IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
December 4, 2003 Session
MARLIN FINANCIAL & LEASING CORPORATION v. NATIONWIDE
MUTUAL INSURANCE COMPANY
Appeal from the Chancery Court for Hamilton County
No. 01-0722 Howell N. Peoples, Chancellor
No. E2003-01045-COA-R3-CV - FILED JULY 29, 2004
This is a declaratory judgment action filed by Marlin Financial & Leasing Corporation (“Marlin”)
against its insurer, Nationwide Mutual Insurance Company (“Nationwide”), seeking a determination
as to coverage under Marlin’s insurance policy with Nationwide. Specifically, the suit seeks to
obligate Nationwide to pay $8,333.33, the amount of Marlin’s settlement of a claim asserted by
AmSouth Bank (“AmSouth” or “the Bank”), and associated attorney’s fees and expenses of
$52,654.05. The trial court granted summary judgment to Marlin, finding that AmSouth’s claim
against Marlin for “loss of use” of certain property was covered under the business liability feature
of the policy and that Marlin was entitled to reimbursement for the amount of its settlement of
AmSouth’s claim and Marlin’s related litigation expenses. The trial court ultimately awarded Marlin
prejudgment interest, but it refused to assess a bad faith penalty against Nationwide. Nationwide
appeals and both sides raise issues. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed; Case Remanded
CHARLES D. SUSANO , JR., J., delivered the opinion of the court, in which D. MICHAEL SWINEY , J.,
joined. HOUSTON M. GODDARD , P.J.,1 did not participate in the Court’s decision.
Parks T. Chastain, Nashville, Tennessee, for the appellant, Nationwide Mutual Insurance Company.
John B. Curtis, Jr., Chattanooga, Tennessee, for the appellee, Marlin Financial & Leasing Company.
OPINION
1
This case was originally assigned to Judge Goddard for the preparation of an opinion. W hen he passed away
on April 2, 2004, the case was reassigned to Judge Susano.
I.
Marlin is in the business of brokering leases among vendors, customers, and financial
institutions. On March 20, 1997, Marlin entered into a lease agreement with Island Cove Marina &
Resort (“Island Cove”) for boat racks and a dry storage building. Prior to entering into the lease,
Marlin arranged for financing through AmSouth Bank. In determining whether to provide financing,
AmSouth relied upon financial information it had received from the owners of Island Cove.
The master lease schedule entered into between Marlin and Island Cove provides, in pertinent
part, as follows:
F. SPECIAL CONDITIONS: . . . (2) Unless otherwise stated in this
Schedule, [Island Cove] is hereby given an option to purchase the
Equipment at the end of the lease term for an amount equal to its then
fair market value.
G. OWNER: The Equipment leased herein is owned by [Marlin]
(referred to in the Lease as “Owner”).
(Capitalization in original).
The master lease agreement entered into between Marlin and Island Cove provides, in
pertinent part, as follows:
* * *
7. EXPIRATION OF TERM AND RETURN OF EQUIPMENT.
Upon the expiration of the term of this Agreement . . . [Island Cove]
shall promptly return the Equipment . . . at its sole expense . . . to
such place as [Marlin] may designate . . . . If [Island Cove] shall
retain possession of the Equipment . . . after the expiration or earlier
termination of this lease, [Island Cove] shall be deemed to be holding
over [on] a month-to-month basis, and all terms hereof shall remain
in full force and effect, including the payment by [Island Cove] of
rent.
[Island Cove] shall make the Equipment available for inspection by
prospective buyers at any reasonable time or times prior to [the]
Expiration or termination of this Lease. At the option of [Marlin],
[Marlin] may keep the Equipment on [the] premises until [Marlin]
shall have leased, sold, or otherwise disposed of the Equipment. . . .
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8. TITLE OF LESSOR: POSSESSION AND USE OF THE
EQUIPMENT. Title to the Equipment shall at all times remain in
[Marlin]. . . .
* * *
17. ASSIGNMENT BY LESSOR. [Marlin] may transfer, sell, or
assign this Lease, title to the Equipment, and/or any rents or other
sums due to become due hereunder, or delegate any of [Marlin’s]
duties hereunder without prior notice to or the consent of [Island
Cove] and in such event [Marlin’s] transferee or assignee shall have
all the rights, powers, privileges and remedies of [Marlin] under this
Lease.
* * *
19. REMEDIES. Upon the occurrence of any Event of Default, and
at any time thereafter so long as the same shall be continuing,
[Marlin] may declare this Lease in default. Such declaration shall be
made by written notice mailed to [Island Cove] at its address
specified above. Upon the mailing of such notice, [Island Cove]
hereby authorizes [Marlin] at any time and from time to time to enter
upon, with or without legal process, any premises where the
Equipment may be located and take possession thereof at [Island
Cove’s] expense. Additionally, upon the mailing of the notice
declaring the Lease in default, [Island Cove], without further demand,
shall pay to [Marlin] an amount equal to any unpaid rentals or other
monies due on or before an Event of Default, plus as liquidated
damages, and not a penalty, at an amount equal to the present value
of all rentals remaining to be paid under the Lease together with the
present value of [Marlin’s] residual interest of the Equipment (as if
no default had occurred) discounted using a simple interest rate per
annum equal to the “Federal Funds Rate” means the average between
the high and low Federal Funds money rate published (as of the date
of the Event of Default (or the next business day)[)] in The Wall
Street Journal such rate representing reserves traded among
commercial banks for overnight use in amounts of one million dollars
or more. If the value of the residual interest of the Equipment is not
specified in the Schedule, it shall be deemed the fair market value of
the Equipment at the end of the term of the Lease. Thereupon,
[Marlin] shall (i) sell the Equipment at a private or public sale, in
bulk or in parcels, with or without notice, and at [Marlin’s] option,
without having to have the Equipment present at the place of sale, or
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(ii) lease, otherwise dispose of or keep idle all or part of the
Equipment subject, however, to its obligation to mitigate damages,
and (iii) at [Marlin’s] option, use [Island Cove’s] premises for any
or all of the foregoing without costs, damages, or otherwise. The
proceeds of sale, lease or other disposition of the Equipment shall be
applied first (1st) to all of [Marlin’s] costs incurred in obtaining
possession of and selling the Equipment, second (2nd), to any unpaid
sums or other monies due [Marlin] under the Lease, including unpaid
rentals, costs, and any indemnification then remaining unpaid; third
(3rd) to the liquidated damages due [Marlin] under this Lease; fourth
(4th) to any incidental damages of [Marlin]; and fifth (5th) any
surplus funds, if any, shall be paid to [Island Cove]. In addition to
any remedies set forth herein or otherwise available at law, [Marlin]
shall also have all the rights and remedies afforded to [Marlin] under
UCC – [L]eases § 47-2A-I 01. et seq., including but not limited to
UCC – [L]eases § 47-1-A-508.
In the event [Marlin] shall be entitled to possession of the Equipment
pursuant to the Section, due to an Event of Default, [Island Cove] (at
its own expense) shall cause the Equipment to be delivered to
[Marlin] at such point or points designated by [Marlin] in accordance
with Section 7. At the option of [Marlin], [Marlin] may keep the
Equipment on any of the premises of [Island Cove] (or where the
Equipment is located) until [Marlin] shall have leased, sold, or
otherwise disposed of the Equipment. For such purposes, [Island
Cove] agrees to use its facilities without charge. [Island Cove] shall
pay [Marlin] all costs and expenses, including reasonable attorney’s
fees, incurred by [Marlin] in exercising any of its rights or remedies
hereunder.
No remedy provided herein is intended to be exclusive, but each shall
be cumulative, and shall be in addition to any other remedy referred
to herein or otherwise available to [Marlin] at law or in equity. The
exercise of any of the remedies provided herein shall not be deemed
to constitute a termination of this Lease unless [Marlin] so notifies
[Island Cove] in writing.
* * *
26. FILING AS TRUE LEASE, SECURITY INTEREST. [Island
Cove] shall execute any such documents or financing statements as
[Marlin] deems to be necessary or advisable and shall otherwise
cooperate to defend the title and interest of [Marlin]. [Island Cove]
agrees to pay all costs of preparing and filing any such
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documentation. . . . It is expressly agreed that any filings or financing
statements shall not be deemed to affect the nature of this Lease as a
true and bona fide equipment lease and/or a Finance Lease, but rather
to give notice to all interested parties of [Marlin’s] interest in the
property. . . .
(Boldface type and capitalization in original) (emphasis added).
Upon entering into the lease, Marlin assigned all of its right, title, and interest in the boat
racks and dry storage building to AmSouth. Marlin then entered into a second lease with Island
Cove on August 28, 1997, for three floating docks. The terms of the second lease are identical to
those of the first lease. As before, AmSouth provided the financing, and in return, Marlin assigned
its right, title, and interest in the docks to the Bank.
The initial lease assignment from Marlin to AmSouth provides, in pertinent part, as follows:
1. [Marlin] hereby assigns to [AmSouth] its entire right, title and
interest in and to that certain Master Lease Agreement (“the Lease”)
. . . between [Marlin] and [Island Cove], together with [Marlin’s]
right to receive all rent and other monies thereunder, and all of
[Marlin’s] right, title and interest in and to any guaranties or other
rights and interests granted to [Marlin] to secure the payments due
under the terms of the Lease. [Marlin] retains the right, title and
interest to any amounts paid by [Island Cove] should [Island Cove]
exercise its option to purchase the Equipment . . . at the end of the
lease term. Should [Island Cove] not exercise this option, [Marlin]
retains the right to take possession of the Equipment and the right to
all proceeds from the sale or other disposition of the Equipment.
The assignment of the August, 28, 1997, lease to the Bank provides, in pertinent part, the following:
1. [Marlin] hereby assigns to [AmSouth] its entire right, title and
interest in and to that certain Master Lease Agreement (“the Lease”)
dated August 28, 1997 and entered into by and between [Marlin] and
[Island Cove], together with [Marlin’s] right to receive all rent and
other monies thereunder, and all of [Marlin’s] right, title and interest
in and to any guaranties or other rights and interests granted to
[Marlin] to secure the payments due under the terms of the Lease.
Subject to Section 2 hereof, [Marlin] retains the right, title and
interest to any amounts paid by [Island Cove] should [Island Cove]
exercise its option to purchase the Equipment . . . at the end of the
lease term. Should [Island Cove] not exercise this option, [Marlin]
retains the right (subject to Section 2 hereof) to take possession of the
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Equipment and the right to all proceeds from the sale or other
disposition of the Equipment.
2. [Marlin’s] right to receive payments from [Island Cove] at the end
of the term of the Lease, as set forth in Section 1, is subject to the
condition that [AmSouth] shall receive full payment of all other
amounts due and owing by [Island Cove] to [AmSouth] under the
Lease. Only after full payment of all amounts due and owing by
[Island Cove] under the Lease to [AmSouth], shall [Marlin] receive
any amounts retained in Section 1.
(Underlining in original). The Addendum to the August 28, 1997, lease assignment provides, in
pertinent part, as follows:
1. Paragraph 1 of the Assignment of Lease dated the 28th day of
August, 1997 by and between [Marlin] and [AmSouth] is amended to
add the following:
“The last two sentences of Paragraph 1 of the
Assignment of Lease, which state that [Marlin] retains
the right, title and interest in and to any amounts paid
by [Island Cove] should [Island Cove] exercise its
option to purchase the equipment and the right to all
proceeds from the sale or other disposition of the
equipment, are subject to and explicitly contingent
upon [Marlin’s] having paid the Loan from
[AmSouth] in full, and such Loan having been duly
cancelled and released by [AmSouth] on its books.
[AmSouth] retains and is granted by [Marlin] all
rights to the equipment and the proceeds thereof until
the Loan from [AmSouth] to [Marlin] has been paid
in full.[”]
2. This Assignment of Lease is unconditional as to AmSouth’s right
to repossess and dispose of the equipment and collect the proceeds
thereof in the event of any default by [Marlin] in the payment of the
Loan from [AmSouth] to [Marlin] during the Lease Term or at any
time prior to final satisfaction of the Loan.
(Underlining in original).
In servicing the leases of the property to Island Cove, Marlin issued checks drawn on
AmSouth to both Island Cove and the vendors who supplied improvements. Marlin then delivered
the checks to Island Cove’s chief manager, who in turn was to deliver the checks to the vendors.
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When Island Cove subsequently filed for bankruptcy, it was discovered that its chief manager had
forged endorsements on some of the vendor checks, resulting in those vendors never receiving
payment for the boat racks or the third floating dock.
It was Marlin’s responsibility to inspect the construction of all of the improvements. Because
of Island Cove’s fraudulent endorsements, not all of the checks earmarked for the dry storage
building were delivered to the vendor, thus making it impossible to determine whose funds had been
used to pay for the building. With respect to the boat racks, they were not installed by the vendor
who had been identified in the lease agreement, and since the checks were not delivered to the
appropriate vendor, there was no way to determine whose funds had paid for the boat racks. The
third of the three floating docks was never constructed.
Island Cove filed for bankruptcy on September 14, 1998, after which no further payments
on the AmSouth loans were made. Thereafter, both R & F Leasing and Pioneer Bank asserted an
interest in the dry storage building and boat racks; additionally, Pioneer Bank claimed at least a
partial interest in the floating boat docks. Island Cove then filed a claim against AmSouth, as
Marlin’s assignee, for the purpose of determining the extent and validity of AmSouth’s interest in
and to the dry storage building, boat racks, and floating docks.
At this point, Marlin persuaded AmSouth to forego joining it as a party to the bankruptcy
litigation in exchange for Marlin’s assistance in establishing the Bank’s ownership interest in the
Island Cove improvements. As a part of this arrangement between AmSouth and Marlin, the parties
entered into a tolling agreement, which preserved the Bank’s right to file suit against Marlin at a later
time.
In the bankruptcy proceeding, a settlement was ultimately achieved. By the terms of the
settlement, AmSouth received a security interest in two floating docks and the right to 25% of the
apportioned sale proceeds attributable to the value of the dry storage building. As a part of the
settlement, AmSouth gave up its interest in one floating dock, 75% of the dry storage building, and
all of the boat racks.
Marlin assisted AmSouth in filing suit against Cornerstone Bank (“Cornerstone”), which had
accepted some of the fraudulently-endorsed checks. The case against Cornerstone was later settled
in mediation. Marlin, as a part of a global settlement, paid AmSouth $8,333.33 to settle any claims
that the Bank had against it.
Prior to the litigation in the bankruptcy and Cornerstone cases, Marlin, in a letter dated
December 11, 1998, had informed its insurer, Nationwide, of the negligence claims being asserted
by AmSouth against Marlin. Nationwide had issued a businessowners insurance policy to Marlin
that was effective from March 7, 1996, until March 7, 1997; Marlin had renewed the policy from
March 7, 1997, through March 7, 1998. The policy’s Businessowners Liability Coverage Form
provided, in pertinent part, the following business liability coverages:
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A. COVERAGES
1. Business Liability
a. We will pay those sums that the
insured becomes legally obligated to
pay as damages because of “bodily
injury,” “property damage,” “personal
injury” or “advertising injury” to
which this insurance applies. We will
have the right and duty to defend any
“suit” seeking those damages. We
may at our discretion investigate any
“occurrence” and settle any claim or
“suit” that may result. . . .
* * *
No other obligation or liability to pay
sums or perform acts or services is
covered unless explicitly provided for
under COVERAGE EXTENSION –
SUPPLEMENTARY PAYMENTS.
* * *
e. Coverage Extension –
Supplementary Payments
In addition to the Limit of Insurance,
we will pay, with respect to any claim
or “suit” we defend:
* * *
(4) All reasonable expenses incurred
by the insured at our request to assist
us in the investigation or defense of
the claim or “suit,” . . . .
* * *
F. LIABILITY AND MEDICAL EXPENSES DEFINITIONS
* * *
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12. “Property Damage” means:
* * *
b. Loss of use of tangible property
that is not physically injured. All such
loss of use shall be deemed to occur at
the time of the “occurrence” that
caused it.
(Capitalization and boldface type in original).
On December 22, 1998, Nationwide gave Marlin’s claim to its employee, Rockwell Dukes,
for investigation. One month later, Nationwide notified Marlin that the issue of coverage was being
investigated, particularly as to the issue of whether a professional services exception applied to
Marlin’s claim. Marlin’s policy contained an exception which provided that Nationwide did not
provide coverage for injuries “due to rendering or failing to render any professional service.” The
policy then contained a list of activities which were not covered under the policy, which included
accounting and legal services, supervisory services, and medical services, among many others.
In October, 1999, the Liability Insurance Research Bureau (“the Bureau”), which researches
and provides opinions to insurance companies on coverage issues, issued an opinion at the request
of Nationwide. It advised Nationwide that the professional services exception contained in the
policy was not applicable to lease brokers such as Marlin. The Bureau reasoned that “[w]hile being
a lease broker requires training, the training is not to the level of specialized intellectual training such
as that of a doctor, lawyer, engineer, or architect.” Two months after receiving the Bureau’s opinion,
Nationwide forwarded Marlin’s case to an attorney and requested a second opinion on the coverage
issue. On February 18, 2000, Nationwide sent a letter to Marlin, advising that it was denying
coverage of Marlin’s claim. Marlin made a second demand for coverage, claiming it was entitled
to reimbursement of legal expenses incurred in assisting AmSouth, as well as reimbursement of the
funds paid to the Bank as part of the settlement in the Cornerstone litigation. Nationwide again
denied coverage.
Marlin filed suit against Nationwide on June 22, 2001, claiming that Nationwide had
breached its insurance contract with Marlin by failing to defend and indemnify it against the claims
of AmSouth. In its complaint, Marlin sought a declaratory judgment of its rights under the
Nationwide policy and asserted that it was entitled to indemnification and reimbursement of
attorney’s fees and expenses; reimbursement of the AmSouth settlement; interest; and costs.
Nationwide answered, denying all liability. Marlin later amended its complaint to assert that is was
entitled to the 25% bad faith penalty, codified at Tenn. Code Ann. § 56-7-105 (2000). Both parties
filed motions for summary judgment.
The trial court filed its initial memorandum opinion and order on July 1, 2002. In that
opinion, the trial court held that the professional services exception in the insurance policy did not
apply to Marlin. The trial court then considered the issue of whether the insurance policy provided
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coverage for attorney’s fees and expenses since no lawsuit was filed against Marlin. The court
concluded that “the actions of Nationwide, through its agent Rockwell Dukes, waived the right to
insist upon a formal lawsuit to trigger coverage and/or created a new contract with Marlin in which
it could not deny coverage on the basis of whether a formal lawsuit had been filed against Marlin.”
In addition, the court held that “the undisputed facts show that Nationwide should be estopped from
insisting that a lawsuit is necessary to trigger coverage.” Finally, the court addressed the issue of
whether the damages sought by Marlin on behalf of AmSouth constitute “property damage” as
defined in the insurance policy. The court held that there were insufficient facts before it to
determine whether AmSouth was the true owner of the property or whether the Bank merely held
a security interest in the property, and therefore, the court concluded that it could not yet rule on the
property damage issue. The court also reserved the issue of Nationwide’s bad faith until the
coverage issue could be resolved.
The trial court filed a second memorandum opinion and order on April 7, 2003, in which it
opined that, contrary to its initial impression, the determination of what constitutes property damage
does not hinge upon whether the agreement between AmSouth and Marlin is a true lease or a
disguised security interest.2 Instead, the court held that AmSouth, as Marlin’s assignee, had the right,
under Marlin’s assignment of its rights to AmSouth, to repossess the property upon Island Cove’s
default. The trial court went on to note, however, that, due to Marlin’s negligence, AmSouth lost
its right to take possession, at least as to some of the property, thereby suffering a “loss of use” of
that property. As this “loss of use” constitutes property damage under the Nationwide policy, the
trial court reasoned that the Bank did indeed suffer property damage, which was covered under the
policy. The trial court went on to address the issue of the bad faith penalty, holding that it was not
appropriate in the instant case. Finally, the trial court held that Nationwide was not liable to Marlin
for prejudgment interest.
Upon consideration of Marlin’s motion to alter or amend the judgment, the trial court
amended its previous judgment to allow for prejudgment interest against Nationwide in the amount
of 10%. From this judgment, Nationwide appeals.
II.
In deciding whether a grant of summary judgment is appropriate, courts are to determine “if
the pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party
is entitled to a judgment as a matter of law.” Tenn. R. Civ. P. 56.04. Courts “must take the strongest
legitimate view of the evidence in favor of the nonmoving party, allow all reasonable inferences in
favor of that party, and discard all countervailing evidence.” Byrd v. Hall, 847 S.W.2d 208, 210-11
(Tenn. 1993) (citations omitted).
2
Nationwide did not argue below, and does not argue now, that this distinction is important in this case. On
this point, it agrees with the trial court.
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Since summary judgment presents a pure question of law, our review is de novo with no
presumption of correctness as to the trial court’s judgment. Gonzales v. Alman Constr. Co., 857
S.W.2d 42, 44-45 (Tenn. Ct. App. 1993).
III.
Nationwide raises three issues, which issues present the following questions:
1. Is Nationwide liable under the insurance policy for monies paid by
Marlin to AmSouth in settlement of claims asserted by the Bank
against Marlin; and for legal fees and expenses incurred by Marlin?
2. Do the damages suffered by AmSouth fall under the “property
damages” language of the insurance policy issued by Nationwide to
Marlin?
3. Did the trial court abuse its discretion in awarding Marlin
prejudgment interest against Nationwide?
Marlin also raises an issue, i.e., whether the trial court erred in failing to find that Nationwide “was
guilty of bad faith in the handling of Marlin’s request for defense and indemnification.”
IV.
A.
Nationwide first contends that its insurance policy with Marlin does not provide coverage
for the amounts paid to AmSouth to settle its claims against Marlin, nor does the policy cover
Marlin’s legal fees and expenses. In support of its position, Nationwide relies upon the language
of the insurance policy, which provides that it will cover “those sums that [Marlin] becomes legally
obligated to pay as damages because of . . . ‘property damage,’ . . . to which this insurance applies,”
and that Nationwide “will have the right and duty to defend any ‘suit’ seeking those damages.” The
applicable insurance policy defines “suit” as follows:
“Suit” means a civil proceeding in which damages because of . . .
“property damage,” . . . to which this insurance applies are alleged.
“Suit” includes:
a. An arbitration proceeding in which such damages
are claimed and to which you must submit or do
submit with our consent; or
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b. Any other alternative dispute resolution proceeding
in which such damages are claimed and to which you
submit with our consent.
Citing this language, Nationwide contends that its obligation to provide coverage is contingent upon
the condition precedent of the filing of a lawsuit against the insured. Because AmSouth never filed
suit against Marlin, Nationwide claims that it is not liable for Marlin’s legal fees and settlement
costs.
In the seminal case of Bill Brown Constr. Co. v. Glens Falls Ins. Co., 818 S.W.2d 1 (Tenn.
1991), the Supreme Court concluded that an insurer “may be estopped to deny coverage for any loss
by the misrepresentations of its agent upon which the insured reasonably relies.” Id. at 12. In
expounding on its pronouncement, the court stated that it
reaffirm[ed] the long-standing rule in Tennessee that any contractual
provision of a policy of insurance, whether part of an insuring,
exclusionary, or forfeiture clause, may be waived by the acts,
representations, or knowledge of the insurer’s agent.
Id. at 13 (emphasis in original).
On January 25, 1999, Marlin’s attorney, John B. Curtis, Jr., wrote a letter to Dukes of
Nationwide summarizing the events surrounding AmSouth’s potential claim against Marlin. The
tolling agreement between Marlin and AmSouth had not yet been executed. Dukes was questioned
by Curtis about the letter during his deposition:
Q: All right. And did you receive a letter from me dated January 25
concerning this particular claim?
A: Yes.
* * *
Q: [Were you] advised in this letter that AmSouth had indicated an
intention to name Marlin as an adverse party in the bankruptcy
proceedings or a separate proceeding[?]
A: Yes.
Q: And were you advised at this time that we had persuaded
AmSouth to forego any adversary proceeding as to Marlin until the
dispute regarding ownership of the leased property was resolved?
A: Yes.
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Q:Was it explained to you that the purpose of that was to avoid
unnecessary attorney fees and to possibly avoid litigation down the
line if we were able to prove ownership of the property?
A: I believe that was the explanation given.
Q: Were you also advised in this letter about AmSouth’s willingness
to proceed in this fashion only if Marlin would execute a tolling
agreement as to any statute of limitation?
A: Yes.
Q: Were you advised that it was thought best to have counsel present
during any involvement between AmSouth and Marlin because of the
potential for AmSouth filing a claim somewhere down the line
against Marlin?
A: Yes.
* * *
Q: Were you asked in this letter to give your thoughts regarding the
proposed tolling agreement?
A: Yes.
Q: And the P.S. acknowledges that we had a conversation on January
25 and that you indicated we should proceed with execution of the
tolling agreement?
A: Yes.
Q: Do you recall having that conversation?
A: I recall speaking to you, but I do not recall specifics.
Q: Do you recall the topic of the tolling agreement coming up in our
discussion?
A: I do remember something about the tolling agreement.
Q: Do you recall a discussion to the effect that it would be wise to go
ahead and execute the tolling agreement in order to avoid a lawsuit by
AmSouth at that point in time?
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A: I believe so.
Q: Do you recall a discussion to the effect that these attorney fees in
defense of Marlin would be incurred in any event; and that if it was
later deemed that there was coverage, that Nationwide could simply
reimburse that expense?
A: I believe that was the agreement, that if there was coverage, we
would reimburse; if there wasn’t, we wouldn’t. And at that time, we
were uncertain as to whether coverage applied or not.
Q: And did you think it was best that we enter into the tolling
agreement at that time in order to avoid the immediate lawsuit and the
fees that would be incurred as a result?
A: I believe so.
Based upon Curtis’ letter to Dukes and their conversation of January 25, 1999, it was
reasonable for Marlin to believe that the failure of AmSouth to bring suit would not be, in and of
itself, a bar to coverage. As the trial court stated, while Nationwide had informed Marlin from the
outset “that the issue of coverage was under investigation,” it had “never informed Marlin that the
basis for the denial would be that a formal lawsuit had never been initiated.” Indeed, Marlin was
initially informed that the coverage investigation revolved around the professional services
exception. Nationwide later stated – in a letter dated February 18, 2000 – that the nature of
AmSouth’s damages might also be excluded, and that other unidentified exclusions could apply.
Significantly, none of this specifically advised Marlin that Nationwide was relying upon the policy
requirement that suit be filed. Furthermore, Nationwide’s reliance on this provision is totally
inconsistent with its reaction to the tolling agreement as fleshed out by the Curtis/Dukes’ discussion
regarding that agreement and the surrounding circumstances.
We agree with the trial court that Nationwide waived the lawsuit requirement through the
words, action, and non-action, of its agent, Dukes. As the trial court stated, “[i]f Nationwide did not
intend to provide coverage based on the fact that AmSouth had not filed a lawsuit against Marlin,
a requirement that is expressly stated in the written policies, it should have consistently informed
Marlin that no expenses would be covered until a formal lawsuit was brought against Marlin.”
Furthermore, we agree with the trial court that the doctrine of estoppel prevents Nationwide
Insurance from relying on the lawsuit provision. Finding the trial court’s analysis of the estoppel
argument to be quite well-reasoned, we will quote from it liberally and adopt it as our own:
Marlin informed Nationwide of the situation and sought approval for
the actions it was taking and the expenses it was incurring. This was
done at a very early stage in the litigation. Mr. Dukes represented
that the expenses would be reimbursed if coverage was not denied.
Marlin relied on the statement and incurred additional fees and
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expenses. Nationwide was fully aware that Marlin was incurring
expenses. Further, Nationwide was notified of Marlin’s situation in
December of 1998. It did not send Marlin a letter detailing the
possible exclusions until February 18, 2000. During this time it was
aware that Marlin was incurring expenses. Yet Nationwide did not
inform Marlin that the lack of a formal lawsuit would preclude
coverage, regardless of whether Marlin had coverage. The time lag
between the time Marlin first contacted Nationwide in [late] 1998
and early 1999 until Nationwide gave Marlin a formal statement of its
position in February of 2000 is another reason why Nationwide
should be estopped from asserting the lawsuit provision. An
insurance company cannot tell an insured that expenses related to
avoiding expensive litigation will be paid, then sit back for months
while the insured’s expenses mount, and hope that the lawsuit settles
so that the insurer can escape without expending any costs.
In short, Nationwide cannot have its proverbial cake and eat it, too. We hold that Nationwide
waived the lawsuit requirement in Marlin’s insurance policy, and alternatively, that Nationwide is
estopped from asserting the suit requirement provision. Accordingly, Nationwide is liable to Marlin
for its settlement costs, as well as its legal fees and expenses, provided the damages claimed by
AmSouth constitute covered “property damage” under the terms of the policy. We now turn to the
second of Nationwide’s three issues, i.e., whether AmSouth’s damages are covered damages under
the policy.
B.
Nationwide asserts that AmSouth sustained an “economic loss” and that its policy does not
cover economic loss. More specifically, it contends that “loss of use” as defined in the policy does
not encompass the type of loss suffered by the Bank. This argument requires us to examine
Nationwide’s policy and to do so under the strictures of the well-established principles of contract
construction.
In interpreting contracts of insurance, we must, as a general rule, apply the same rules of
construction as are applicable to other types of contracts. See McKimm v. Bell, 790 S.W.2d 526,
527 (Tenn. 1990). Such contracts are to be interpreted as they are written – absent any fraud or
mistake – and their terms must be given their plain and ordinary meaning. Swanson v. Mid-South
Title Ins. Corp., 692 S.W.2d 415, 419 (Tenn. Ct. App. 1984). The law is well-settled in this state
that any uncertainties or ambiguities in an insurance policy “must be construed strongly against the
insurer and in favor of the insured.” Travelers Ins. Co. v. Aetna Cas. & Sur. Co., 491 S.W.2d 363,
366 (Tenn. 1973). However, the finding of an ambiguity does not end our inquiry. “Even if
ambiguous, the questioned language must be susceptible to a reasonable interpretation,” which
would favor the party “seeking coverage under the policy.” Allstate Ins. Co. v. Barnes, 896 S.W.2d
565, 571 (Tenn. Ct. App. 1995) (emphasis in original) (citing Tata v. Nichols, 848 S.W.2d 649, 651
(Tenn. 1993)).
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When we look at the policy in the instant case, we are struck by the dearth of definitional
language pertaining to the concept of “loss of use.” The policy provides that it covers two types of
“property damage,” i.e., “[p]hysical injury to tangible property, including all resulting loss of use of
that property” and “loss of use of tangible property that is not physically injured.” It is clear that the
boat racks, floating docks, and dry storage building are “tangible property” and it is likewise clear
that none of the property under discussion suffered “physical injury.” Thus, our focus is upon
whether AmSouth lost the use of the boat racks, a significant part of the dry storage building, and
one floating dock.3 No issue is made with respect to Marlin’s negligence.
In the instant case, Island Cove, the lessee of the property, brought about an “occurrence of
[an] Event of Default” under paragraph 19 of the leases when it filed for bankruptcy protection.
Nationwide does not contend otherwise. Under the leases assigned to AmSouth, that bankruptcy
gave AmSouth the right to “take possession” of the property and the right to “sell” it or “lease,
otherwise dispose of or keep idle all or part of the Equipment subject, however, to its obligation to
mitigate damages.” The issue before us is whether these contractual rights gave AmSouth the right
to “use” the property as the word “use” is found in the concept of “loss of use.”
When we examine the policy and particularly the definitional part of this insurance contract,
we are struck by the fact that loss of use is not defined in any way. It certainly is not defined in a
way that would exclude “economic loss” from its reach.
Since the policy does not define the concept of “loss of use,” we must give those words their
“usual, natural and ordinary meaning.” See Swanson, 692 S.W.2d at 419. To aid us in this task, we
turn to the dictionary. See Am. Justice Ins. Reciprocal v. Hutchison, 15 S.W.3d 811, 815 (Tenn.
2000); Tata, 848 S.W.2d at 653. The word “use” is defined as “[t]o put into service or apply for a
purpose.” The American Heritage College Dictionary 1486 (3d ed. 2000). “Loss” is defined as
“[t]he condition of being deprived . . . of something.” Id. at 801. Thus, as applied to the policy
language before us and considering the operative facts, it appears that, given the ordinary meaning
of these words, “loss of use” means the deprivation of the ability to put the boat racks, the missing
floating dock, and the dry storage building into service or apply them for a purpose.
Nationwide strenuously contends that it did not intend to cover “economic loss;” but it can
point to no language in the policy spelling this out. We recognize one could argue that “loss of use”
is a vague term and hence somewhat ambiguous. This does not help Nationwide. As the author of
the policy, Nationwide had it within its power to define loss of use in a way that would exclude
“economic loss.” It failed to do so. Thus, any ambiguity must be construed against Nationwide and
in favor of Marlin, provided there is a reasonable interpretation of the “loss of use” language which
would provide coverage for AmSouth’s loss. See Allstate, 896 S.W.2d at 571.
3
The one floating dock whose utility was lost by AmSouth was lost because it was never constructed.
Nationwide argues that this dock – never having been built – cannot constitute “tangible property.” Even if this be the
case, it is clear that the other property, the use of which was lost due to Marlin’s negligence, does constitute “tangible
property.”
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The lease is very clear. Once Island Cove filed for bankruptcy, AmSouth had the right to
take physical possession of all of the subject property. In other words, according to the dictionary,
it had the right to possess the property and “put [it] into service” or “apply [it] for a purpose.” While
it was required to do certain things with the property in order to mitigate its damages, this does not
change the fact that it had the right to use the property, i.e., the right to sell it or “lease, otherwise
dispose of or keep idle all or part of the” property under discussion. It lost that right, at least as to
some of the property, because of the negligence of Marlin.
Thus, there is a reasonable interpretation of the policy that would cover AmSouth’s loss.
Since the insurance company chose not to define the somewhat-vague term of “loss of use,” that
failure is construed against Nationwide and in favor of an interpretation of the policy favorable to
Marlin.
Nationwide relies on a number of cases from other jurisdictions to support its position that
this case involves economic loss and that “property damage,” under the language of the Nationwide
policy, does not include economic loss. All of these cases are distinguishable from the case at bar.
In L. Ray Packing Co. v. Commercial Union Ins. Co., 469 A.2d 832 (Me. 1983), the
Supreme Judicial Court of Maine held that “loss of profits” did not fall within the property damage
language in a liability policy with provisions not dissimilar to those in the instant case. Id. at 835-36.
The court in L. Ray noted that the underlying suit was an antitrust action brought under the federal
Clayton Act. Id. at 835. The court relied on a case from the United States Supreme Court and noted
that it was “compelling authority that antitrust actions do not allege property damage.” Id. (citing
Chattanooga Foundry and Pipe Works v. City of Atlanta, 203 U.S. 390, 51 L.Ed. 241, 27 S.Ct. 65
(1906)). The holding in L. Ray is not implicated by the facts of the instant case.
In Liberty Bank of Mont. v. Travelers Indem. Co., 870 F.2d 1504 (9th Cir. 1989), the United
States Court of Appeals for the Ninth Circuit, applying Montana law, addressed a coverage issue
under a policy with “property damage” provisions functionally identical to those in the case at bar.
Id. at 1508. In Liberty Bank, the plaintiff had been sued in the underlying litigation for conduct
which allegedly “‘denied [the claimants] their right to claim a security interest’ against the increase
in the value of the inventory.” Id. The claimants had charged that they invested money in one of
the bank’s customer based upon the bank’s commitment that, if the claimants invested additional
money in the customer who was then in default to the bank, “the bank would subordinate its security
position in the inventory and accounts receivable to the extent that they appreciated in value after
September 1, 1981.” Id. at 1505. When the bank “repudiated its subordination agreement” and
foreclosed its security interest to the detriment of the claimants, they successfully sued the bank. Id.
The plaintiff in Liberty Bank sued its insurance company on the theory that the claimants’
claim in the underlying action fell within the property damage coverage of the plaintiff’s liability
policy with the defendant. Id. at 1505. The court in Liberty Bank held that the claim for which
coverage was being sought did not involve a loss of use of tangible property. Id. at 1509.
While Liberty Bank is similar to the case at bar, there are significant differences which
distinguish it from the instant case. First, Liberty Bank does not set forth the language of the
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document(s) upon which the claimants relied to sustain their rights in that case. We have the
documents in this case and they clearly permit AmSouth to take and utilize the property in one of a
number of ways. Furthermore, Liberty Bank does not attempt to analyze “loss of use” in terms of
the usual and ordinary meaning of those words. We do not find this case persuasive authority for
Nationwide’s position in this case.
Nationwide relies on other cases which we also do not find persuasive. See USX Corp. v.
Adriatic Ins. Co., 99 F. Supp. 2d 593, 617 (W.D. Pa. 2000) (finding no coverage where, in the
underlying case, “liability was imposed for the loss of intangible property, i.e., the ability to compete
and generate profits, gain investment values and increase productivity”); Vogel v. Russo, 613
N.W.2d 177, 179 (Wisc. 2000) (holding that a comprehensive general liability insurance policy with
property damage provisions similar to those in the case at bar did not provide “coverage for
diminution in value of a home that resulted from [the insured’s] faulty masonry work”); Wisc. Label
Corp. v. Northbrook Prop. & Cas. Ins. Co., 607 N.W.2d 276, 278 (Wisc. 2000) (holding that there
was no “property damage” where the loss involved occurred as a result of the mislabeling of
products which in turn “caused the products to be sold at less than half of their intended retail
price”). See also Safeco Co. v. Andrews, 915 F.2d 500 (9th Cir. 1990); Comm. Union Ins. Co. v.
Image Control Prop. Mgmt., 918 F. Supp. 1165 (N.D. Ill. 1996); Fireman’s Fund Ins. Co. v. Nat’l
Bank for Coops., 849 F. Supp. 1347 (N.D. Cal. 1994); Ticor Title Ins. Co. v. Employers Ins., 48
Cal. Rptr. 2d 368 (Cal. Ct. App. 1995); Standard Fire Ins. Co. v. Chester-O’Donley & Assoc., 972
S.W.2d 1 (Tenn. Ct. App. 1998) (decided under Kentucky law). None of these cases involve facts
that are similar to the facts in the instant case.
In the instant case, we are dealing with a claim by a third party for a loss that we have found
is covered under the applicable policy language as interpreted under well-established precedent.
Nationwide’s argument pertaining to “economic loss” is a “red herring” in this case. AmSouth’s
claim was based upon its inability, because of Marlin’s negligence, to “use” some of the property
it had a right to use under the assigned contract documents. In our judgment, it matters not, under
the language of the policy before us, how AmSouth was going to use the property; what matters is
that it had a right to use property and that right was lost due to Marlin’s negligence. The cited cases
are of no help to us in resolving the questions now before us. They simply are not implicated by the
facts of the instant case.
C.
Finally, Nationwide argues that the trial court erred in awarding Marlin prejudgment interest
of 10%. We disagree.
The decision of whether to award prejudgment interest is within the sound discretion of the
trial court and will not be disturbed by an appellate court absent “a manifest and palpable abuse of
discretion.” Myint v. Allstate Ins. Co., 970 S.W.2d 920, 927 (Tenn. 1998). “A trial court acts
within its discretion when it applies the correct legal standard and reaches a decision that is not
clearly unreasonable.” Bogan v. Bogan, 60 S.W.3d 721, 733 (Tenn. 2001). In the instant case, the
trial court, relying upon the authority of Myint, determined that an award of prejudgment interest was
necessary in order to fully compensate Marlin “for the loss of the use of funds to which it was legally
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entitled.” We cannot say that this decision was “clearly unreasonable.” See Bogan, 60 S.W.3d at
733. We find no abuse of discretion in the trial court’s award of prejudgment interest.
D.
Marlin contends that the trial court erred in failing to find that Nationwide was guilty of bad
faith in its handling of Marlin’s claim. We disagree.
Tenn. Code Ann. § 56-7-105(a) provides the following:
The insurance companies of this state, and foreign insurance
companies and other persons or corporations doing an insurance or
fidelity bonding business in this state, in all cases when a loss occurs
and they refuse to pay the loss within sixty (60) days after a demand
has been made by the holder of the policy or fidelity bond on which
the loss occurred, shall be liable to pay the holder of the policy or
fidelity bond, in addition to the loss and interest thereon, a sum not
exceeding twenty-five percent (25%) on the liability for the loss;
provided, that it is made to appear to the court or jury trying the case
that the refusal to pay the loss was not in good faith, and that such
failure to pay inflicted additional expense, loss, or injury including
attorney fees upon the holder of the policy or fidelity bond; and
provided further, that such additional liability, within the limit
prescribed, shall, in the discretion of the court or jury trying the case,
be measured by the additional expense, loss, and injury including
attorney fees thus entailed.
Before a plaintiff may recover a penalty pursuant to this provision,
(1) the policy of insurance must, by its terms, have become due and
payable, (2) a formal demand for payment must have been made, (3)
the insured must have waited 60 days after making his demand before
filing suit (unless there was a refusal to pay prior to the expiration of
the 60 days), and (4) the refusal to pay must not have been in good
faith.
Palmer v. Nationwide Mut. Fire Ins. Co., 723 S.W.2d 124, 126 (Tenn. Ct. App. 1986); Walker v.
Tennessee Farmers Mut. Ins. Co., 568 S.W.2d 103, 106 (Tenn. Ct. App. 1977). The plaintiff has
the burden of proving the insurer’s bad faith. Palmer, 723 S.W.2d at 126.
The trial court found that “[g]iven all of the facts and circumstances of this case,” there were
“legitimate ground[s] for disagreement about the coverage of the insurance policy and that
Nationwide should not be burdened with the statutory penalty.” The imposition of a statutory
penalty upon an insurer is discretionary with the trial court and, absent an abuse of that discretion,
will not be disturbed on appeal. Daugherty v. Stuyvesant Ins. Co., 169 Tenn. 300, 86 S.W.2d 1095,
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1096 (1935). After reviewing the record, we cannot say that the trial court abused its discretion in
refusing to impose the bad faith penalty.
V.
The judgment of the trial court is affirmed. This case is remanded for enforcement of the trial
court’s judgment and for collection of costs assessed below, all pursuant to applicable law. Costs
on appeal are taxed to the appellant, Nationwide Mutual Insurance Company.
_______________________________
CHARLES D. SUSANO, JR., JUDGE
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