Sixth Circuit Reaffirms Dismissal of Insurance Fraud Case in Tennessee

In a notable legal battle involving allegations of insurance fraud, the U.S. Court of Appeals for the Sixth Circuit recently affirmed the dismissal of a lawsuit filed by US Framing International LLC against Continental Building Company and six of its executives. The case centers around an insurance claim under a subguard policy, where US Framing accused Continental of making false material representations and omissions. However, the court ruled that US Framing failed to demonstrate any economic injury directly resulting from the purported fraud, a requirement under the Tennessee Insurance Fraud Act. This decision, issued on April 7, 2025, sheds light on the stringent requirements for pursuing claims under Tennessee's fraud statutes.

The legal dispute originated from a subcontract between Continental and US Framing concerning framing services for two student housing projects in Knoxville, Tennessee, and Ann Arbor, Michigan. When work commenced in 2017, the relationship between the two parties quickly soured due to project delays in Knoxville. By December of that year, both parties amended their agreement to waive any delay-related claims. A subsequent agreement in January 2018 saw US Framing exit the Knoxville project, followed by a 'change order' that marked the contract complete, precluding further payments or claims from either side. However, by February 2018, Continental terminated the Knoxville subcontract for default and halted payments related to the Ann Arbor project. This action was soon followed by Continental's $2.8 million insurance claim under its subguard policy with Steadfast Insurance Company, which was later revised to exceed $6 million. Steadfast settled the claim for over $3.1 million.

In 2023, US Framing initiated a lawsuit in Tennessee state court under Tenn. Code Ann. § 56-53-101 et seq., alleging that Continental’s insurance claim was fraudulent. The complaint accused Continental of unfairly attributing its losses to US Framing, naming the company and its executives in the process. However, upon removal to federal court, the district court dismissed the case, citing US Framing's failure to adequately allege a direct economic injury resulting from the alleged fraud. The appellate decision reinforced this dismissal, focusing on the statutory language of § 56-53-107(b)(1)(C). The court underscored that US Framing's supposed damages, including rescinded payments on the Ann Arbor project and litigation costs, were either unrelated to the claimed fraud or too tangential to warrant a statutory claim. Notably, Continental had discontinued payments before filing its insurance claim, severing any causal link with the alleged damages.

The court also addressed US Framing's infrastructure costs for litigation, which it argued were unnecessarily inflated by the insurance payout to Continental, allowing prolonged court battles. The court, however, ruled these expenses were not the direct outcome of the alleged fraud and were, at best, secondary to damages incurred by Steadfast, not US Framing. This decision clarified that the statute does not support recovery for indirect or third-party injuries. Additionally, the court discarded US Framing's request for treble damages under Tenn. Code Ann. § 56-53-107(c), as no plausible economic damage was demonstrated. The lack of specific pleading about a statutory penalty under § 56-53-107(b)(1)(E) further weakened their case. Finally, the claim for attorney's fees was denied since Tennessee law grants such fees solely to a prevailing party, a status US Framing did not achieve. In summary, this case emphasizes the rigorous standards applied by Tennessee courts regarding direct causation in claims of insurance fraud, highlighting the necessity for substantial and direct evidence of economic harm.