Allstate Ins. Co. v. Tarrant - Part 1

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!

 

Morrison v. Allen, Part III

This is the third installment of my recent discussion of the Morrison v. Allen decision.  Assume these facts (a skeletal version of the facts in Morrison):  John Doe requests life insurance from his insurance agent in the amount of $1,000,000.  A policy is issued, but a claim by John's wife, Jane, for benefits under the policy is denied based on alleged misrepresentations in the insurance application. Jane claims that John's insurance agent failed to do his job and is liable to her on a failure to procure theory for the face amount of the insurance policy.  Jane then settles with insurance company for $900,000, but moves forward with her suit against the agent for the full amount of the insurance policy, i.e., $1,000,000.  And then Jane actually wins her case, resulting in her receiving $1.9 million on a $1 million policy.  Double recovery, right?  Wrong.

In Morrison, the plaintiff sued the insurance company on multiple theories, including violations of the TN Consumer Protection Act, negligence, breach of contract, etc.  She also sued the defendant insurance agents for failure to procure the appropriate insurance policy.  To decide whether the defendant agents were entitled to an offset as a result of the $900,000 payment by the insurance carrier in settlement of Ms. Morrison's claims against it, the Supremes were faced with the question of whether the claim against the insurance carrier was based in contract or some other theory.  If liability was based in contract, then the agent would be entitled to an offset.  But, if the claim was based in tort, then no offset is required.

The Morrison court ultimately found that the defendant agents were not entitled to an offset, which had the rather odd result that Ms. Morrison received $1.9 million on a $1 million policy.  The key to this decision appears to be that the actual settlement documents between Ms. Morrison and the defendant insurance company did not specifically state that payment was being made on the breach of contract claim.  On the contrary, the settlement settled all the claims, with no specific delineation as to what amount was being attributed to the various causes of action that had been alleged. Accordingly, no offset was required.  

This is an extremely important part of this case that will come into play in almost every case in which the policyholder has sued both his insurance agent and his insurance company.  It allows a plaintiff to settle with one, and still preserve his or her right to go after the other for the full amount of the alleged damages with no offset.  All it requires is a little thought when drafting the settlement agreement.  

 

Tennessee Supreme Court Redefines the Law of Insurance Agent Liability

On February 16, 2011, the Tennessee Supreme Court rendered a landmark decision concerning insured's rights to pursue claims against their insurance agents for failure to procure appropriate insurance.  The case is Morrison v. Allen, and can be found here.  

In Morrison, the basic facts were that Mr. and Mrs. Morrison obtained life insurance policies on each of their lives from their insurance agents, Roberts and Allen. The agents filled out the applications, and sent them to the Morrisons to sign with instructions on where to sign, which they did.  Although the applications contained the typical warnings regarding misrepresentations and contained an affirmation that the statements therein had been read, neither of the Morrisons read the applications before signing them.  Two months later, Mr. Morrison died.  The insurance company then denied Ms. Morrison's claim for benefits under the policy, alleging misrepresentations in the application (failure to disclose a DWI).  After filing suit, Ms. Morrison ultimately settled her claim with the insurance carrier for $900,000 ($100,000 less than policy limits), but proceeded to trial against the insurance agents, Roberts and Allen.  After a bench trial, the trial court awarded a judgment to Ms. Morrison against the defendant agents for breach of contract and negligence and further found the defendants violated the Tennessee Consumer Protection Act.  

The Supremes then totally revamped and redefined the law of agent liability in the State of Tennessee.  A few broad principles emerge:

First, the Court adopted the following elements for a cause of action for failure to procure:  (1) an undertaking or agreement by the agent or broker to procure insurance; (2) the agent's or broker's failure to use reasonable diligence in attempting to place the insurance and failure to notify the client promptly of any such failure; and (3) that the agent's or broker's actions warranted the client's assumption that he or she was properly insured.

Second, the Supreme Court held "that if an agent undertakes to obtain an insurance policy for an insured, and the policy obtained is contestable due to the acts or omissions of the agent, then the applicant has the same right to recover for failure to procure as he or she would have had if no policy had issued at all."

Third, a finding of liability does not require evidence that an insured specifically request an "immediate incontestability clause"  or a promise by the agent that the policy would be incontestable.  On the contrary, all that is required is that the insured show that he contracted with the agent to procure an insurance policy and then reasonably rely on the agent "to successfully complete the groundwork for procuring the policy."  Accordingly, a cause of action arises "where coverage is denied by the insurer on a policy that is contestable as a result of the acts or omissions of the agent.

Fourth, and here's where it gets interesting, the Court held that an applicant's failure to read an application does not insulate agents from liability.  "When an applicant applies for an insurance policy and the agent undertakes to fill out the application on his or her behalf, the applicant should be able to trust that the agent will ask the important questions and accurately record the answers to them so that the policy cannot later be successfully contested based on inaccuracies."  Put simply, an insured's failure to proofread an application is inconsequential in a failure to procure case, and the signature of the applicant does not shield the agent from liability.

And that just covers 15 pages of the 27 page opinion.  More to follow in the coming days on this case that is a huge win for policyholders in the State of Tennessee.

 

 

Certificates of Insurance Do Not Create Policy Coverage Obligations

One of the issues that arises far too often in cases I handle is lack of understanding of the purpose or role of documents called “Certificates of Insurance.” A “Certificate of Insurance” is not an insurance policy – it has no insuring provision, no exclusions, and typically no terms or conditions. These “Certificates” are usually issued by agents, brokers, or other producers, not the actual insuring entity. In such a situation, the correct and limited purpose of a “Certificate of Insurance” is merely to certify that a policy was issued to the named insured for the specific period listed. 

“Certificates of Insurance” do not provide coverage, nor do they confer any rights upon the certificate holder. When people assume that the “Certificates” represent coverage that does not exist on a policy, the “Certificates” become the subject of litigation. Most “Certificates” contain language on their face indicating that the “Certificate” is only issued as a matter of information and does not amend or alter the policy coverage. I have successfully litigated cases involving the following language, and obtained rulings that the subject “Certificate” did not create coverage:

 

I.

 

This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below.

II.

 

We certify that we have issued the policy to the Named Insured for the policy period as identified in this Certificate. Notwithstanding any requirements, terms or conditions of any contract or other document with respect to which this Certificate may be issued, the insurance is that which we customarily provide for the coverage indicated in Item 6 below. This Certificate is issued as a matter of information only and does not amend, extend or alter the coverage afforded by the policy.

Now, the producer issuing the “Certificate” may face liability for failing to accomplish the directions of its client. But, absent any misrepresentation or conduct estopping the insurance carrier from denying that coverage exists, “Certificates of Insurance” should not create coverage. 

 

"But the agent..." - Ending the Litigation Tactic of Blaming the Agent

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.