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It seems to be more and more common. I see language in demand letters in tort cases making a demand for policy limits with the caveat that failure to settle for policy limits is “bad faith” on the part of the insurer and “opens” the insurance policy. What does this mean?

The threat is that failure to pay the policy limits by the insurer, and in the event of a judgment in excess of the insurer’s policy limits, will result in an “open” insurance policy and permit collection against the insurer in an amount in excess of the insurer’s policy limits. But, is it just that easy?

No. It is always going to be on a case-by-case basis.

Insurers have an obligation to act reasonably and protect their insureds. Failure to act reasonably in the protection of the insured may trigger a bad faith claim. Bad faith is defined by "the idea of willingness [of the insurer] to gamble with the insured's money in an attempt to save its own money or as an intentional disregard of the financial interests of the plaintiff in the hope of escaping full liability imposed upon it by its policy." Perry v. United States Fidelity & Guaranty Co., 49, Tenn. App. 662, 674 (1962). A reasonable dispute over the value of a claim, or the relatedness of injuries to an event, does not rise to the level of bad faith. In Tennessee, the Supreme Court has held that it is not bad faith to refuse to negotiate when there was an honest belief that the insured's act was not the proximate cause of the accident and that all liability could be avoided on that basis. Alford v. National Emblem Ins. Co., 225 Tenn. 379, 469 S.W.2d 375, 378 (Tenn. 1971).

Insurers must look at what information has been provided and/or learned in order to evaluate the claim. I think this includes what is provided by plaintiff’s counsel (or the pre-litigation claimant) and what is learned in discovery. I am sure there are going to be the most obvious cases where discovery is not necessary and the policy limits should be paid. However, many, many times the parties are going to have to engage in discovery and sort out the basis for the claim in order for the insurer to conduct an appropriate evaluation.

Did the insurer act reasonably with the information that was provided? For example, did the insurer have all of the information necessary to evaluate the claim and did the insurer act timely? “An insurer having exclusive control over the investigation and settlement of a claim may be held liable by the insured for an amount in excess of the policy limits if, as a result of bad faith, it fails to effect settlement within the policy limits; and this may be true even though the injured party did not make an offer of settlement within the policy limits. However, in order to prevail in such a case, the insured must prove that the failure to settle within policy limits is fraudulent or in bad faith". Johnson v. Tennessee Farmers Mutual Ins. Co., 2005 Tenn. App. LEXIS 142 at *29. Bad faith can be premised on conduct that is either fraudulent or in bad faith. Southern Fire & Casualty Co. v. Norris, 250 S.W.2d at 790.

This is only a brief discussion and very general overview of the law. It is always going to be a case-by-case basis. What is important to remember is that simply refusing to pay policy limits by the insurer is not in and of itself bad faith contrary to what may be stated in a demand letter. The demand must be supported; the claim must be of a value that equal to or in excess of an insured’s policy limits; the judgment/verdict must exceed the policy limits; and, it must proven that the insurer was acting either fraudulently or in bad faith in order to prevail on a bad faith claim and “open” an insurance policy.

Tommy Santel is a co-founding partner of Santel | Garner. Tommy is a former government prosecutor. He is a Tennessee Supreme Court Rule 31 General Civil Mediator. Tommy’s practice areas include criminal defense and civil litigation.

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