As many are aware, the Tennessee Legislature recently amended T.C.A. § 56-7-130, the statute requiring insurance carriers offering homeowner’s insurance in the state to “make available” sinkhole coverage to their insureds. The original statute was enacted in 2006, and its verbiage has created a few issues now going through the court systems. I wanted to comment further on this amendment as it relates to coverage litigation specifically.
The original statute imposed the following requirement upon homeowner property insurers in the state:
(b) Every insurer offering homeowner property insurance in this state shall make available coverage for insurable sinkhole losses on any dwelling, including contents of personal property contained in the dwelling, to the extent provided in the policy to which the sinkhole coverage attaches.
Tenn. Code Ann. § 56-7-130. Some insureds took the position that the meaning of “make available” was that insurance companies had to affirmatively offer sinkhole coverage to their insureds, while insurance companies took the position the statute simply required them to have the coverage available for purchase if desired.
Many lawsuits were filed throughout the state over this specific issue with mixed results. Some trial courts granted summary judgment to insurers and determined insurance companies were not required to affirmatively offer the coverage to their insureds. Other courts found that a fact issue existed preventing the court’s ruling on the issue. Many of these cases are still pending – awaiting a ruling.
Not only does the new verbiage of the statute resolve the “problem” but it clarifies that sinkhole coverage is optional and available upon request by the insured. The statute now makes it clear sinkhole coverage is not mandated to be included in homeowner property insurance policies - only that such coverage be available for optional purchase on request by policyholders. Importantly, the legislative history of this amendment reveals that the legislature did not intend to change the requirements that previously existed – merely to clarify what the requirements were.
The new statute also adds several helpful definitions such as “building stabilization or foundation repairs”, “covered building”, “homeowner property insurance”, “land stabilization”, “primary structural member”, “primary structural system”, and “structural damage” helpful in interpreting the law. According to the new statute, “sinkhole loss” is further clarified to require coverage for “structural damage” and does not include land stabilization. Without “structural damage”, as defined by the statute, any other cracking, shrinking, and/or expansion damage would not be covered even if actually caused by a sinkhole unless otherwise covered under the terms of the policy.
The old statute seemed to required insurers to take certain investigative steps upon receipt of a sinkhole claim:
(d) Upon receipt of a claim for a sinkhole loss, an insurer shall meet the following minimum standards in investigating a claim:
It was not clear whether an insured had to actually have the sinkhole coverage before insurance companies had to follow the required investigative procedures. Now it is clear - insurers are required to follow the statute’s specific investigation standards only if the insured’s policy contained the sinkhole coverage.
Under the standards, if sinkhole coverage is provided, upon a claim for sinkhole loss, the carrier must inspect the property. If structural damage possibly caused by sinkhole activity is present, before a sinkhole claim may be denied, written certification must still be obtained from an engineer or other qualified professional that sinkhole activity did not cause the observed structural damage.
If a loss is covered and determined to be the result of sinkhole activity, the statute speaks directly to how the claim is to be paid. The carriers, through the terms of their policies, may limit recovery to the Actual Cash Value of the loss, excluding the costs for building stabilization or foundation repair, until the insured actually enters a contract for such building stabilization or foundation repair. To receive payment in excess of the aforementioned Actual Cash Value:
· The insured must actually repair the damage in accordance with a repair plan approved by the insurer; and
· The policyholder is required to enter into a contract for foundation and building stabilization repairs within ninety (90) days after the insurer confirms coverage for the loss.
The carrier is required to pay the amounts necessary to begin the repairs and may not require the insured to advance payment for the necessary repairs. Such repairs are required to be completed within twelve (12) months unless there is mutual agreement; the matter is in litigation, appraisal or litigation; or circumstances beyond the control of the insured.
The new law takes effect July 1, 2014. It is a substantial improvement over the previous statute as it provides much needed clarity as to the requirements of insurers in making the coverage available as well as the specific steps required in the event of a covered sinkhole loss.
I recently represented the owner of a commercial property in a hail damage claim in which the metal roof was clearly dented by hail. Remarkably, the insurance company denied the claim on the basis that the roof was still functional. In the process of working with the opposing lawyer to obtain payment, I ran across a FC&S Bulletin that was dead on point:
Direct Physical Loss and Cosmetic Loss
Hail stones have created dents to a copper roof. The section of roofing is located over a second story bay window. It does not appear that the hail has compromised the life span of the roof's surface or otherwise affected or decreased its useful lifespan.
Our HO policy provides coverage for direct physical loss. If the roof's integrity was not compromised by the hail stone impact, has a physical loss occurred?
We believe that some carriers view this type of damage as cosmetic and do not provide coverage for replacement of the copper roof. Does FC & S have an opinion?
Whether or not the dents are cosmetic or affect the roof structure, they are still direct physical loss. The policy doesn’t define damage so standard practice is to go to a desk reference. Merriam Webster Online defines damage as loss or harm resulting from injury to property, person, or reputation. The roof now has dents where it didn't before; that's direct damage. The policy doesn't exclude cosmetic damage, so direct damage, even if it is cosmetic, is covered. It's the same as if vandals had painted the side of the house purple. While cosmetic, it's damage, and is covered. The principle of indemnity is to restore the insured to what they had before the loss, and this insured had a roof with no dents.
This one was fairly obvious to me - - my client had a roof without hail dents before the storm and a roof with hail dents after the storm. But the insurance company denied the claim anyway. I shared this article with the opposing lawyer, and the case was resolved shortly thereafter. I encourage all adjusters, as well as lawyers practicing insurance law, to subscribe to the FC&S Bulletins. Their industry reference materials are often a great supplement to case law.
The Tennessee Court of Appeals' recent decision in Artist Building Partners v. Auto Owners Mut. Ins. Co. serves as an important reminder in coverage disputes that any ambiguities will be strictly construed against the insurance company and in favor of coverage. Tennessee courts have made clear over and over again that any language in an insurance policy is ambiguous if it is susceptible of more than one reasonable interpretation. Going even further, our courts have held that if a disputed provision has more than one plausible meaning, the meaning favorable to the insured control. The Artist Building Partners case reaffirmed these long-standing principles, and I am not at all surprised at the Court's holding.
It was particularly nice to see the Court cite back to a 1996 Tennessee Supreme Court case that noted that "an insured should not have to consult a long line of case law or law review articles and treatises to determine the coverage he or she is purchasing under an insurance policy." The issue really boils down to one of reasonableness. Is the insured's interpretation reasonable and sensible? If so, the insured will (or at least should) win every single time.
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!
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.
Yesterday, I wrote a bit about the recent Tuturea v. Tennessee Farmers Mutual Insurance Company case that was decided last week by the Western Section of the Court of Appeals. Remember, this is the case where the plaintiff's allegedly insane husband set fire to the house in an unsuccessful effort to commit suicide. I saved the best part for today . . .
One of Mrs. Tuturea's arguments in favor of coverage was that the innocent co-insured doctrine should allow her to recover. However, like pretty much all policies I read these days, Tennessee Farmers had contracted around that doctrine to prohibit an innocent insured from recovering when another insured intentionally causes the loss. Accordingly, Mrs. Tuturea lost.
What's intriguing about this this case is that the Court of Appeals stepped outside of its scope of review and considered, without deciding, an issue that was not presented by Ms. Tuturea, i.e., whether the policy language excluding recovery by an innocent co-insured is enforceable at all. The Tuturea court stated,
We recognize that insurance companies have written policies in response to the proliferation of the innocent co-insured doctrine that often expressly exclude recovery by an innocent co-insured or, at the very least, more clearly impose joint responsibility on the co- insureds. An argument exists that these carefully written provisions return the relationship between insureds and the insurer to the former status quo previously deemed unacceptable, but it is not the duty of the judiciary to impose liability where none exists. See Certain Underwriter's at Lloyd's of London v. Transcarriers Inc., 107 S.W.3d 496, 499 (Tenn. Ct. App. 2002) (citations omitted) (recognizing that courts are not at liberty to rewrite an unambiguous insurance policy simply to avoid a harsh result). While courts in other jurisdictions have reformed or held unenforceable policies excluding recovery by an innocent co-insured where the policies did not comply with legislative limitations on liability exclusions, e.g., Sager v. Farm Bureau Mutual Insurance Co., 680 N.W.2d 8, 9 (Iowa 2004); Watson v. United Services Automobile Ass'n., 566 N.W.2d 683, 692 (Minn. 1997). Mrs. Tuturea has not argued that similar limitations govern the enforcement of insurance agreements in Tennessee. Because the specific language of the policies before us clearly excludes recovery by an innocent co-insured, the trial court’s decision is affirmed.
Needless to say, I'll be taking a hard look at the cases cited above as the Court's dicta seems to be a clear invitation for someone to present the issue. A favorable ruling would certainly be advantageous for policyholders, and I see plenty of opportunities to give the Court an opportunity to do just that.
The Tennessee Court of Appeals released Tuturea v. Tennessee Farmers Mutual Insurance Company on June 29, 2010. Its certainly an interesting opinion, although a bit long for fun reading (29 pages). The basic facts are this. Mr. Tuturea suffered from terminal cancer, and set fire to his house in an unsuccessful attempt to commit suicide. His home was destroyed in the fire, and he then passed away a few months later. His wife's claim for insurance proceeds was denied, and she sued to recover on the insurance policy.
The issue presented by Mrs. Tuturea on appeal was whether the fire was "intentional" within the meaning of the subject insurance policy. Relying on expert testimony, she argued that Mr. Tuturea did not form a conscious desire to bring about the fire because "he was insane, had an acute break with reality, and was not in control of his actions when he set the fire." After weighing the evidence, the trial court disagreed, and the Court of Appeals affirmed his decision. What's interesting about this case is the issue that wasn't decided. In a footnote, the court noted that "some jurisdictions hold that an insane person is incapable or forming the intent to commit an intentional act in the insurance context," while others hold "that an actor is able to commit an intentional act so long as the actor understands the physical nature and consequences of the act, regardless of whether the actor is able to distinguish right from wrong." Unfortunately, that issue wasn't presented, nor was it decided.
There was one other interesting twist about this case, but I'll save that for tomorrow.
Earlier this week, the Tennessee Court of Appeals issued a 24 page opinion addressing a variety of issues affecting insureds in the State of Tennessee. The case is Adams v. Tennessee Farmers Mutual Insurance Company, a copy of which is available here. My partner, Clint Scott, and I represented the insured in this case, which was tried way back in December 2008 before Judge Roy Morgan in Chester County. The case was defended by Charlie Trotter, a very talented and experienced defense lawyer who certainly keeps us on our toes. The Court of Appeals opinion is worthy of several blog posts, but I’ll try to summarize the major points here.
First, the Court of Appeals made it crystal clear that legal title is not required in order to have an insurable interest in real property. Tennessee Farmers argued that an insured’s transfer of legal title to a family member mandated a finding that there was no insurable interest. The Court of Appeals disagreed, finding that any interest in property, even the mere right to use property, is enough for a finding that there is an insurable interest. All that is required is that the insured benefit from the property’s continued existence or suffer a loss as a result of its destruction.
Second, the Court of Appeals rejected the proposition that an insured has a duty to notify an insurer of a change in ownership of the insured property when the change in ownership occurs after the policy is issued. This contention actually raised an even broader issue of first impression in Tennessee, i.e., whether an insured has a duty to supplement the disclosures made on an application for insurance after a policy has been issued. After surveying several jurisdictions across the country, the Court of Appeals concluded that there is no such duty, reasoning “the burden is more appropriately placed on the insurer to specify when the insured will be required to notify it of changes in circumstances after the policy is delivered.” Because the policy at issue in this case had no such provision, there was no duty to disclose the change in legal ownership subsequent to the issuance of the policy.
Finally, the Adams case also addressed the issue of whether an insured is entitled to the full policy proceeds when he or she was occupying the property but lacked legal title. In considering this issue, the Court of Appeals again referenced decisions from our sister states and adopted the reasoning of the Oklahoma Supreme Court in concluding that “the insurable interest requirement should not be extended beyond the reasons for its existence by an overly technical construction that frustrates the legitimate expectations of the insured or that permits an insurer to avoid the very risk it intended to insure.”
The Adams case is an important case for first party insurance practitioners on both sides of the bar, and all such lawyers would be wise to read it closely.
Insurance litigation requires a lot of briefing so we keep a stash of helpful citations that are often used in our court filings. An example is the rules that courts must follow when interpreting insurance policies. These rules of construction can be quite helpful in the right case. Below are several that insurance practitioners should not forget:
- Insurance contracts, being subject to the same rules of construction as contracts generally, should be interpreted and enforced as written. Absent fraud or mistake, the terms of a contract should be given their plain and ordinary meaning, for the primary rule of contract interpretation is to ascertain and give effect to the intent of the parties. U.S. Bank, N.A. v. Tennessee Farmers Mut. Ins. Co., 277 S.W.3d 381, 387 (Tenn. 2009).
- The parties' respective rights and obligations are governed by their contract of insurance whose terms are embodied in the policy. As with any other contract, our responsibility is to give effect to the expressed intention of the parties, by construing the policy fairly and reasonably, and by giving the policy's language its common and ordinary meaning. We are not at liberty to rewrite an insurance policy simply because we do not favor its terms or because its provisions produce harsh results. In the absence of fraud, overreaching, or unconscionability, the courts must give effect to an insurance policy if its language is clear and its intent certain. Angus v. Western Heritage Ins. Co., 48 S.W.3d 728, 731 (Tenn.Ct.App. 2000).
- Exclusionary clauses are to be strictly construed against the insurer when drafted by the insurer. Palmer v. State Farm Mut. Auto. Ins. Co., 614 S.W.2d 788, 789 (Tenn. 1981).
- The language of the policy must be taken and understood in its plain, ordinary and popular sense. Where language is susceptible to more than one reasonable interpretation, the language is ambiguous. If such ambiguous language limits the coverage of the insurance policy, that language must be construed in favor of the insured. In determining the “plain, ordinary and popular” meaning of language, courts may refer to dictionary definitions. CBL & Associates Management, Inc. v. Lumbermens Mut. Cas. Co., 2006 WL 2087625, 6 (E.D.Tenn. 2006); Am. Justice Ins. Reciprocal v. Hutchison, 15 S.W.3d 811, 814 (Tenn. 2000).
- Language in a policy is ambiguous if it is capable of more than one reasonable interpretation. Tata v. Nichols, 848 S.W.2d 649, 650 (Tenn. 1993). A contract is ambiguous only if it is of uncertain meaning and may fairly be understood in more ways than one. Rogers v. First Tennessee Bank Nat. Ass'n., 738 S.W.2d 635 (Tenn.Ct.App. 1987).
- If possible, all provisions in the contract should be construed in harmony with each other to promote consistency and to avoid repugnancy between the various provisions. Guiliano v. Cleo, Inc., 995 S.W.2d 88, 95 (Tenn. 1999).
- In Tennessee, exceptions, exclusions, and limitations in insurance policies must be construed against the insurance company and in favor of the insured. Allstate Ins. Co. v. Watts, 811 S.W.2d 883, 886 (Tenn. 1991). The entire policy, however, including insuring clauses and exceptions thereto, must be read as a whole. Am. Sav. & Loan Ass'n v. Lawyers Title Ins. Corp., 793 F.2d 780, 782 (6th Cir. 1986). Further, exceptions should not be construed so narrowly as to defeat their evident purpose. Standard Fire Ins. Co. v. Chester-O'Donley & Assocs., Inc., 972 S.W.2d 1, 8 (Tenn. Ct. App. 1998).
- “[T]he paramount rule of construction in insurance law is to ascertain the intent of the parties.” Blue Diamond Coal v. Holland-America Ins. Co., 671 S.W.2d 829, 833 (Tenn.1984).
- The insuring agreement defines the outer limits of an insurance company's contractual liability. The courts are not at liberty to rewrite an insurance policy solely because they do not favor its terms, and must avoid forced constructions that render a provision ineffective or extend a provision beyond its intended scope. As long as a policy's terms are unambiguous, it will be enforced as written, and courts cannot rewrite an unambiguous policy simply to avoid harsh results. Therefore, the insured cannot simply focus on the declarations/summary portion of a contract in isolation; the policy must be read as a whole. Hoyt v. Pyles, 2007 WL 1217264, 5-6 (Tenn.Ct.App. 2007).
- The insuring agreement sets the outer limits of an insurer's contractual liability. If coverage cannot be found in the insuring agreement, it will not be found elsewhere in the policy. Exclusions help define and shape the scope of coverage, but they must be read in terms of the insuring agreement to which they apply. Exclusions can only decrease coverage; they cannot increase it. Exclusions should also be read seriatim. Each exclusion reduces coverage and operates independently with reference to the insuring agreement. Exclusions should not be construed broadly in favor of the insurer, nor should they be construed so narrowly as to defeat their intended purpose. Once an insurer has established that an exclusion applies, the burden shifts to the insured to demonstrate that its claim fits within an exception to the exclusion. Standard Fire Ins. Co. v. Chester O'Donley & Associates, Inc., 972 S.W.2d 1, 8 (Tenn. Ct. App. 1998).
- An insurance contract should be construed in “a reasonable and logical manner.” Standard Fire Ins. Co. v. Chester O'Donley & Associates, Inc., 972 S.W.2d 1, 7 (Tenn. Ct. App. 1998). When coverage questions arise, the components of a policy should be construed in the following order: 1) the declarations; 2) the insuring agreements and definitions; 3) the exclusions; 4) the conditions; and 5) the endorsements. Id.
Parks' recent post about whether an insured has to rebuild at the same location in order to recover replacement cost got me thinking, and then researching. Here's what I found:
Although none in Tennessee, there are a dozen or so cases across the country dealing with the issue of whether an insured has to rebuild at the same location in order to recover replacement cost. For example, in Hess v. N. Pac. Ins. Co., 859 P.2d 586 (Wash. 1993), the Supreme Court of Washington held that insureds are entitled to replace at an alternate location, but that the reimbursement amount is limited to the amount it would have cost to rebuild at the original location. Specifically, the court stated,
"This particular limitation does not require repair or replacement of an identical building on the same premises, but places that rebuilding amount as one of the measures of damage to apply in calculating liability under the replacement cost coverage. The effect of this limitation comes into play when the insured desires to rebuild either a different structure or on different premises. In those instances, the company's liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises. Although liability is limited to rebuilding costs on the same site, the insured may then take that amount and build a structure on another site, or use the proceeds to buy an existing structure as the replacement, but paying any additional amount from his or her own funds."
Several other courts have rendered similar decisions. See, e.g., Kumar v. Travelers Ins. Co., 211 A.D.2d 128 (N.Y. 1995) (holding that insurance provision offering to pay full cost to repair or replace damaged dwelling on the same premises merely established the limits of coverage and that replacement cost is limited to what it would cost to replace the damaged structure on the same premises, however, the insured is not required to replace the damaged dwelling on the same premises in order to recover replacement cost); Conway v. Farmers Home Mut. Ins. Co. , 26 Cal. App.4th 1185 (Cal. App. 1994 (“[W]hen the insured desires to rebuild either a different structure or on different premises . . . the company’s liability is not to exceed what it would have cost to replace an identical structure to the one lost on the same premises); S and S Tobacco and Candy Co., Inc. v. Greater New York Mutual Ins. Co., 617 A.2d 1388 (Conn. 1992) (holding that construction of replacement structure at different location constituted replacement under the policy).
So as much I hate to say it, Parks seems to have a lot of folks with "Judge" in front of their names who agree with him. And so I guess I agree as well.
Hope everyone had a great Thanksgiving!