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!