Was Middle School Grammar Study a Waste of Time? Court of Appeals Finds 12 Month Business Income Limitation for Period of Restoration to be Ambiguous - Despite Expert Proof as to Sentence Diagramming
Long title, I know, but hopefully it sparked your interest, or perhaps dredged up painful memories of drawing those sentence diagram structures on wide ruled paper, wondering if you would ever use that skill in “real life.” Well, see how you think it worked in the case of Artist Building Partners v. Auto-Owners Mutual Insurance Company, No.M2012-00915-COA-RM-CV (Tenn. Ct. App. Nov. 21, 2013) (Download here). This was an insurance case where the issue under consideration was the construction of a Business Income and Extra Expense limitation, which provided in part as follows:
[w]e will pay for the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration and necessary Extra Expense you incur during the ‘period of restoration’ that occurs within 12 consecutive months after the date of the direct physical loss of or damage to property at the described premises, including personal property in the open (or in a vehicle) within 100 feet, caused by or resulting from any Covered Cause of Loss.
The question presented was whether the 12 month limitation contained in the above policy provision applied both to the business income coverage and the extra expense coverage, or only to the extra expense coverage. Despite efforts by the insurer to argue that the 12 month limitation applied to both coverages (including the proffering of an expert witness from Vanderbilt University who had prepared a diagram of the sentence at issue and rendered an opinion as to its meaning), both the trial court and the Court of Appeals found that the language was, at the very least, ambiguous, since it was susceptible to more than one reasonable interpretation.
The Court of Appeals acknowledged the contrary opinion of the “learned professor” but opined that “an insured should not have to resort to retaining an ‘expert in sentence diagraming’ in order to properly interpret his or her insurance policy.” Because the policy language was susceptible of this reasonable interpretation from the standpoint of the insured, the 12 month limitation did not apply to the business income claim.
I’ll bet most of us were thankful that we stopped diagraming sentences in high school – but maybe we need to get those grammar books back out!
One of my partners won a Court of Appeals decision earlier this week wherein the court construed an earth movement exclusion in a factual scenario not previously presented. The case is Hearn v. Erie Insurance Exchange, No. M2012-00698-COA-R3-CV. Download a copy here.
The language at issue in the policy provided that the company would not pay for loss directly or indirectly resulting from “earth movement due to natural or manmade events….” The Court of Appeals found no ambiguity in the language of this exclusion, and held that blasting damage, including damage because of vibration coursing through the ground, was manmade earth movement within the meaning of the exclusion. The Court concluded, as a matter of law, that cracks in the plaintiff’s home which were caused by shockwaves or vibrations triggered by blasting were excluded under the policy.
This decision was somewhat dependent upon the language used in the exclusion, so check your policy language as you assess the impact of this case.
Back in 2009, Parks wrote about the Spears v. TFMIC case and correctly cited it for the proposition that an insured must submit to an examination under oath upon request, and that a failure to do so can bar recovery on an insurance claim. Notably absent from the Spears opinion was any requirement of prejudice in order to avoid payment. However, the Spears opinion is muddied a bit by a prior decision from the Sixth Circuit Court of Appeals in Talley v. State Farm Fire & Cas. Co., 223 F.3d 323 (6th Cir. 2000), in which the court held that an insurance company must prove prejudice in order to preclude recovery.
So what's the rule? Must an insurance company show prejudice to avoid payment of a claim on the basis of a refusal to submit to an EUO? In 2012, we almost got an answer to that very question in Farmers Mutual v. Atkins, 2012 Tenn. App. LEXIS 184 (Tenn. Ct. App. 2012). In that case, Judge Stafford noted the potential conflict between Spears and Talley, and seemed primed to rule on this murky issue. But unfortunately the ruling wasn't meant to be. In short, the trial court apparently just noted the divergence of opinion on the issue and then granted an interlocutory appeal without ever ruling at all. Thus, the matter was not ripe for consideration by the Court of Appeals and was remanded.
This particular topic isn't particularly exciting, but nonetheless should be considered by both insurers and insureds when claims are denied for failure to submit to an EUO. Depending on how this issue is ultimately decided, an insured's failure to show up just might not put the proverbial "nail in the coffin" of the insured.
Far from being “ho hum” as my colleague writes, the case of U. S. Bank, N.A. as servicer for the Tennessee Housing Development Agency v. Tennessee Farmers Mutual Insurance Company, No. W2012-00053-COA-R3-CV, filed November 29, 2012, the did establish some important points of law - but from the insurer's perspective, in limiting bad faith and TCPA recovery. The Court of Appeals was presented with appellate review of a trial court finding imposing bad faith and Consumer Protection Act damages upon Tennessee Farmers Mutual Insurance Company for failing to pay a mortgagee. The case actually arose from a Supreme Court ruling in U. S. Bank, N.A. v Tennessee Farmers Mutual Insurance Company, 277 S.W. 3d 381 (Tenn. 2009), where the Tennessee Supreme Court held that the mere institution of foreclosure proceedings did not constitute and increase in hazard sufficient to allow an insurance company to avoid payment of a mortgagee under a standard mortgage clause. Upon remand, the trial court was presented with the issues of whether the interpretation advanced by Tennessee Farmers constituted bad faith and the violation of the Tennessee Consumer Protection Act. The trial court entered judgment under both bases, awarding the bank a judgment for the amount due on the mortgage plus accrued interest, but also attorney’s fees and costs based upon a finding that Tennessee Farmers’ interpretation of the policy amounted to bad faith and an unfair act or practice under the Tennessee Consumer Protection Act. The Court of Appeals reversed.
From a defense perspective, the significance of this holding lies in the fact that the issue was one of first impression, and the Court of Appeals noted as follows:
We respectfully disagree with the trial court’s conclusion that Tennessee Farmers’ interpretation of the policy throughout the litigation amounted to bad faith and an unfair act or practice under the TCPA. As noted by the Supreme Court, the issue of whether, under a standard mortgage clause in a fire insurance policy, the Bank’s commencement of foreclosure proceedings amounted to an increase in hazard requiring notification to Tennessee Farmers involved ‘a matter of first impression.’…The Supreme Court further noted that ‘no Tennessee case has squarely addressed the precise issue presented….’ Moreover, prior to the Supreme Court’s opinion, this Court agreed with Tennessee Farmers’ interpretation of the policy. Clearly, reasonable minds disagreed over the precise issue which the trial court claimed to be well-settled. In fact, had the Supreme Court agreed with the position taken by this Court, there would be no basis for the trial court’s reasoning that Tennessee Farmers’ interpretation was unreasonable and inconsistent with well-settled law.
Three cheers for the Court of Appeals! On an issue of first impression, even where law exists on both sides of the issue from other jurisdictions, it seems to this writer that a judgment of bad faith or violation of the Consumer Protection Act should not be warranted. This case may be appealed even further, and we will see if the Supreme Court takes further action, but for now, it seems that justice has been done.
But, Brandon contends that the Court of Appeals implicitly recognized a common law bad faith cause of action. I disagree. Brandon noted that it seemed a “rather odd opinion for such a big issue.” Indeed, creating or recognizing a cause of action which has not been recognized in Tennessee law would seem to be more noteworthy. But here’s why I do not think the Court of Appeals implicitly sanctioned the cause of action. First, the Court of Appeals did not really address it. Second, what they did address were the facts which formed the basis of the trial court’s findings on BOTH a bad faith action and the TCPA.
The Court of Appeals simply confirmed that, under neither theory, the same set of facts did not create liability. The cause of action for common law bad faith failure to pay has never been entrenched in Tennessee law, as evidenced by the fact that the trial court did not cite to any Tennessee case law supporting such cause of action. It would have been nice had the Court of Appeals indicated such a cause of action did not exist, but to make the leap that, under these facts, the Court of Appeals impliedly authorized such action seems, to use Brandon’s phrase in good natured banter, “rather odd.”
You might recall the 2011 legislation that took away consumers' right to bring claims against insurance companies under the Tennessee Consumer Protection Act, but that same legislation seemed to recognize the existence of a common law cause of action for bad faith in Tennessee. (click here for a prior post on that topic). Since that time, I've been tracking a couple of bad faith cases working their way through the Tennessee appellate courts. Today the Court of Appeals for the Western Section issued its ruling in one of those cases. See U.S. Bank v. Tennessee Farmers Mutual Insurance Company.
The opinion itself was rather "ho-hum," and doesn't offer much of any substantive discussion regarding common law bad faith claims, but it impliedly holds that such a cause of action exists. The issue in the case was whether a mortgage company who is a named mortgagee on an insurance policy has a duty to notify the insurance company of a foreclosure on the insured property. The Tennessee Supreme Court previously ruled that no such duty exists, but on remand one of the issues to be considered was the Bank's common law bad faith claim. After hearing proof on the issue, the trial court (Judge Clayburn Peeples) ruled that such a cause of action exists and expressly held that Tennessee Farmers Insurance Company acted in bad faith in denying the Bank's claim for insurance proceeds. In reviewing Judge Peeples' decision, the Court of Appeals quoted his ruling at length, which stated in part:
US Bank has shown by a preponderance of the evidence the following elements of a claim for common law claim for a bad faith failure to pay:
a.That [Tennessee Farmers] issued a policy of insurance to US Bank and that US Bank made lawful, reasonable claim under that policy;
b. That [Tennessee Farmers] intentionally refused to pay US Bank's claim;
c. That [Tennessee Farmers] had no reasonably legitimate or arguable reason for its refusal to pay the claim;
d. That [Tennessee Farmers] had actual knowledge of the absence of a reasonably legitimate, debatable or arguable reason for the refusal; and
e. That [Tennessee Farmers] intentionally failed to determine whether it had a reasonably legitimate or arguable reason for refusing to pay US Bank's claim.
In reviewing this holding by the trial court (which was a specific issue on appeal), the Court of Appeals seemingly accepted the elements of a bad faith claim as set forth by Judge Peeples, but then went on to hold that the facts before the Court did not amount to bad faith. Its a rather odd opinion for such a big issue, but nonetheless is an extraordinary win for victims of insurance bad faith in Tennessee. The door is now wide open for future common law bad faith claims.
I recently learned that Tennessee Farmers Mutual Insurance Company (Farm Bureau) has changed the way it will pay roof claims. Specifically, a recent endorsement changes roof coverage to actual cash value for roofing materials instead of replacement cost. This means that roof materials will be depreciated in the event of a roof claim. For example, if hail damages a roof that is 10 years old, the replacement cost would be depreciated to account for the age of the roof. The depreciation rate will vary depending on the age and condition of the roof, but could be as high as 75%, which will impact consumers' ability to replace their roofs after a catastrophe. This is obviously a huge deal for Tennessee consumers, particularly in light of the wind and hail storm events that has become common in our state.
Practitioners should be aware that Tennessee courts generally apply the law of the state where an insurance policy was issued and delivered if there is no enforceable choice of law clause in the policy. Gov't. Employees Ins. Co. v. Bloodworth, 2007 Tenn. App. LEXIS 404 (Tenn. Ct. App. 2007). So, for example, if a policy on a property in Nashville is issued and delivered to the owner at his home in California, the law of California would generally apply. However, the Bloodworth case cited above noted an exception that provides the an insurance policy is governed by the law of the principal location of the insured risk unless some other state has a more signficant relationship..
But what happens when there is a package policy that is delivered in California but covers properties in various states across the county? That's when it gets hairy, and there is authority going both ways. The best answer is probably found inThe Restatement (Second) of Conflicts, 193 cmt. f, which indicates that the court should treat such a case as if it involves multiple policies, each insuring its own individual risk. So if a house is located in state X were damaged by fire, then the law of State X would apply under this analysis.
I represented a Memphis homeowner a couple of years ago whose residential rental property was destroyed by fire. The policy provided coverage for fire loss, but contained an exclusion for "vandalism and malicious mischief . . . if the dwelling has been vacant for more than 30 days immediately before the loss." In our case, it was undisputed that the house had been vacant for more than 30 days at the time of the fire, which was intentionally set by an unknown third person. These undisputed facts left one unanswered question - - does arson constitute vandalism or malicious mischief? If so, there would be no coverage for the claim. If not, then the claim should be paid in full.
After summary judgment briefing, Chancellor Armstrong in Shelby County ruled that arson isn't necessarily the same thing as vandalism or malicious mischief. Noting the split of authority across the country, Chancellor Armstrong ultimately ruled that fire is a separate peril from vandalism and malicious mischief, and that arson was not included within the exclusion applying to losses caused by vandalism or malicious mischief. Accordingly, the court granted my client's motion for summary judgment and the case was concluded, marking another victory for insureds in Tennessee.
Download a copy of Chancellor Armstrong's Order by clicking here.
In response to a couple of cases rendered earlier this year, the Tennessee legislature has adopted Senate Bill 2271, which has two important impacts. The statute was signed into law by Governor Haslam on May 10, 2012. For a PDF copy, click here.
The new law provides that the signature of an applicant for or party to an insurance contract which states the type, amount, or terms of condition of coverage actually creates a rebuttable presumption that the statements provided by the person so signing bind all insureds and that the person signing such document has read, understands, and accepts the contents of the document.
Secondly, the new law provides that the payment of premium by an insured also creates a rebuttable presumption that the coverage provided has been accepted by all insureds.
This should have some immediate impact in coverage cases dealing with the knowledge of an insured as to certain coverages.
In March 2012, the Tennessee Supreme Court issued a landmark opinion concerning the liabilty of insurers and insurance agents in cases involving failure to procure and maintain appropriate insurance coverage. The case is Allstate Ins. Co. v. Tarrant. The case is a "must read" for insurance practitioners, and is full of good nuggets. Today I'll address the basic facts of the case and the first issue of ratification.
The basic facts in the Tarrant case were that Mrs. Tarrant was involved in an automobile accident, resulting in injuries to the driver of a motorcycle. The injured motorcycle driver then sued the Tarrants, alleging that they were liable for his injuries. After the personal injury suit was filed, a dispute arose between the Tarrants and their vehicle insurer, Allstate, as to the amount of insurance coverage that was available. Allstate claimed that Mr. Tarrant had requested that his agent move the vehicle from a commercial policy with limits of $500,000 to a personal policy with limits of $100,000. Mr. Tarrant denied that he directed his agent to make that change, and that the transfer was the result of the agent's mistake.
The agent didn't deny that the agency may have made a mistake, but argued that it was the Tarrants' responsibility to notify the agency of the mistake upon his receipt of the proof of insurance cards. Instead, Mr. Tarrant did not notify the agent and continued to pay premiums. Based on these facts, the trial court held that Mr. Tarrant ratified the change of insurance by continuing to pay premiums on the policy after receiving notice of the change. The Supreme Court upheld the Court of Appeals' reversal of this decision, holding that an insured cannot ratify the actions of the insurance agent because the agent, by statute, is regarded as the agent of the insurance company, not the insured. The full reasoning of the opinion is too in depth to discuss here, but the entire decision was premised around the application of Tenn. Code Ann. 56-6-115(b), which states that an insurance producer who obtains an application for insurance must be considered to be the the agent of the insurer and not the insured. Applying that statutory mandate to the elements of ratification (which requires an adoption, approval or confirmation of a contract previously executed by another in his stead and for his benefit), the Supremes held that Mr. Tarrant could not have ratified the agent's actions.
Another interesting thing about the case is that the Court's decision was not in the slightest bit affected by any question of whether the agent was a true agent of the company as opposed to a broker, which is usually regarded as an agent of the insured. In fact, the court implicitly noted that the same rules would apply to both because the relevant statute applies to "insurance producers," which are statutorily defined as persons required to be licensed under the laws of the state to sell, solocite, or negotiate insurance.
There were several other important points in the case that I'll address in following posts. But for those who haven't heard, just wait til you hear what our Legislature did in response to this opinion!