Bad Faith Law Clarified

The Tennessee Supreme Court has issued an extremely important decision in the field of bad faith law.

In Johnson v. Tennessee Farmers Mutual Insurance Company, No. E2004-00250-SC-R11-CV  (August 28, 2006), Justice Holder, writing for an unanimous court, reversed the Court of Appeals and upheld a bad faith verdict against Tennessee Farmers.

Johnson sued his own insurer after he got hit for an excess judgment in an auto case.  A 2-1 decision of the Court of Appeals took away a plaintiff’s verdict of $279,430.92 against Tennessee Farmers, saying that the trial judge had not charged the jury correctly on the law of bad faith.  Judge Lee dissented, saying the trial judge had gotten it right. 

The TSC approved these excerpts from the charge to the jury:

[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.

[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.

[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.

More importantly, the Court said what the law was not when it held that it was not error to refuse to give the following requested instructions:

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.

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.

Why was it not error to refuse to give these charges?  "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."

This is a must-read opinion.

It is respectfully suggested that the TSC is not suggesting that the quoted language from the charge must be given in every bad faith case.  The TSC approved the concepts in the charge, and held that (a) the charge as given was not erronous and (b) the language sought to be added to the charge by the defendant was not an accurate statement of the law. 

That being said, the charge includes redundant language that, in my opinion, need not and should not be given. Over time, a charge will be developed that concisely states these points of law.