Tennessee Insurance Litigation Blog : Tennessee Insurance Lawyer & Attorney : Brandon McWherter & Parks Chastain : TN Case Law Updates & Trial Tactics

Many times, lawyers for insureds attempt to make an insurance company’s pre-litigation coverage counsel a witness. I have faced two arguments on this issue. I have been a witness in a couple of cases, and must say that I do prefer the role of attorney. But, I think it is useful to debunk the two primary arguments litigants use to attempt to turn the pre-litigation coverage lawyer into a witness.

First, insureds argue that the pre-litigation coverage lawyer was merely performing an investigator’s job – one that could have been performed by the insurance company as opposed to the lawyer. The law simply does not support that conclusion, so long as the lawyer is actually rendering legal services, and relying upon his or her skill, training and expertise to do so. While there may be some similarity between functions of an attorney and the claims adjuster in investigating a loss, only where the attorney would act as a claim adjuster in his “pure, ordinary business function” should a Court even entertain making the attorney subject to discovery. See e.g. In re Allen, 106 F.3d 582, 602-03 (4th Cir. 1997).

Obviously, lawyers do not become involved in the majority of insurance claims, and particularly not as routine investigators. Their expertise is often needed, and it is because of that expertise that the attorney –client privilege should remain intact. Thus, there is a:

great body of law holding that confidential communications made to attorneys “hired to investigate through the trained eyes of an attorney” are privileged. . . .
Accordingly, we must reject the legal theory . . . that the attorney-client privilege does not apply here, simply because [the attorney’s] assigned duties were investigative in nature. The relevant question is not whether [the attorney] was retained to conduct an investigation, but rather, whether this investigation was “related to the rendition of legal services.” If it was, and it clearly was here, then “[t]he privilege is not waived.”

Id.

In Connecticut Indem. Co. v. Carrier Haulers, Inc., 197 F.R.D. 564, 572 (W.D.N.C. 2000), the Court held that, because the attorney’s involvement in “any fact finding or investigation was clearly related to his ‘rendition of legal services to’ [the insurer], the attorney client privilege protects confidential communications between [the attorney], the lawyers assisting him, and his staff, and [the insurer], its agents, and its employees”.

The second argument I have faced is that my work product, or perhaps even my opinions, were relied upon in rendering a coverage decision. Now, I acknowledge that where my client (or former client once this happens) decides to assert the defense of “advice of counsel,” attorney-client communication may be subject to discovery. However, that defense is seldom asserted, and probably should be asserted less than it is. In such circumstances, the attorney-client privilege should not be waived, even in a bad faith case. See, e.g., Robertson v. Allstate Insurance Company, 1999 U.S. Dist. LEXIS 2991 at *15-16 (E.D. Pa. 1999).

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In litigating coverage cases on behalf of insurance carriers, I often hear – “But, my agent said…” or “But, I told the agent that…” In Tennessee, juries still hold litigants to a degree of personal accountability and responsibility, particularly when they have had the opportunity to read the document about which they may be claiming ignorance. Often, I have been successful in convincing juries that an insured was simply incorrect about the representations of an agent (either by innocent failure of recollection or otherwise), or that is was simply unreasonable for an insured to have relied upon the representations of an agent when faced with application provisions or clear policy provisions in documentation they have received. .

Our appellate courts have aided this cause in the past two years, through two significant cases imputing knowledge to applicants and insureds when information was readily available. Most recently, in the case of Tennessee Farmers Mutual Insurance Company v. Farrar, No. E2008-00779-COA-R3-CV, filed April 30, 2009, the Tennessee Court of Appeals held that an unintentional misrepresentation regarding the ownership of property was material, and increased the risk of loss, such that the policy could be voided from inception. In this case, the applicant had failed to disclose the existence of a life estate, and the testimony from the underwriter for the carrier was that, had the life estate been disclosed, the holder of the estate would have been required to complete a form entitled “additional named insured application for insurance,” and the form would have been submitted to the company’s home office. The policyholder argued that it would be speculation as to how the policy form would have been answered. The court did not accept the argument, however, noting:

The point, however, is not what he might have answered; the point is that because the life estate was not disclosed, the Company never had an opportunity to ask him questions so it might evaluate the risk associated with the dual ownership of interests of the Claimant and Mr. Volheim. As a holder of a life estate, Gary Volheim has a right to possession and enjoyment of the property to the exclusion of Mr. Farrar….As the company puts it, ‘Based on [the Claimant’s] application, [the Company’s] Underwriting Department had no knowledge that the right to present possession and enjoyment of [the property] was actually vested in Gary Lee Volheim, a man that [the Claimant] described as mentally ill, an alcoholic, and a paranoid schizophrenic.’

The court also noted that the applicant had signed the application, but apparently did not read it. The court held:

The Claimant’s signature binds him as a matter of law to the representations in the signed document and he may not now attempt to rely upon alleged oral statements to or by the insurance agent to avoid the effects of his own negligent failure to read the application.

The Tennessee Court of Appeals has also addressed a situation where an agent allegedly made a representation that coverage would be provided for particular losses, when the policy issued did not provide such coverage. The Court noted:

In this case, the commercial fire policy with Shelter states that its terms “can be amended or waived only by endorsement issued by [Shelter Insurance Company] and made a part of this policy.” Ms. Finchum admitted that she received the policy. The terms of the policy unambiguously excluded coverage for damage or loss due to theft, and stated clearly that only Shelter Insurance had authority to alter or amend the terms of the policy. This language was clear notice to the Plaintiffs that neither Davenport nor Patterson had the authority to alter the provision in the policy excluding coverage for damage or loss due to theft. Moreover, the Plaintiffs do not allege that Davenport misrepresented that she had authority to alter the policy. They assert only that they did not read the policy. The plaintiff in Reed made a similar assertion; in response, the Reed court stated: “While the plaintiff alleges that he did not read the documents, it is settled law in Tennessee that he is nonetheless charged with knowledge of their contents.” Id. at *3 (citations omitted). We agree.

Finchum v. Patterson, 2008 WL 2019408, 7 (Tenn.Ct.App.,2008)

These cases emphasize than an applicant or insured has a duty to read materials, and will be presumed to know the contents of documents available to or signed by them. These holdings reflect reality, in my opinion. Many times during jury selection, I have asked “How many of you have ever read your insurance policies?” For many years, nary a hand was raised. However, in recent trials, particularly after Hurricane Katrina, I have seen quite a difference. In fact, in one trial, every single member of the jury indicated that he or she had actually read their insurance policies.

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Often, litigants attempt to use the Valued Policy Law to establish that losses are total for purposes of maximizing policy recovery. In many instances, unless the home or structure is totally destroyed and “on the ground,” so to speak, expert proof can be adduced to establish that much of the building could be re-used, and that the house could in fact be rebuilt. I have had great success using experienced restoration contractors to come to trial, and show “before and after” pictures of their work. Trial Judges have submitted the question of whether a particular property experienced a “total loss” to juries, and these experts have won the case for me.

And the fact is that the statutes have not been applied unless the damage makes the building unrecognizable, or witnesses for the insurance company agree that the home was a “total loss.” Guidance in making the determination of whether this home sustained a “total loss” comes from two Tennessee cases. First, the general rule is stated in Laurenzi v. Atlas Insurance, 131 Tenn. 644, 663, 176 S.W. 1022 (1915), where the court noted:

Was there a total loss? The roof of the building, a wooden structure, was wholly destroyed; likewise all of the walls except on one side, and part of the front porch; but these were so badly burned in places that the lumber in them was not worth the labor of rescuing and removing. However, the walls standing were considered so dangerous by the city authorities that they were required to be taken down. The floor remained uninjured, except that a large hole was burned through it in one place. The brick foundation on which the structure stood was unimpaired. Since, under these facts, the identity and specific character of this structure as a building were obliterated, we think the loss was total, although the parts last referred to remained unconsumed.

Implicitly, the Laurenzi decision follows the general rule that a structure will be deemed a total loss when it has lost its identity and specific character as a building. Our courts have specifically refused to impose a “prudent man test” in place of the Laurenzi decision. In the case of Hollingsworth v. Safeco Ins. Companies 782 S.W.2d 477, 478 (Tenn.App.,1988), the trial could had commented that, under a “prudent man” test, the house in question should be declared a total loss because a prudent man would not repair the house for $31,000.00 or $32,000.00 when a comparable new structure could be built for $35,000.00. That is very close to the constructive total loss doctrines that have been adopted in other states. On appeal, however, the Court of Appeals refused to adopt the “prudent man test,” noting:

We are not prepared to make such an adoption. There is a marked difference between the Supreme Court, the highest court in the state, and the Court of Appeals, an intermediate appellate court. It is the duty of the Court of Appeals to apply the law as promulgated by the legislature or as announced by the Supreme Court. This Court is bound by the Supreme Court's decisions under the doctrine of stare decisis and in no way is it the function of this court to intentionally reverse the holding of the Supreme Court. Although the Supreme Court may wish to adopt the prudent man test for making a determination as involved in this case, we feel constrained to follow the test established in Laurenzi.

Hollingsworth, 782 S.W.2d at 479 -480.

But, what about those counties or cities in Tennessee where code requirements provide that a home should be razed and requires rebuilding if the cost to repair exceeds 70% of the value of the home. There are no Tennessee cases which have held that the local code requirements (be it 50% or 70%) are applicable and trump the insurance policy, but that has occurred in other jurisdictions. However, if the Courts will not apply a “prudent man test,” they should not impose any requirement other than the criteria originally noted by Laurenzi – has the building lost its specific identity and character? If not, there should be no total loss.

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For the past two years, the spring months have brought severe and deadly tornados to various parts of Tennessee. One issue that has often arisen, but has not yet been addressed by any Tennessee appellate court, is the extent to which Tennessee’s “Valued Policy Law” would, or should, apply to wind or tornado losses.

Tennessee’s “Valued Policy Law” (pdf)  is created by three separate statutes, T.C.A. §§ 56-7-801 through 803, all found under in Chapter 7 of the Insurance Code, and specifically in Part 8 (entitled “Fire Insurance”). Attorneys for insureds argue that this law, written in 1927, and last amended in 1932, no longer reflects insurance industry practice and insuring provisions, and that it must be interpreted to cover any losses to which it would otherwise apply (i.e., total losses to real property).

Such an argument is, in my opinion, contrary to a proper interpretation of Tennessee’s “Valued Policy Law.” Some states have specifically expanded the scope of their valued policy law to encompass other causes of loss. For instance:

• The valued policy law of Minnesota applies to fire, lightning, or other hazard
• The valued policy law of North Dakota applies to any covered cause of loss
• The valued policy law of West Virginia applies to losses cause by fire or otherwise.

In contrast, Tennessee’s valued policy law references “fire insurance” and “loss by fire.” As mentioned, the three statutes in play appear in section 8 (“Fire Insurance”) of Chapter 7 of the insurance code. With respect to this issue, these statutes provide in pertinent part:

• T.C.A. § 56-7-801 – Provides that there is a period of 90 days after which a “fire insurance policy” is issued for an inspection to occur, and prohibits any “fire insurance policy” being issued for an amount in excess of the fair market value of any building or structure;
• T.C.A. § 56-7-802 – Provides for a return of premium where buildings “totally destroyed by fire” were over-valued and too high a premium was charged. The statue applies to “buildings within the state insured against loss by fire” which “are totally destroyed by fire”; and
• T.C.A. § 56-7-803 – With respect to losses occurring after ninety (90) days after policy inception, the statute provides that the value as shown on the application or policy shall be “conclusively presumed to be reasonable, and settlement shall be made on that basis.”

Tennessee has recognized that a “fire policy” provided only narrow coverage, and under such coverage, the insured protected by loss from "fire." Allied American Mut. Fire Ins. Co. v. Wesco Paving Co., 35 Tenn. App. 154, 162-163 (Tenn. Ct. App. 1951).

Other jurisdictions having similar valued policy statutes have held that the statutes apply only to losses by fire. One of the best cases I have found is the South Carolina case of McNeely v. South Carolina Farm Bureau Mut. Ins. Co., 259 S.C. 39 (S.C. 1972) in which the court noted that South Carolina’s Valued Policy Statutes referenced total loss by fire, and thus held that the Valued Policy Law did not apply to loss by windstorm. The case analyzed the importance of the language “loss by fire” when reviewing the legislative history of the statute. The statute (Section 37-154 of the 1962 Code of Laws) is very close to the Tennessee version in parts quoted. It provides:

No company writing fire insurance policies, doing business in this State, shall issue a policy for more than the value stated in the policy or the value of the property to be insured, the amount of insurance to be fixed by the insurer and insured at or before the time of issuing the policy. In case of total loss by fire the insured shall be entitled to recover the full amount of insurance, and in case of a partial loss the insured shall be entitled to recover the actual amount of the loss, but in no event more than the amount of the insurance stated in the contract. * * *"

McNeely , 259 S.C. at 42. The Court commented as follows, and much of this reasoning could be applied to the Tennessee statute:

This section plainly says that "in case of total loss by fire the insured shall be entitled to recover the full amount of insurance" provided by the policy. . . . Therefore, under the clear language of the statute, the plaintiff would be entitled to recover the sum of Six Thousand ($ 6,000.00) Dollars, the amount of insurance which his policy admittedly provided, if the mobile home had been destroyed by fire; however, the question now arises as to whether or not this statute is applicable when the mobile home was destroyed by windstorm.

Section 37-154 of the 1962 Code of Laws of South Carolina requires the parties to a fire insurance contract to agree upon the value of the property to be insured and require that such value be stated in the policy.

Prior to 1947 the statute read as follows:

"No fire insurance company or individuals writing fire insurance policies, doing business in the State, shall issue policies for more than the value to be stated in the policy, the amount of the value of the property to be insured, and the amount of insurance to be fixed by insurer and insured at or before the time of issuing said policies, and in case of total loss by fire, the insured shall be entitled to recover the full amount of insurance and a proportion amount in case of partial loss . . ."

In 1947, the Legislature amended this Statute slightly however, in both the original statute and the amended statute the Legislature included the language "total loss by fire." Had the Legislature intended either statute to apply to loss by windstorm, it would have been a simple matter to so state. The 1947 amendment was to clear up any ambiguity that existed in the event of partial loss which we are not concerned with in the instant case. It is patently clear to me that the Legislature stated and intended in clear and unambiguous terms that "in case of total loss --" and described the manner by using the words "by fire."

McNeely, 259 S.C. at 43-44.

As in South Carolina, the province to change the coverage of this statute lies with the legislature, and unless these statutes are amended, this case, and principles of statutory construction, almost compel the conclusion that Tennessee’s Valued Policy Law applies only to “losses by fire.”
 

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