Caveat Contractor: No Private Right of Action for Unpaid General Contractors

Photo by Becca Tapert on Unsplash

By: Eric C. Lyons, Associate - Meridian Law

When a homeowner suffers a loss of more than $1,000 in structural damage, T.C.A. § 56-7-111 requires that their insurance company make repair checks payable to the general contractor who completed the repair.  

But if the insurance company fails to do so, does the general contractor have a right to sue?  

In late April, the Tennessee Supreme Court answered this question with a unanimous “No” in Affordable Construction Services, Inc. v. Auto-Owners Ins. Co., No. M202001417SCR23CV, 2021 WL 1608412, at *1–6 (Tenn. Apr. 26, 2021).  

Facts

This case was the culmination of three separate lawsuits.  The first lawsuit arose when a property owner’s association sued its insurance company over property damage caused by severe weather. The parties settled privately, and the insurer issued a check payable directly to the association to cover the repairs by a general contractor. While the insurer did not name that general contractor on the check, it included in its settlement agreement that the association would “satisfy all liens or interests of third parties.” 

Next, the general contractor sued the association and insurer for failure to repay the repair bill.  However, the Hardeman County Circuit Court dismissed the general contractor’s claims against the association because no contract existed between the parties.

Finally, the general contractor filed a declaratory judgment action against the insurer for violating T.C.A. § 56-7-111. Finding no precedent addressing the issues posed by the case, the federal court certified several questions of law to the Tennessee Supreme Court.  The key question before the Court was whether a general contractor has a private right of action—that is, a right to sue—an insurance company for failing to name it on checks for damages over $1,000 as required by statute.

The Tennessee Supreme Court’s analysis of the statute’s legislative history showed that the purpose of the statute was to avoid a “hold up” of payment to the general contractor. But although the general contractor managed to show that it was an intended beneficiary of the statute, it could not show that the Tennessee legislature had intended to create a private right of action or that implying such a right would be consistent with the statute’s purpose.  As such, the general contractor had no private right of action against the insurance company.  

Takeaways

The Affordable Construction Services case illustrates how imperative it is that contractors pay heed to who they contract with and how they receive payment. 

The Court’s decision reminded insurance companies that a violation of T.C.A. § 56-7-111 is a Class C misdemeanor, meaning that although private parties cannot enforce the regulation, district attorneys general can nonetheless enforce the statutes.  For now, it is too early to speculate whether this case will lead to an uptick in the prosecution of violations, particularly if general contractors remain unaware of their rights under the law. 

Finally, although the Court held in favor of the insurance company, the Court acknowledged that this statute would have more “teeth” if the general contractor had a private right of action, allowing it to sue for violations.  The Tennessee General Assembly adjourned its 2021 session last week. Only time will tell whether a future session takes the Court up on its hint that general contractors would benefit from the creation of a private right of action.