American Home Assur. Co. v. Ozburn-Hessey Storage Co.

• Citation: 817 S.W.2d 672
• Decision Date: 03 September 1991
• Docket Number: OZBURN-HESSEY
• Parties: AMERICAN HOME ASSURANCE CO., Plaintiff/Appellee, v.STORAGE CO., Defendant/Appellant. 817 S.W.2d 672
• Court: Supreme Court of Tennessee

Page 672

817 S.W.2d 672

AMERICAN HOME ASSURANCE CO., Plaintiff/Appellee, v. OZBURN-HESSEY STORAGE CO., Defendant/Appellant.

817 S.W.2d 672

Supreme Court of Tennessee,

at Nashville.

Sept. 3, 1991.

Rehearing Denied Oct. 14, 1991.

R. Dale Grimes, J. Mark Tipps, Bass, Berry & Sims, Nashville, for defendant/appellant.

Robert Orr, Jr., Levine, Mattson, Orr & Young, Nashville, for plaintiff/appellee.

OPINION

O'BRIEN, Justice.

This suit was initiated in the Chancery Court for Davidson County as a declaratory judgment action by plaintiff, American Home Assurance Company, against defendant, Ozburn-Hessey Storage Company. During all times pertinent to these proceedings American Home was an insurance company licensed and authorized to write insurance and conduct business within the State of Tennessee. It provided "warehouseman or bailee liability" insurance for Ozburn-Hessey Storage Company which conducted business as a warehouse operator with warehouses at several locations in the Nashville and Middle Tennessee area. The policies of insurance involved provided $2,000,000 of coverage with a $10,000 deductible for each "occurrence," as that term was defined in the policies.

In early 1980, Ozburn-Hessey contracted with the Trane Company to provide warehouse space and labor for storage and distribution of Trane's products at defendant's facilities in Nashville. Defendant received heating and air conditioning units and other goods from Trane and stored and distributed the goods at and from its facilities as agreed. In May of 1982, the Trane Company filed suit against Ozburn-Hessey in the Chancery Court for Davidson County, Tennessee styled "The Trane Company v. Ozburn-Hessey Storage Company" Docket No. 82-913-III, alleging Ozburn-Hessey had damaged between 5,000 and 8,000 of its products during the warehousing operation between March of 1980 and December of 1981.

In the fall of 1981 Trane made a claim for damaged units. Ozburn-Hessey notified American Home at the time the claim was made. Trane originally sought $347,084 in damages and later amended its complaint to seek damages in excess of $500,000. Ozburn-Hessey disputed the claim. American Home undertook the defense of the action. Ozburn-Hessey did not hire separate counsel to defend the case but relied solely and unconditionally upon the representation provided by American Home, pursuant to the terms of the policies. After some three years of litigation and negotiation, in January 1985, American Home negotiated a settlement with Trane under which it paid $450,000 for a release and discharge of the claim against Ozburn-Hessey. American Home alleged in this action against Ozburn-Hessey that it was entitled to reimbursement for the full $450,000, on the premise that it had no liability to Ozburn-Hessey under its policy because the Trane claim involved 5,925 separate "occurrences", none of which exceeded the $10,000 deductible provided in its policy of insurance for each occurrence.

Ozburn-Hessey defended the suit, denying liability to American Home, and subsequently moved for summary judgment on the ground that American Home undertook the defense of Ozburn-Hessey for approximately three (3) years ... without a reservation of rights. By doing so, American Home waived its right and was estopped to assert any grounds of non-liability under the policy on the claim asserted in the Trane lawsuit. The trial court granted the motion for summary judgment, finding there was no genuine issue as to any material fact. The court held that defendant was entitled to a judgment as a matter of law for the reason that American Home was estopped to deny liability under the insurance policy on the claim upon which the action was based.

American Home took the case to the Court of Appeals presenting three issues:

(1) Whether the Chancellor erred in holding that by furnishing a defense to Ozburn-Hessey without a reservation of rights American Home was estopped to rely on its $10,000 policy deductible to deny liability?

(2) Was it error to hold that there was no genuine issue of material fact as to whether Ozburn-Hessey was prejudiced because American Home provided a defense in the Trane litigation without a reservation of right?

(3) Whether the Chancellor erred in holding that insurance protection not contained within the insuring portions of the insurance policy, not commonly available in the industry, may be created by estoppel?

The Court of Appeals pretermitted two of the issues posed and rendered its opinion on the sole issue of whether the trial court erred in holding that, by furnishing a defense to Ozburn-Hessey without a reservation of rights, American Home was estopped to rely on its $10,000 policy deductible to deny liability.

The intermediate court, citing from 44 Am.Jur.2d, Insurance, Sec. 1423 (1982) found the general rule to be that:

"Although there is authority to the contrary, if a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage. In other words, the insurer's unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert such grounds.

They found that Ozburn-Hessey relied on four (4) Tennessee cases which were in accord with the general rule, ¹ but each had a common thread, i.e., there was either no coverage under the policy, or there had been a violation by the insured of a policy provision which would have brought about a forfeiture, and notwithstanding either lack of coverage or policy violations, the insurance company defended without a "non-waiver" or a "reservation of rights." They held that this case did not fall into the same category. They considered, and declined to apply, the rule that there is a presumed prejudice to an insured which estopped an insurer to assert a policy defense where the insurer defended without a "non-waiver" or a "reservation of rights", even though the insurer had knowledge of a ground of forfeiture or noncoverage under the policy. They found that American Home was obligated to defend Ozburn-Hessey under the terms of the policy against the loss allegedly sustained by Trane Company, because there had been no violation of a policy provision by the insured, nor had it done anything that would have caused a forfeiture.

They opined that, under the factual situation as stated, there was no presumption of prejudice by American Home's failure to defend under a "reservation of rights" or "non-waiver", and it was not estopped to assert the deductible provision of the policy. They remanded the case for trial.

We granted the appeal by the defendant Ozburn-Hessey because we are of the opinion the Court of Appeals went astray in deviating from the general rule applicable in cases of this nature for the reasons stated in their opinion. The issues as couched here are as follows:

(1) Whether the general rule--that a liability insurer is estopped from denying liability for a claim against its insured when it defends the insured without a reservation of rights--applies when the defense is provided pursuant to a contractual duty to defend?

(2) Whether Ozburn-Hessey was presumably prejudiced or established actual prejudice as the result of American Home actions?

(3) Whether American Home is estopped from denying liability on the disputed ground that the claim involves thousands of deductibles, which combined, consume the entire coverage of the policy?

In considering the issues raised by the appellant here we find it appropriate to utilize the language of the intermediate court, that is, when an insurer who has a contractual duty to defend does so without a "non-waiver" or a "reservation of rights" is there such presumed prejudice to the insured that the insurer is estopped to rely on the deductible provision of the policy. The lower court held that because American Home was obliged to defend the suit initiated by the Trane Company there could not be any presumption that Ozburn-Hessey was prejudiced by the insurer's failure to defend under a reservation of rights or a non-waiver. That conclusion is not defensible. The law in this State is clear. For at least the better part of a hundred years the rule has been recognized that an insurance company will not be permitted to deny liability under its indemnity policy, after it has taken charge of and conducted the defense of the claims asserted against its insured, without having reserved its rights by some form of agreement, stipulation or notice. See Fulton Co. v. Mass. Bonding and Insurance Co., 138 Tenn. 278, 285, 197 S.W. 866 (1917); Hardware Mutual Casualty Co. v. Higgason, supra, 134 S.W.2d at 175. The rule applicable to the circumstances of this case, and which we consider to be the law in Tennessee is stated in Maryland Casualty Co. v. Gordon, supra, 371 S.W.2d at p. 464 ² citing from 29A Am.Jur.--Insurance--Sec. 1465, p. 577 [44 Am.Jur.2d, Insurance, Sec. 1423, p. 369]:

"The general rule supported by the great weight of authority is that if a liability insuror, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage. In other words, the insuror's unconditional defense of an action brought against its insured, constitutes a waiver of the terms of the policy and an estoppel of the insured to assert such grounds."

The rule by its very language establishes the presumption of prejudice. Otherwise, there would be no necessity...