Opinion
CASE NO. 8:03CV48
January 6, 2004
MEMORANDUM AND ORDER
This matter is before the Court on a Plaintiff's Appeal (Filing No. 21) from the July 24, 2003, Order of Magistrate Judge F.A. Gossett, in which he granted in part and denied in part the Plaintiff's Motion to Amend the Complaint. Judge Gossett denied the motion to add a claim for a statutory bad-faith penalty pursuant to Tenn. Code Ann. § 56-7-105, from which Plaintiff takes this appeal. Judge Gossett also denied the part of the motion that sought to add a common law claim for punitive damages under Tennessee law, and he granted the motion to enable Plaintiff to correct typographical errors in the original Petition. Plaintiff does not appeal from those portions of the Order. In addition, Plaintiff has filed a Motion for Leave to File a Reply Brief in Support of the Appeal (Filing No. 24), which is granted.
The parties agree that for purposes of this motion only, Tennessee law applies. At this juncture, I find no reason to disagree.
Plaintiff Deanna Liddy commenced this action against Defendant UNUM Life Insurance Company of America ("UNUM") alleging breach of contract and bad faith refusal to pay in connection a long-term disability insurance policy. Liddy alleges that she was covered under a group policy written by UNUM and made available to her through her former employer, the University of Nebraska at Omaha. In 1994, Liddy was diagnosed with Primary Biliary Cirrhosis. She was asymptomatic at the time of her diagnosis, but her health gradually worsened. In June 2000 she stopped working, and in August 2000, her employment with the University ended. In February 1991, she submitted a claim for long-term disability insurance benefits under the group policy, but her initial claim and three subsequent appeals to the insurer were denied. This lawsuit, which was commenced in state court and removed to this Court, followed.
Standard of Review
Pursuant to 28 U.S.C. § 636(b)(1)(A) and NELR 72.3, the Court has reviewed the orders from which these appeals have been taken and the parties' briefs offered in support of their respective positions. In an appeal from a magistrate judge's order on a pretrial matter within 28 U.S.C. § 636(b)(1)(A), a district court may set aside any part of the magistrate judge's order shown to be clearly erroneous or contrary to law. 28 U.S.C. § 636(b)(1)(A); NELR 72.3(d); United States v. Apker, 139 F.R.D. 129, 131 (D. Neb. 1991). I have considered all the briefs, and I have carefully reviewed the July 24, 2003, Order. For the following reasons, I shall deny Plaintiff's appeal.
ANALYSIS
While it is true that leave to amend a complaint should be freely given, "[g]ood reason to deny leave to amend exists if the amendment would be futile." Williams v. Little Rock Mun. Water Works, 21 F.3d 218, 225 (8th Cir. 1994) citing Foman v. Davis, 371 U.S. 178, 182 (1962). In her appeal, Liddy contends that Judge Gossett failed to give a reason for his decision to deny the amendment to add a claim for the statutory bad faith penalty. Relying on Rice v. Van Wagoner Cos., Inc., 738 F. Supp.2d 252 (W.D. Tenn. 1990), and authorities cited therein, Judge Gossett found that a claim of bad faith refusal to pay an insurance claim is not the kind of egregious conduct that is required to support a punitive damages claim, and he denied the motion to amend, concluding that Liddy's proposed claims for punitive damages and for statutory bad faith damages would be futile.
I agree with Judge Gossett's conclusion that allowing amendment to add a claim for the statutory bad faith damages would be futile, though for a different reason. While the Rice decision contains a lengthy discussion of § 56-7-105, it does not address the notice requirement of the statute. Because I conclude that the proposed Amended Complaint contains no allegations that demonstrate that Liddy satisfied the demand requirement that is a condition precedent to allowing statutory bad-faith damages under Tenn. Code Ann. § 56-7-105, I will deny the appeal.
Tennessee courts have required a plaintiff to comply with four requirements before recovery of the statutory penalty under § 56-7-105 is permitted.
Before there can be a recovery of the penalty, (1) the policy of insurance must, by its terms, have become due and payable, (2) a formal demand for payment must have been made, (3) the insured must have waited 60 days after making demand before filing suit (unless there was a refusal to pay prior to the expiration of the 60 days), and (4) the refusal to pay must not have been in good faith.Minton v. Tennessee Farmers Mut. Ins. Co., 832 S.W.2d 35, 38 (Tenn.Ct.App. 1992) citing Palmer v. Nationwide Mut. Fire Insurance Co., 723 S.W.2d 124, 126 (Tenn.Ct.App. 1986).
In Walker v. Tennessee Farmers Mut. Ins. Co., 568 S.W.2d 103 (Tenn.Ct.App. 1977), the Tennessee Court of Appeals held that a plaintiff's failure to make a formal demand on a defendant insurer was fatal to the plaintiff's claim for the statutory bad-faith damages under Tenn. Code Ann. § 56-1105 — the precursor to Tenn. Code Ann. § 56-7-105. The Walker court observed that "it is incumbent upon the Plaintiff to show compliance" with the statutory demand requirements, even when a court might reasonably conclude that such a demand would have been refused. The Walker Court relied on an earlier Tennessee Supreme Court decision that employed the following logic:
The demand provided for in the statute is intended to operate as a fair warning to the insurer that the penalty will be claimed, on failure to pay within 60 days. It is not improper or unjust that such warning should be required. This requirement does not have any bearing upon the right of the insured to enforce the contract itself. Immediately upon the maturing of the policy under its terms, the arising of the duty to pay, the insured may bring suit to enforce the contract. The penalty statute gives an additional right. Its purpose was to supersede the necessity of suit, or, in case suit should finally have to be brought as a result of the delinquency of the insurer, then to indemnify the insured against delay interposed and defense made in bad faith; the underlying thought being that the insurers on formal demand so made would, noting the warning, thereby be induced to pay the loss without suit, in the absence of some real and bona fide defense. Is it not better that the insured should in this simple manner hasten the payment of the loss within two months than that suit should be brought immediately on the maturity of the policy, and then that the insured should be compelled by the necessary delays of litigation to wait many months, or a year, or longer?Walker, 568 S.W.2d at 106, quoting St. Paul Fire Marine Ins. Co. v. Kirkpatrick, 164 S.W. 1186, 1190 (Tenn. 1914) (referring to the precursor to § 56-1105.)
One court recently acknowledged that the Tennessee courts "have failed to define the exact nature of a "formal demand" for the purposes of seeking the bad-faith penalty," and concluded that "it is not necessary for the demand to be written . . ." Topmost Chemical and Paper Corp. v. Nationwide Ins. Co., 2002 WL 1477880, at 8 (W.D.Tenn. 2002) citing Hampton v. Allstate Ins. Co., 48 F. Supp.2d 739, 746 (M.D. Tenn. 1999) (holding that the notice requirement was satisfied when the insureds called their insurance carrier "on numerous occasions, telling them with each call that if Allstate did not pay the claim within sixty days, they would sue and seek the bad-faith penalty.")
Given its penal nature, Section 56-7-105 is to be strictly construed. Palmer v. Nationwide Mut. Fire Ins. Co., 723 S.W.2d 124, 126 (Tenn.Ct.App. 1986). The Tennessee courts have required that a plaintiff seeking the statutory bad faith penalty must give the insurer notice specifically of the claim of bad faith, as distinguished from notice of a claim for proceeds under an insurance policy. See Walker, 568 S.W.2d at 106. In addition, the Tennessee courts have required that even if the demand is not formal, plaintiff must provide notice that adequately alerts the insurer to the fact that the insured intends to claim entitlement to the bad faith penalty and it must be made early enough to give the insurer time (60 days by statute) to consider the ramifications of its denial. See De Rossett Hat Co. v. London Lancashire Fire. Ins. Co., 183 S.W. 720, 723 (Tenn. 1916), and Hampton, 48 F. Supp.2d at 746.
When the allegations of the proposed Amended Complaint are considered against the requirements of Tenn. Code Ann. § 56-7-105 and the Tennessee court's interpretation of the statute, I conclude that the allegations fall short of stating a claim for relief under the statute. I have considered Liddy's argument that the allegations contained in paragraphs 15, 16, 17, and 18 of the proposed Amended Complaint are sufficient to satisfy the notice requirement of the statute. Those paragraphs describe that Liddy followed the procedures set out by the policy of insurance: Liddy filed a claim, which was supported by her physician's documentation; her claim was denied, and thereafter she appealed the denial three times; and that she has complied with all obligations set forth in the long term disability policy. These allegations set forth that Liddy followed the policy's claim and appeals procedures, but that is not the equivalent of satisfying the demand requirement of § 56-7-105. I have thoroughly considered the Amended Complaint, paying close attention to the paragraphs referenced by Liddy in her reply brief, but I do not find that those allegations, even when liberally construed, satisfy the demand requirement of the statute.
I conclude that the allegations in the proposed Amended Complaint are legally insufficient to state a claim for the statutory bad faith penalty under Tennessee law, and that allowing the amendment would be futile. Because Magistrate Judge Gossett's disposition of the motion to amend reflected in the July 24, 2003, Order is not clearly erroneous or contrary to law, though I reach the same conclusion under a different analysis, I shall deny Liddy's appeal.
IT IS ORDERED:
1) Plaintiff's Motion for Leave to File a Reply Brief (Filing No. 24) is granted; and
2) Plaintiff's Appeal (Filing No. 21) from the Magistrate Judge's Order of July 24, 2003, is denied.