Day on Torts - New Post: Insurance statute did not create private right of action for general contractor

Insurance statute did not create private right of action for general contractor

Posted: 05 May 2021 06:00 AM PDT

The Tennessee Supreme Court recently explained the analysis for whether a statute creates a private right of action.

In Affordable Construction Services, Inc. v. Auto-Owners Insurance Company, No. M2020-01417-SC-R23-CV (Tenn. April 26, 2021), plaintiff was a general contractor who had been hired to repair property owned by a property association that had been damaged by severe weather. When the association and defendant insurance company settled the matter, defendant issued a check payable only to the association. Plaintiff general contractor brought this action in chancery court, asserting that it had a private right of action pursuant to a Tennessee statute. The case was removed to federal court under diversity jurisdiction, and the district court certified three questions to the Tennessee Supreme Court. The only question considered by the Court, because it was dispositive of the case, was whether the statute cited by plaintiff created a private right of action.

Tenn. Code Ann. § 56-7-111 states that “when an insured property owner’s home or other structure sustains more than $1,000 in damages, the property or casualty insurance company shall name the general contractor of an uncompleted construction contract as a payee when issuing payment to the owner for the loss.” The issue here was whether plaintiff general contractor could bring a private right of action against defendant insurance company who failed to include plaintiff as a payee on the insurance proceeds.

The Court began by explaining that the legislature can create a private right of action based on a statute in two ways: “based on the express terms of a statute or by implication through the statute’s structure and legislative history.” (internal citation omitted). The statute at issue here did not explicitly create a private right of action, so the Court went on to analyze whether there was an implicit private right of action based on § 56-7-111.

In a previous Tennessee Supreme Court case, the Court explained that three factors should be considered when determining whether a statute includes an implicit private right of action:

(1) whether the party brining the cause of action is an intended beneficiary within the protection of the statute,

(2) whether there is any indication of legislative intent, express or implied, to create or deny the private right of action, and

(3) whether implying such a remedy is consistent with the underlying purposes of the legislation.

(internal citation omitted). Here, plaintiff was able to satisfy the first factor, as general contractors were clearly intended to benefit from this statute. The second and third factors, however, did not weigh in plaintiff’s favor.

To succeed on its claim, plaintiff had to “show an indication of express or implied legislative intent to create a private right of action.” (internal citation omitted). While this statute was passed to help ensure general contractors got paid on projects in a timely manner, the Court found that “nothing, express or implied, in the statutory scheme or legislative history indicate[d] that the legislature envisioned contractors filing suit under the statute.” The Court noted that the statute might have had more “teeth” had a civil remedy been added, but that the legislature had opted not to do so.

Further, the third factor in this analysis required plaintiff to “show that an implied private right of action would be consistent with the statute’s purposes,” which plaintiff also could not do. (internal citation omitted). Because no specific penalty was included in this statute, “a party who violates this section may be guilty of a misdemeanor.” (internal citation omitted). Because § 56-7-111 was “a regulatory statute enforced through governmental remedies,” the Court explained that a “private right of action would be inconsistent with the statute’s purpose…” (internal citation omitted). The Court therefore held that the statute at issue did not create a private right of action for plaintiff to pursue.

In this opinion, the Tennessee Supreme Court goes through a detailed analysis of whether a statute creates a private right of action. Any lawyer dealing with the issue of whether a case can be brought pursuant to the violation of a statute should read this opinion. He or she may also wish to read Tenn. Code Ann. Sec. 1-3-119, the statute discussing the issue.

NOTE: This opinion was released two months after this case was assigned on briefs.