Coverage Analysis
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 (6th Circuit)


  Tennessee Supreme Court has ruled that there is no coverage if an insured that acts with intent to cause some injury, even if the resulting injury is different in character and degree from the harm that was meant to occur.  Tennessee Farmers Mutual Ins. Co. v. Evans, 814 S.W.2d 49 (Tenn. 1991)(insured burned plaintiff's property in the mistaken belief that it belonged to someone else).  Intent may be actual or may be inferred. American Home Assur. Co. v. Ozburn-Hessey Storage Co., 817 S.W.2d 672 (Tenn. 1991).  

  Allegations of retaliatory discharge and intentional infliction of emotional distress were held to be outside the scope of "occurrence" coverage in I. Appel Corp. v. St. Paul Fire & Marine Ins. Co., 1996 Tenn. App. LEXIS 103 (Tenn. App. February 21, 1996).  Similarly, claims of sexual harassment were held not to allege an "occurrence" in  Meridian Mut. Ins. Co. v. Couch, 1990 Tenn. App. LEXIS 336 (May 11, 1990).


   Tennessee has both an intermediate appellate court and a state Supreme Court.


  Unfair or deceptive consumer practices are proscribed by Tenn. Code Ann. § 47-18-101 (1988).  Unfair claims handling by insurers is regulated under Tenn. Code Ann. § 56-8-104(8) (1980).

  A third-party tort claimant has no right to assert bad faith claims against the tortfeasor’s liability insurer.   Clark v.  Hartford Accident & Indemnity Company, 457 S.W. 2d 35 (Tenn.  App.  1970). 

  Insurer's settlement without assent of insured was not bad faith.  The Austin Co. v. Royal Ins. Co., 842 S.W.2d 608 (Tenn. App. 1992).

  The Tennessee Court of Appeals recognized an insurer's action for reverse bad faith in Adams v. Tennessee Farms Mutual Ins. Co., 898 S.W.2d 216 (Tenn. App. 1994)(false application for insurance and claim for insurance benefits constitutes policyholder bad faith under Tenn. Code Ann. § 56-7-106 and establishes liability to insurer for bad faith).
  Tennessee has recognized a cause of action for an insurer’s negligent failure to settle within policy limits.  An insurer may not be held liable for failure to settle within policy limits where the refusal to settle was based upon a coverage dispute between the insurer and its policyholder.  National Service Fire Ins. Co. v. Williams, 454 S.W.2d 362, 365 (Tenn. 1970). 

  On the other hand, an insurer may be liable for failing to solicit an offer within limits, where warranted, even if the plaintiff never actually made such an offer.  State Auto Ins.  Co.  v.  Rowland, 427 S.W.2d 30, 32 (Tenn.  1968)


  Prior to 1998, Tennessee followed the traditional view that prompt notice is a condition precedent to coverage, whether or not it results in prejudice. Phoenix Cotton Oil Co. v. Royal Indemnity Co., 205 S.W.2d 128 (Tenn. 1918);  Hartford Accident & Indemnity Co. v. Creasy, 530 S.W.2d 778 (Tenn. 1975); North River Ins. Co. v. Evans, 757 S.W.2d 334 (Tenn. App. 1988) and Tennessee Farmers Mutual Ins. Co. v. Nee, 643 S.W.2d 673 (Tenn. App. 1982).  See also   Hospital Underwriting Group, Inc. v. Summit Health, LTD.,  63 F.3d 486 (6th Cir. 1995)(excess insurer not required to show prejudice).

  In December 1998, however, the Tennessee Supreme Court ruled in  Alcazar v. Hayes, 982 S.W.2d 845 (Tenn. 1998) that henceforth late notice would only defeat coverage if it resulted in prejudice to the insurer.  The inquiry to be used for all future cases is whether (1) the insured provided timely notice in accordance with the contract and, if not, did the insured carry its burden proving that the insurer was not prejudiced by the delay.  The rule will apply prospectively.

  An insured's belief in its non-liability did not excuse its failure to give notice to its insurers until several months after the original counterclaims were asserted against it.  Gibson Guitar Corp. v. Travelers Indemnity Co., 1996 WL 705966 (M.D. Tenn. 1996).

  An insured that settles a claim or otherwise makes a "voluntary payment" without the knowledge or consent of the insurer forfeits its rights under the policy.  Anderson v. Dudley L. Moore Ins. Co., 640 S.W.2d 556, 560 (Tenn. App. 1982).


  Although the "occurrence" policy limitation bars coverage for intentional acts, ambiguity has been found given the conflict between this limitation on coverage and the grant of insurance for intentional torts under "personal injury" coverage provisions. Lineberry v. State Farm Fire & Casualty Co., 885 F.Supp. 1095, 1099 (M.D. Tenn. 1995)

  Extending the narrow construction of “advertising injury” that it adopted under Michigan law in Advance Watch, the Sixth Circuit has ruled in a Tennessee case  that claims of service mark infringement do not allege a claim for “misappropriation of advertising ideas or style of doing business” nor do they set forth a claim for “infringement of copyright, title or slogan.”  While agreeing that trade dress and service mark infringement are distinct claims, the court found in Sholodge, Inc.  v.  Travelers Indemnity Co.  of Illinois, 1999 WL 52269 (6th Cir.  February 8, 1999) that there was no fundamental distinction for the purpose of the application of these coverage limitations.  Further, the court held that a trademark or service mark is not a “slogan” or “title.”  

  In a case interpreting Tennesse law, the Indiana Court of Appeals ruled in Osco, Inc. v. St. Paul Fire & Marine Ins. Co., 656 N.E.2d 548 (Ind. App. 1995) that pollution liabilities were not covered on this basis.


  Insured has initial burden of showing that its claim is within the scope of coverage.  C.F.W. Construction Co. v. The Travelers Ins. Co., 363 N.W.2d 557 (6th Cir. 1966)(insured must show that endorsement was issued covering him).

  Insurer must prove exclusions.  However, if it can do so, the insured then has the burden of proving the applicability of an exception to an exclusion.  Standard Fire Ins. Co. v. Chester-O'Donley & Associates, Inc., 1998 Tenn. App. LEXIS 65 (Tenn. Ct. App. January 28, 1998).


  It is unclear whether Tennessee continues to follow the traditional place of contacting approach or has clearly adopted a Restatement "most significant relationship" test.  Earlier cases looked to the place where the policy was issued and delivered.  Ohio Casualty Ins. Co. v. Travelers Indemnity Co., 493 S.W.2d 465, 467 (Tenn. 1973) and Hutchinson v. Tennessee Farmers Mutual Ins. Co., 652 S.W.2d 904, 905 (Tenn. Ct. App. 1983). More recently, however, the Supreme Court ruled in Bush v. Liberty Mut. Ins. Co., 1992 WL 3326 (Tenn. January 13, 1992) that it might use a "most significant contacts" approach.  See also, Standard Fire Ins. Co. v. Chester-O'Donley & Associates, Inc., 1998 Tenn. App. LEXIS 65 (Tenn. Ct. App. January 28, 1998)(holding that Kentucky law should be applied under either approach).  


  Recognized in Allstate Ins. C. v. Watts, 811 S.W.2d 883 (Tenn. 1991)(exclusion rejected).


  This issue has not yet been ruled on by the Tennessee state courts.  Judge McRae in the federal district court has ruled in Cedar Chemical Corp. v. American Universal Ins. Co.,  No. 87-2838-4B (W.D. Tenn., September 13, 1989) and Terminix International v. Maryland Cas. Co., No. 88-2186-4B (W.D. Tenn. March 7, 1991), aff'd, 956 F.2d 270 (6th Cir. 1992) that response costs are not covered.

  Comprehensive general liability policies are not "all risk" policies.  Standard Fire Ins. Co. v. Chester-O'Donley & Associates, Inc., 1998 Tenn. App. LEXIS 65 (Tenn. Ct. App. January 28, 1998). Rather, such policies provide an insured with indemnification for damages up to policy limits for which the insured becomes liable as a result of tort liability to a third party.  


  An insurer may seek permissive intervention in the lawsuit against its policyholder for the purpose of crafting special interrogatories to permit apportionment of the damages between covered and non-covered claims.  Plow G.H., Inc. v. International Flavors and Fragrances, Inc., 96 F.R.D. 136 (W.D. Tenn. 1982).

  Insureds are not entitled to recover their fees in coverage litigation.  Hurst Co., Inc. v. Bituminous Ins. Companies, 1998 Tenn. App. LEXIS 344 (Tenn. App. May 28, 1998).


   --Claims Manuals

   --Drafting History

   --Other Policyholder Claims

   --Reinsurance Information



  Traditionally, Tennessee has been a strict "four corners" jurisdiction.  See Bituminous Fire and Marine Ins. Co. v. Izzy Rosen's, Inc., 493 F.2d 257, 263 (6th Cir. 1974); Graves v. Liberty Mut. Fire Ins. Co.,745 S.W.2d 282 (Tenn. App. 1987) and First National Bank v. South Carolina Ins. Co., 341 S.W.2d 569 (Tenn. 1960).  The Court of Appeals appeared to open the door a crack on this issue in Meridian Mut. Ins. Co. v. Couch, 1990 Tenn. App. LEXIS 336 (May 11, 1990), noting only that a trial court did not err in refusing to consider extrinsic facts in holding that the insurer had no duty to defend since nothing in the extrinsic record would have changed the result.  However, the Tennessee Supreme Court has since reaffirmed that the duty to defend is determined solely by reference to the allegations in the underlying complaint.  St. Paul Fire & Marine Ins. Co. v. Torpoco, 879 S.W.2d 831 (Tenn. 1994). 


  In the context of insurance coverage, Tennessee courts appear to treat waiver and estoppel almost interchangeably. While waiver generally requires a voluntary surrender of a known right, the elements of estoppel under Tennessee law are:  (1) good faith reliance upon the statement or actions of another without an opportunity to know the truth; and (2) action based on that reliance which results in detriment to the one not acting.  Campbell v. Precision Rubber Products, Corp., 737 S.W.2d 283, 286 (Tenn. App. 1987).
  An insurer will not be estopped from disputing coverage merely because one of its agents stated that coverage existed, particularly where such statements are in conflict with the actual terms of the policy.  Standard Fire v. Chester-O'Donley & Associates, Inc., No. 01A01-9508-CV-00382 (Tenn. Ct. App. January 28, 1998).

  An insurer can be estopped to deny coverage based upon the misrepresentations of its agent concerning the policy's scope.  In Bill Brown Construction Co. v. Glens Falls Ins. Co., 818 S.W.2d 1 (Tenn. 1991), the Tennessee Supreme Court further held that in such circumstances, the normal rule that waiver and estoppel could not expand the scope of coverage did not apply.

  Further, an insurer must give specific notice of its coverage reservation to each insured to whom it is directed to apply.  In Knox-Tenn Rental Co. v. Home Ins. Co., 2 F.3d 678 (6th Cir. 1993), the Sixth Circuit ruled that a reservation of rights letter that was issued to the insured did not put an additional insured on notice of the carrier's concerns.

  If an insurer assumes the defense of an action with knowledge of a ground of forfeiture or non-coverage under the policy and fails to communicate these coverage concerns to the insured by way of a non-waiver agreement or reservation of rights letter, it will be deemed to have waived the right to contest coverage on these bases. American Home Assur. Co. v. Ozburn-Hessey Storage Co., 817 S.W.d 672 (Tenn. 1991).  However, where an insurer defends a case under a reservation of rights, it is not estopped to subsequently dispute the scope of its indemnity obligation.  Richards Mfg. Co. v. Great American Ins. Co., 733 S.W.2d 916 (Tenn. App. 1989)(insurer permitted to contest whether it had to indemnify insured for award of punitive damages).


  U.S. Court of Appeals for the Sixth Circuit refused to compel an umbrella insurer to drop down over insolvent insurance where its policy was written excess of "collectible" insurance in Terminix Int. Co. v. Safety Mutual Cas. Co., 974 F.2d 1339 (6th Cir. 1992).


  In an old "accident" case, the Tennessee Supreme Court ruled in Kuhn's of Brownsville, Inc. v. Bituminous Cas. Co., 197 Tenn 60, 270 S.W.2d 358 (1954) that an "effect" analysis should be used, thus resulting in two policy limits being triggered for a case where the insured's negligent excavation work had caused two buildings to collapse two days apart.


  Tennessee Court of Appeals ruled in Drexel Chemical Co. v. Bituminous Ins. Co., 933 S.W.2d 471 (Tenn. App. 1996), review denied (Tenn. 1996) that "when discharges of pollution occur on a regular, ongoing basis over a lengthy period of time as a normal part of an operation, they are not `sudden' within the meaning of the pollution exclusion clause.  However, where the damage is caused by a few discrete polluting events, each of which were short in duration and accidental in nature, the discharge will fall with the `sudden and accidental' exception to the pollution exclusion."   See also Terminix, supra and USF&G v. The Murray Ohio Mfg. Co., 693 F.Supp. 617 (M.D. Tenn. 1988), affirmed, 875 F.2d 868 (6th Cir. 1989)(dumping of generators' wastes over a multi-year period was not "sudden").

  The U.S. Court of Appeals for the Sixth Circuit has held that the meaning of “atmosphere” is ambiguous in the context of an exclusion for “dampness or dryness of atmosphere” citing various toxic tort cases in which courts had ruled that the air confined within a building is not the “atmosphere.”  Blaine Construction Corp.  v.  INA, No.  97-5579 (6th Cir.  March 8, 1999).

  There are no Tennessee cases construing the absolute pollution exclusion.


  Accusations that a thoracic surgeon incorrectly advised an patient that she had an ovarian cyst as a ruse to perform a gynecological exam wherein he sexually assaulted her were held to allege "professional services" sufficient to give rise to a duty to defend in St. Paul Fire & Marine Ins. Co. v. Torpoco, 1993 Tenn. App. LEXIS 43 (Tenn. App. January 15, 1993).


  Claims for lost profits and economic loss are not "property damage." Standard Fire Ins. Co. v. Chester-O'Donley & Associates, Inc., 1998 Tenn. App. LEXIS 65 (Tenn. Ct. App. January 28, 1998). 


  Coverage not permitted unless punitive award is based upon vicarious liability.  Lazenby v. Universal Underwriters Ins. Co., 383 S.W.2d 1 (Tenn. 1964).


  In the absence of fraud or mistake, insurance policies should be interpreted as written and given their natural and ordinary meaning.  Allstate Ins. Co. v. Wilson, 856 S.W.2d 706, 708 (Tenn. Ct. App. 1992); American National Prop. & Cas. Co. v. Gray, 803 S.W.2d 693 (Tenn. App. 1990) and Tata v. Nichols, 848 S.W.2d 649, 650 (Tenn. 1993).  However, because insurers are strictly accountable for the language in their contracts, ambiguous language will be construed against them.  Harrell v. Minnesota Mutual Life Ins. Co., 937 S.W.2d 809, 814 (Tenn. 1996).  

  In considering the meaning of an insurance policy, courts are directed to examine, in the following order: (1) the declarations; (2) the insuring agreements and definitions; (3) the exclusions; (4) the conditions; and (5) any endorsements to the policy.  Standard Fire v. Chester-O'Donley & Associates, Inc., 1998 Tenn. App. LEXIS 65 (Tenn. Ct. App. January 28, 1998).  If coverage cannot be found in the insuring agreement, it will not be found elsewhere in the policy.  Exclusions help to define coverage and shape the scope of coverage that they must be read in terms of the insuring agreement to which they apply. 

  The use of dictionary definitions to conjure up ambiguities was criticized by  Justice Boggs of the Sixth Circuit in a dissenting opinion in Blaine Construction Corp.  v.  INA, No.  97-5579 (6th Cir.  March 8, 1999) in which he explained how an exclusion for a bit by a “dog” might nonetheless be construed to create coverage for an assault by a “bitch” or an “andiron.”


  None adopted to date.  Enterprise liability was rejected in Davis v. Yearood, 612 S.W.2d 917 (Tenn. App. 1980).


  No cases.

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