IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
FILED
ED REEVES, d/b/a ED’S ) September 17, 1999
IMPORTS, )
Cecil Crowson, Jr.
)
Appellate Court Clerk
Plaintiff/Appellee, )
)
v. ) No. 01A01-9807-CH-00379
)
GRANITE STATE INSURANCE ) Grundy Chancery
CO., ) No. 4708
)
Defendant/Appellant. )
APPEAL FROM THE CHANCERY COURT OF GRUNDY COUNTY
TENNESSEE
THE HONORABLE JEFFREY F. STEWART PRESIDING
ERNEST D. BENNETT, III
TAYLOR, PHILBIN, PIGUE, MARCHETTI
& BENNETT, PLLC
2908 Poston Avenue
Nashville, Tennessee 37203
Attorney for the Defendant/Appellant
ROBERT S. PETERS
100 First Avenue S.W.
Winchester, Tennessee 37398
Attorney for Plaintiff/Appellee
AFFIRMED AND REMANDED
PATRICIA COTTRELL, J.
CONCURS:
BEN CANTRELL, P. J., M.S.
DISSENTS IN SEPARATE OPINION:
WILLIAM C. KOCH, JR., J.
OPINION
This is an action to recover upon an insurance policy insuring an
automobile against loss. The named insured, Mr. Nance, the owner of the
automobile, is not a party to the action. Instead, the suit was brought by Ed
Reeves, doing business as Ed’s Imports, in his capacity as the loss payee named
in the insurance policy. This appeal involves the rights of the loss payee under
the loss payable provision of the insurance contract where, after the loss, the
insurance company canceled the policy retroactively due to a discovered
misrepresentation in the application by the insured. The trial court ruled in favor
of the appellee, Ed’s Imports. We affirm.
Ed Reeves, doing business as Ed’s Imports, sold a 1992 Nissan Maxima
to Mr. Nance and financed this purchase. Mr. Nance gave Mr. Reeves a
promissory note, and agreed to maintain insurance coverage on the car. Mr.
Nance purchased that insurance from Granite State Insurance Company, the
appellant. Granite State issued the policy, which designated Ed’s Imports as the
loss payee. Also included in the policy was a provision establishing a
“deductible” for the loss payee. Ed’s Imports received notice of the insurance
and its loss payee status from the insurer.
Mr. Nance’s car was stolen on June 8, 1996, and a claim was filed. In the
course of its investigation, Granite State discovered that Mr. Nance had been
convicted of felonious possession of marijuana before he applied for insurance
coverage. In his application for insurance, he had answered “no” to the question,
“has anyone in household been arrested for any offense other than traffic
offenses?” Based upon this misrepresentation by the insured, Granite State
denied the claim and canceled the insurance policy retroactively, declaring it
void ab initio.
2
Ed’s Imports, the loss payee, does not dispute the insurance company’s
right to cancel the policy retroactively with regard to the insured. Therefore, we
need not consider the validity of the insurance company’s retroactive
cancellation of the policy as to the insured.
Ed’s Imports, the loss payee, attempted to recover from the insurance
company, and Granite State denied that claim. Ed’s Imports filed suit in the
Chancery Court of Grundy County, and the matter was tried by Stipulation of
Facts submitted by the parties. The trial court found that, under the terms of the
policy, the loss payee was entitled to recover. The court found that the policy
should be construed to require notice to the loss payee before cancellation would
be effective as to the loss payee, that any ambiguity in this regard should be
resolved in favor of the loss payee, and that the loss occurred prior to the notice
of cancellation of the policy. The trial court awarded Ed’s Imports the stipulated
amount, $12,008. Granite State appeals that decision.
Counsel for both parties have clearly and accurately defined the issue for
this Court and for the trial court:
Whether Granite State’s ab initio cancellation of the policy,
subsequent to the loss, prevents recovery by the loss payee, based
upon the terms and conditions of the policy and applicable law.
Since the questions raised herein are purely questions of law and not of
fact, our review is de novo on the record with no presumption of correctness of
the trial court’s conclusions of law. See Chrysler Credit Corp. v. Noles, 813
S.W.2d 437, 438 (Tenn. App. 1990); Adams v. Dean Roofing Co., 715 S.W.2d
341, 343 (Tenn. App. 1986).
I.
Both parties rely upon the following provision, which they refer to as the
3
loss payable clause, and the outcome of this case largely turns on the
interpretation of this language:
Loss or damage under this policy shall be paid, as
interest may appear, to you and the loss payee shown
in the Declarations or in this endorsement. This
insurance with respect to the interest of the loss payee,
shall not become invalid because of your fraudulent
acts or omissions unless the loss results from your
conversion, secretion or embezzlement of “your
covered auto.” However, we reserve the right to
cancel the policy as permitted by policy terms and
cancellation shall terminate this agreement as to the
loss payee’s interest. We will give the same advance
notice of cancellation to the loss payee as we give to
the named insured shown in the Declarations.
Under Tennessee law, where an insurance contract includes an “open” or
“simple” loss payable clause, a loss payee has no greater right than the insured.
See Hocking v. Virginia Fire & Marine Ins. Co., 99 Tenn. 729, 42 S.W. 451
(1897); Central Nat’l Ins. Co. v. Manufacturers Acceptance Corp., 544 S.W.2d
362 (Tenn. 1967). Open or simple clauses designate the loss payee, and declare
that the loss, if any, is payable to the mortgagee as its interest may appear. The
rights of the mortgagee under a simple loss payee clause are wholly derivative
and cannot exceed those of the insured. In Hocking, the court held that the act of
the insured in burning down the covered property extinguished her right to
recover under the insurance contract as well as the rights of the mortgagee or loss
payee. Hocking, 42 S.W. at 451. In Central National Insurance, the chattel
mortgagee/loss payee was denied recovery because of the acts of the insured who
breached material conditions of the policy. Central Nat’l Ins., 544 S.W.2d at
364. In that case, however, the court noted that the contract in question
contained no language “protecting the interest of the mortgagee from acts or
omissions of the insured-mortgagor.” Id.
A clear majority of jurisdictions recognize the existence of a second type
4
of mortgagee or loss payee clause, the “standard” or “union” clause, which is the
type referred to in Central National Insurance as missing from that contract.
Standard or union clauses designate the mortgagee, and then go a step further.
The signature characteristic of a standard clause is that it contains language
insuring that the interest of the mortgagee will not be invalidated by certain acts
of the insured. See, e.g., Nationwide Mut. Ins. v. Dempsey, 495 S.E.2d 914 (N.C.
App. 1998); see generally 4 Lee R. Russ, Couch on Insurance 3d § 65.32 et seq.
A standard or union clause appears in a policy obtained by the mortgagor for
the benefit of both the mortgagor and the mortgagee. Where an insurance policy
contains a standard or union mortgage clause, the mortgagee has an independent
contract with the insurer, the rights of a mortgagee can be greater than those of
the insured, and the mortgagee’s rights are determined by its separate contract
with the insurer. Id. at § 65.32.
Tennessee courts have long recognized the existence of the two types of
mortgagee or loss payee clauses and the difference in the effect of their inclusion
in an insurance contract. See Laurenzi v. Atlas Ins. Co., 131 Tenn. 644, 176 S.W.
1022 (1915).
That view is that the contract evidenced by the rider is
a separate and distinct one with the mortgagee,
designed for his protection, and in operation from the
date of its execution; that, in so far as the policy or
contract with the mortgagor is in harmony therewith,
it is to be referred to, to supplement and complete the
terms of the mortgagee’s contract, and, in so far as the
policy is out of harmony with the rider, such adverse
provisions are to be disregarded; and, further, that
under such a contract the security of the mortgagee
cannot be invalidated, either in whole or in part, by
any act or neglect of the mortgagor, either prior or
subsequent to the execution of such contract with the
mortgagee.
Laurenzi, 176 S.W. at 1024.
5
Our courts have consistently held that where the insurance policy contains
a standard or union mortgage clause, the mortgagee has an independent contract
with the insurer. See Third Nat’l Co. v. Thompson, 28 Tenn. App. 436, 191
S.W.2d 190 (1945); Phoenix Mut. Life Ins. Co. v. Aetna Ins. Co, 59 S.W.2d 517
(Tenn. 1933); Phoenix Mut. Life Ins. Co. v. Greene County Farmers’ Mut. Fire
Ins. Co., 54 S.W.2d 971 (Tenn. 1932). Although these cases deal with policies
insuring real property,1 Tennessee courts have also recognized that a standard
mortgage clause contained in an insurance policy for personal property has the
same effect. See Union Planters Nat’l Bank v. American Home Assurance Co.,
865 S.W.2d 907 (Tenn. App. 1993) (bank which lent money for purchase of an
aircraft sued insurer under standard mortgage clause); Noles, 813 S.W.2d at 439
(“The primary importance of the distinction is that the standard clause provides
a separate and distinct contract between the insurer and the lienholder,”
regarding an automobile liability policy); Central Nat’l Ins. Co., 544 S.W.2d at
364 (while interpreting a simple or open clause contained in a motorcycle
insurance policy, the court in dicta noted the existence of standard or union
clauses).
In a recent case involving the applicability of the doctrine of res judicata
to subrogation claims against the insured by an insurer who had paid the loss
payee, this Court noted:
We begin our analysis with the observation that
plaintiff [the insurer] was charged with the knowledge
that its separate contractual obligation with First
1
A statute passed after Laurenzi, now codified at Tenn. Code Ann. § 56-7-804,
protects the interest of a mortgagee from invalidation of a fire insurance policy on realty
because of any act or neglect of the insured. The standard mortgage clauses in that type of
policy could not provide less protection to the mortgagee than the statute. Thus, the language
in the cases involving fire insurance on real property may indicate that the insurer cannot limit
the loss payee’s interest by specifying which acts of the insured may result in invalidation. The
standard mortgage clause language required by Tenn. Code Ann. § 56-7-804 is not required in
other types of insurance.
6
Tennessee [the loss payee] would not generally be
invalidated by the acts of the insured or others . . .
Penn-America Ins. Co. v. Crittenden, 984 S.W.2d 231, 232 (Tenn. App. 1998).
Our Supreme Court has stated that the essential nature and purpose of a
standard or union clause is “to furnish to the mortgagee a reliable security in a
definite sum free from any interference on the part of the mortgagor which
would, to any extent, invalidate or make less adequate that security.” Laurenzi,
176 S.W. at 1026.
The loss payable clause at issue herein clearly includes the language
necessary to classify it as a standard or union clause: “This insurance with
respect to the interest of the loss payee, shall not become invalid because of
your [the insured’s] fraudulent acts or omissions unless the loss results from
your conversion, secretion or embezzlement of ‘your covered auto.’ ”2 Thus,
2
Nationwide Mutual Insurance Co. v. Dempsey involved a clause almost identical to
the one in this case. That provision read:
Loss or damage under this policy shall be paid as interest may
appear to you and the loss payee shown in the Declarations.
This insurance covering the interest of the loss payee shall
become invalid only because of your conversion or secretion of
your covered auto. However, we reserve the right to cancel the
policy as permitted by policy terms and the cancellation shall
terminate this agreement as to the loss payee’s interest. We will
give the loss payee 10 days notice of cancellation.
Dempsey, 495 S.E.2d at 915.
The court discussed the two types of mortgagee (or loss payee) clauses. “The first,
typically referred to as a ‘standard or union mortgage clause,’ stipulates that ‘the interest of the
mortgagee in the proceeds of the policy shall not be invalidated by any act or neglect of the
mortgagor.’ This type of clause acts as a distinct and independent contract between the
insurance company and the mortgagee and ‘confer[s] greater coverage to the lienholder than
the insured has in the underlying policy.’” Id. The court found that the language, “insurance
covering the interest of the loss payee shall become invalid only because of your conversion
or secretion of your covered auto,” clearly extends to the loss payee greater coverage than that
extended to the insured as it sets only two instances in which the loss payee’s insurance
coverage will become invalid. Id. at 916.
In Pittsburgh National Bank v. Motorists Mutual Insurance Co., 87 Ohio App.3d 82,
84, 621 N.E.2d 875, 876 (1993), the Ohio Court of Appeals held that the following language,
which echoes the language of the policy at issue, constituted a standard loss payable clause:
7
Granite State has provided greater protection to Ed’s Imports than to the
insured and has created a separate contract with Ed’s Imports. In its brief,
Granite State acknowledges that the loss payable clause in its policy is a
standard mortgage clause, but asserts that it provides only a “modicum” of
protection greater than that of the insured.
II.
The issue, therefore, is whether the separate contract between the
insurer and the loss payee allows the insurer to retroactively cancel it.
In interpreting an insurance contract, standard principles of contract law
apply. See Hurley v. Tennessee Farmers Mut. Ins. Co., 922 S.W.2d 887, 892
(Tenn. App. 1995); Union Planters, 865 S.W.2d at 912. In construing
contracts, the words expressing the parties’ intentions should be given their
usual, natural, and ordinary meaning. See Taylor v. White Stores, Inc., 707
S.W.2d 514 (Tenn. App. 1985). All provisions of a contract should be
construed as in harmony with each other, if such construction can be
reasonably made, so as to avoid repugnancy between the several provisions of
a single contract. See Bank of Commerce & Trust Co. v. Northwestern Nat’l
Life Ins. Co., 160 Tenn. 551, 26 S.W.2d 135 (1930).
Additionally, where by reason of ambiguity in the language employed
in a contract of insurance, if there is doubt or uncertainty as to its meaning,
and it is fairly susceptible of two interpretations, one favorable to the insured
and the other favorable to the company, the former will be adopted. See
Loss or damage under this policy shall be paid, as interest may
appear, to you and the loss payee shown in the Declarations.
This insurance covering the interest of the loss payee shall not
become invalid because of your fraudulent acts or omissions
unless the loss results from your conversion, secretion, or
embezzlement of your covered auto ...
8
Elsner v. Walker, 879 S.W.2d 852, 855 (Tenn. App. 1994); See also Palmer
v. State Farm Mut. Auto Ins. Co. , 614 S.W.2d 788, 789 (Tenn. 1981);
Travelers Ins. Co. v. Aetna Cas. and Sur. Co., 491 S.W.2d 363, 365 (Tenn.
1973) (exclusions will be strongly construed against the insurer).
While a standard mortgage clause creates a separate contract of
insurance for the mortgagee’s separate benefit, that separate contract is
engrafted upon the main policy and can be understood by reference to the
policy. See Union Planters, 865 S.W.2d at 912. However, the standard
mortgage clause will prevail, as to the loss payee’s interest, over contrary
provisions in the policy. See Third Nat’l Co., 191 S.W.2d at 193. As stated
in Laurenzi, the insurance policy is to be referred to and will be used to
supplement or complete the terms of the mortgagee’s contract only “in so far
as the policy with the mortgagor is in harmony therewith.” Laurenzi, 176
S.W. at 1024.
The provisions of the separate contract between the loss payee and the
insurer, created by the standard mortgage clause, determine the loss payee’s
rights. “Obviously, any claim ... must arise from a contract and the contract
between the parties in this instance is the breach of warranty endorsement
[standard mortgage clause], which provisions must control.” Union Planters,
865 S.W.2d at 912. Thus, the language of the standard mortgage clause, or
loss payable clause, is the primary source of the loss payee’s rights. See
Phoenix v. Greene County Farmers’ Mut., 54 S.W.2d at 972; Phoenix v.
Aetna Ins. Co., 59 S.W.2d at 518. The independent or separate contract “is
measured by the terms of the mortgage clause itself.” Noles, 813 S.W.2d at
439.
9
Both parties rely on the same paragraph in the insurance contract (the
loss payable clause), but differ in their interpretation of that paragraph by
stressing different provisions within it. The insurer relies on the language of
the loss payable provision which states: “We reserve the right to cancel the
policy as permitted by policy terms3 and cancellation shall terminate this
agreement as to the loss payee’s interest.” (emphasis added). The insurer
argues that it retroactively canceled the policy as to the insured, and that such
cancellation also terminated the loss payee’s interest.
On the other hand, the loss payee relies upon the provision which
states, “This insurance with respect to the interest of the loss payee, shall not
become invalid because of your fraudulent acts or omissions unless the loss
results from your conversion, secretion or embezzlement of your covered
auto.” (emphasis added).
3
The terms of the policy governing cancellation provide:
TERMINATION
A. Cancellation. This policy may be canceled during the policy period as follows:
***
2. We may cancel by mailing to the named insured shown in the
Declarations at the address shown in this policy:
a. at least 10 days notice:
(1) if cancellation is for nonpayment of premium; or
(2) if notice is mailed during the first 60 days this policy is
in effect and this policy is not a renewal or continuation
policy; or
b. at least 20 days notice in all other cases
***
3. After this policy is in effect for 60 days, or if this is a renewal or
continuation policy, we will cancel only:
***
c. If the policy was obtained through material misrepresentation.
***
D. Other Termination Provisions.
***
3. The effective date of cancellation stated in the notice shall become the
end of the policy period.
10
The loss payable paragraph can be read to give effect to all of its
component provisions, and can be read in harmony with the policy as a whole,
if the words “invalid” and “cancel” are given their plain and distinct
meanings. By the language it used, Granite State has promised the loss payee
that the insurance will not become invalid as to the loss payee’s interest due to
fraudulent acts or omissions of the insured except those specific acts named in
the loss payable clause. A cancellation which is retroactive to the date of
issuance of the policy is, in effect, an attempt to render the policy invalid from
its inception. The insurer cannot avoid its commitment not to invalidate the
loss payee’s interest by calling its action a cancellation which became
effective on the date of policy issuance. In view of the insurer’s commitment
to the loss payee, the terms “cancel” and “cancellation”, must be interpreted
as providing a prospective remedy only, unavailable to invalidate the loss
payee’s interest after a loss,4 absent one of the circumstances enumerated by
the insurer in its contract with the loss payee.5
The insurer would have us interpret its commitment to the loss payee to
be limited to the situation where the insured’s misrepresentation relates to the
loss, asserting: “Where the insurer would seek to avoid payment of a loss
after its occurrence because of some fraudulent conduct of the insured in
reference to the loss, the loss payee would be protected by the provision of the
loss payable clause in regard to fraud of the insured. Where, however, the
insured lawfully cancels the policy pursuant to its cancellation provision, and
4
Generally, the rights of a loss payable mortgagee are determined at the time of the
loss. See Benton Banking Co. v. Tennessee Farmers Mut. Ins. Co., 906 S.W.2d 436, 438
(Tenn. 1995).
5
It is undisputed that the insured did not commit any of the acts so enumerated, and
the insurer itself characterizes the insured’s misrepresentations as fraudulent.
11
the reasons have nothing to do with fraud of the insured in connection with
the loss, instead having to do with fraud in the inception by the insured
wrongfully procuring the policy, the cancellation is as effective against the
loss payee as against the insured.”
We disagree with the insurer’s interpretation of the loss payee’s
separate contract. The loss payable provision simply does not contain the
words the insurer would have us insert. We interpret the provision as
prohibiting invalidation by the insurer of the loss payee’s interest due to any
fraudulent acts or omissions of the insured except those enumerated in the
provision itself.6
III.
The insurer also argues that the insured’s misrepresentation in the
application renders the policy voidable from its inception, at the option of the
insurer, on the basis of provisions of the policy and on the basis of Tenn.
Code Ann. § 56-7-103.
The insurer relies upon the policy’s termination provisions and the
following two provisions, the first of which is part of the loss payable clause,
and the second of which is referred to as the fraud provision:
However, we reserve the right to cancel the policy as
permitted by policy terms and cancellation shall
terminate this agreement as to the loss payee’s
interest. We will give the same advance notice of
cancellation to the loss payee as we give to the
named insured shown in the Declarations.
...
6
In Noles, 813 S.W.2d at 439, this Court held that the loss payee was protected even
though the insured had let the policy lapse by failing to pay premiums. The loss payable clause
in that contract required the insurer to give ten days notice prior to cancellation of the
lienholder’s protection and also stated that the loss payee’s interest would “not be invalidated
by any act or neglect of the . . . mortgagor.” Id.
12
We do not provide coverage for any ‘insured’ who
has made fraudulent statements or engaged in
fraudulent conduct in connection with any accident
or loss for which coverage is sought under this
policy.
It is the insurer’s position that the fraud provision allows it to cancel the
policy due to the insured’s misrepresentation, that the termination provision
allows the cancellation to become effective on the date the insurer chooses to
state in the notice of cancellation, that the cancellation notice herein dated
November 25, 1996, stated that the cancellation was to take effect at
12:01a.m. on February 28,1996, that the loss payee was only entitled to the
same notice as the insured, and that the retroactive cancellation was valid as
to both the insured and the loss payee under the language of the loss payable
clause.
We respectfully do not agree with the insurer’s interpretation of the
policy provisions as they apply to the separate contract with the loss payee.
First, although the loss payee’s interest can be terminated by cancellation, that
cancellation must comply with the policy terms, under the language the
insurer relies on and under well-settled law. When an insurance company
seeks to cancel a policy, strict compliance with policy cancellation provisions
is required in order to effectuate cancellation. See Jefferson Ins. Co. v. Curle,
771 S.W.2d 424 (Tenn. App. 1989); State Automobile Mut. Ins. Co. v. Lloyd,
54 Tenn. App. 587, 393 S.W.2d 17 (1965).
The termination provisions of the policy contain no language
authorizing retroactive cancellation and, in fact, require advance notice of
cancellation. The insurer has promised to give the loss payee the same
advance notice as is given to the insured. Second, even if the fraud clause
13
provides a basis for the insurer to deny coverage ab initio7 to the insured,
there is a distinction between canceling a policy and denying coverage after a
loss or attempting to avoid the policy. While we agree that such a distinction
may not have practical meaning with regard to the insured in this situation, it
has significance to the interest of the loss payee by virtue of the language used
by the insurer in its policy. Lastly, the fraud clause, by its terms, applies only
to coverage of the insured. It does not affect the loss payee’s separate
contract.
We find that the policy provisions do not authorize the insurer to
retroactively cancel the policy so as to invalidate the loss payee’s interest on
the basis of the insured’s misrepresentation in his application.
IV.
The insurer also relies on Tenn. Code Ann. § 56-7-103 as authorizing it
to void the policy, thereby invalidating the loss payee’s interest. That statute
provides:
No written or oral misrepresentation or
warranty therein made in the negotiations of a
contract or policy of insurance, or in the application
therefor, by the insured or in the insured's behalf,
shall be deemed material or defeat or void the policy
or prevent its attaching, unless such
misrepresentation or warranty is made with actual
intent to deceive, or unless the matter represented
increases the risk of loss.
As stated by the insurer, Tenn. Code Ann. § 56-7-103 provides an
insurer with a defense which may render a contract voidable.8 See National
7
The validity of the cancellation ab initio as to the insured is not at issue in this appeal.
8
A voidable contract is one where one or more parties have the power to avoid the
legal relations created by the contract, or by ratification of the contract to extinguish the power
of avoidance. Accordingly, a voidable contract is valid and binding until it is avoided by the
party entitled to avoid it. See Newton v. Cox, 878 S.W.2d 105, 108 (Tenn 1994).
14
Union Fire Ins. Co. v. F.D.I.C., 837 S.W.2d 373, 381 (Tenn. 1992). The
statute prohibits an insurer from invalidating an insurance contract except in
the specified circumstances. Where those circumstances are present, an
insurer is allowed, but not required, to avoid a contract. An insurer retains
the option to waive invalidation and continue a contract of insurance after
discovery of misrepresentation. An insurer also retains the right to limit its
ability to void a policy by an express agreement to do so. Similarly, we see
no reason why an insurer cannot, by contract, agree to waive its right to
invalidate a policy as to the loss payee to whatever extent it wants.
With regard to the effect of Tenn. Code Ann. § 56-7-103 on the
separate and independent contract between Granite State and Ed’s Imports,
even if Granite State can avoid its contract with the insured in reliance on the
statute and its policy provisions, the voiding of that contract does not
automatically render the separate contract with the loss payee void.9
In Jackson v. American Eagle Fire Insurance Co., 92 S.W.2d 874
(Tenn. 1936), our Supreme Court held that both the insured and the loss payee
were cut off from their right to recover where, at the time of the purchase of
the policy, the loss payee was aware that the insured did not have
unconditional ownership of the covered property, as was required by the
policy. The court relied in part upon the statute and upon the standard
mortgage clause in that policy which required the mortgagee to give notice of
9
Oklahoma courts have held that a standard or union clause is effective to protect the
interest of the mortgagee even though the policy itself was void ab initio as to the mortgagor.
Great American Ins. Co. v. Southwestern Finance Co., 297 P.2d 403 (Okla. 1956); Oklahoma
State Union of Farmers’ Educational & Cooperative Union v. Folsom, 325 P.2d 1053 (Okla.
1958). Similarly, in Pittsburgh National Bank v. Motorists Mutual Ins. Co., 87 Ohio App.3d
82, 621 N.E.2d 875 (1993), the court held that where the actions of the insured would render
the loss beyond the scope of the policy coverage, the mortgagee is not precluded from coverage,
absent such a limitation in the loss payable clause.
15
any increase in hazard, finding that ownership as tenant by the entirety while
insuring the property as sole owner was an increased hazard. Id. at 875.
However, in Third National Co., this Court found that a
misrepresentation as to the nature of the use of the insured premises and a
breach of a stipulation against an increase in hazard did not render the policies
void, where the policy included the statement that the entire policy, unless
otherwise agreed, would be void if the hazard was increased by any means
within the control or knowledge of the insured. Id., 191 S.W.2d at 192.
Holding that the policies were “merely voidable if the insurers chose to avoid
them,” the Court further stated:
The policies, however, were voidable only as to the
insured, not as to the mortgagee. Such is the effect
of the mortgage clause. This misrepresentation, or
increase of the hazard, was an act of the insured, not
participated in or known by the mortgagee. That
clause stipulates, among other things, that the
insurance as to the interest of the mortgagee ‘shall
not be invalidated by any act or neglect’ of the
mortgagor or owner of the property insured, nor by
the ‘occupation of the premises for purposes more
hazardous than are permitted’ by the policy.
Id., 191 S.W.2d at 193.
In General Electric Credit Corporation v. Kelly & Dearing Aviation,
765 S.W.2d 750 (Tenn. App. 1988) this court denied recovery to the
lienholder/loss payee because it found that the loss was due to conversion, a
situation expressly excluded from the protection afforded the loss payee in the
policy. The relevant provision of the policy stated, “should you do anything
which makes your coverage invalid, we will still make a payment to that
lienholder or lessor . . . . We won’t cover your conversion, embezzlement or
secretion of the aircraft.” The insurer also had argued that the insured had
16
made material misrepresentations on its application, thereby rendering the
policy void ab initio, and that the policy should be considered as if it never
existed. Id. at 753. This court found no evidence of misrepresentation in the
application, but stated:
Furthermore, in Tennessee clauses such as this,
lienholder’s endorsement have long been held to
create “a separate and independent contract between
the insurer and the mortgagee that the latter’s rights
cannot be invalidated by any act or neglect of the
mortgagor or insured . . .” Third National Company
v. Thompson, 191 S.W.2d 190, 193 (Tenn. App.
1945). See also, Couch on Insurance 2d, § 74: 347.
Id.
The court further held:
The language used in the lienholder’s endorsement
provides that, regardless of whether the insured does
anything which would cause his coverage to be
invalidated, the insurer will pay the lienholder.
...
[U]nless conversion, embezzlement or secretion by
[insured] can be shown, [lienholder] is entitled to
payment under the lienholder’s endorsement.
Id.
Similarly, in First Tennessee Bank National Ass’n v. U.S. Fidelity and
Guaranty Co., 829 S.W.2d 144, (Tenn. App. 1991), this court found, partially
on the basis of Tenn. Code Ann. § 57-6-103, that a mortgagee bank’s failure
to disclose material information (the co-insured former spouse had threatened
to burn his dwelling to the insurer made the separate contract between the
mortgagee and the insurer voidable. The court based its reasoning on the fact
that the mortgagee, as a party to the independent contract created by the
mortgage clause, was under the duty to disclose conditions affecting the risk.
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Id.
In the case now before us, there is neither proof nor allegation that Ed’s
Imports, the loss payee, had any knowledge of the insured’s misrepresentation
on his application. Such knowledge and failure to disclose, if under a duty to
do so, appear to be the determining factors in denying recovery to a loss payee
due to an insured’s misrepresentation. This interpretation is consistent with
the premise that the loss payee has a separate contract and with the law
regarding the ability of an insurer to avoid liability under its contract with the
insured on the basis of misrepresentation by the insured. To avoid coverage
on the basis of the statute, the insurer must first prove a misrepresentation.
See Gatlin v. World Serv. Life Ins. Co., 616 S.W.2d 606, 608 (Tenn. 1981);
Womack v. Blue Cross & Blue Shield, 593 S.W.2d 294, 295 (Tenn. 1980).
Since Ed’s Imports committed no misrepresentation, the statute cannot be
used by the insurer to void its separate contract with the loss payee.
In essence, the statute provides to an insurer a defense of
misrepresentation to a claim by the insured under an insurance contract, when
properly pled and under the appropriate circumstances. See, e.g., National
Union Fire Ins. v. F.D.I.C., 837 S.W.2d 373 (Tenn. 1992); Bland v. Allstate
Ins. Co., 944 S.W.2d 372 (Tenn. App. 1996). We interpret the loss payable
clause at issue as an assurance that the insurer will not assert the defense of
the insured’s misrepresentation provided by Tenn. Code Ann. § 56-7-103
against the loss payee, unless the loss resulted from the insured’s conversion,
secretion or embezzlement of the covered auto. It is undisputed that Mr.
Nance did not convert, secrete or embezzle the insured automobile, therefore,
under the terms of the loss payable clause, his conduct does not give the
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insurance company the right to assert the defense of misrepresentation against
the loss payee.
IV.
Granite State, through the language of its policy provisions, provided
greater protections to the loss payee than it provided to the insured, and in so
doing created a separate and independent contract between itself and Ed’s
Imports. Based on the foregoing we interpret the language of the loss payable
clause in the instant case to prohibit the insurance company from retroactively
canceling the contract or rendering it invalid or void ab initio with respect to
the loss payee.
The case is remanded to the trial court for whatever further proceedings may
be necessary. The costs of this appeal are hereby taxed to the appellant.
_____________________________
PATRICIA J. COTTRELL, JUDGE
CONCURS:
___________________________
BEN H. CANTRELL, P. J., M.S.
DISSENTS IN SEPARATE OPINION:
WILLIAM C. KOCH, JR., J.
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