep the book current as new opinions are released. BirdDog Law also has John's Tennessee Law of Civil Trial and Compendium of Tennessee Tort Reform Statutes available by subscription, as well as multiple free resources to help Tennessee lawyers serve their clients

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