Insurance Co. of North America v. Federated Mut. Ins. Co.

• Citation: 518 F.2d 101
• Decision Date: 12 June 1975
• Docket Number: No. 74-1689,74-1689
• Parties: INSURANCE COMPANY OF NORTH AMERICA, Plaintiff-Appellee, v. FEDERATED MUTUAL INSURANCE COMPANY, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

Page 101

518 F.2d 101

INSURANCE COMPANY OF NORTH AMERICA, Plaintiff-Appellee, v. FEDERATED MUTUAL INSURANCE COMPANY, Defendant-Appellant.

No. 74-1689.

United States Court of Appeals, Sixth Circuit.

June 12, 1975.

Hewitt P. Tomlin, Jr., Waldrop, Hall, Tomlin & Farmer, Jackson, Tenn., for defendant-appellant.

Jerry D. Kizer, Jr., W. R. Menzies, Jr., Jackson, Tenn., for plaintiff-appellee.

Before CELEBREZZE and McCREE, Circuit Judges, and DeMASCIO ^*, District Judge.

McCREE, Circuit Judge.

Federated Mutual Insurance Company appeals from a judgment in a nonjury trial requiring it to contribute to the settlement of a death claim by Insurance Company of North America after Federated Mutual declined to participate in the defense or negotiation of the claim. It requires us to construe in accordance with Tennessee law an omnibus insuring clause and an exclusion clause in an automobile insurance policy issued by Federated. We affirm.

Federated Mutual Insurance Company (Federated) issued an automobile liability policy to Hub City Equipment Leasing Company (Hub City) for the period May 6, 1970 through May 6, 1971 for a number of vehicles used in its Jackson, Tennessee business. Among the vehicles covered was a 1970 International truck tractor.

On November 28, 1970, Frank Allen, as President of Brazil Gin Company, his wholly-owned corporation, rented this tractor from Hub City to haul his individually owned trailer containing cargo belonging to the corporation. In the rental agreement, the lessee was designated as "Mr. Frank Allen Firm Brazil Gin Company." The Allen trailer was insured by the Insurance Company of North America (INA).

During the transportation of the cargo, Lorenzo Hayes, the tractor driver, who was an employee of both Allen and Brazil Gin, negligently collided with a passenger automobile and killed its occupant. The widow of the decedent sued Allen and Brazil. INA defended the action and eventually settled the claim on behalf of both Allen and Brazil for $30,000. Federated refused to participate in either the negotiations or the settlement. This action for contribution followed.

In the district court, INA contended that Federated was liable for payment of the portion of the settlement charged to Brazil Gin because it was an "insured" under the "Omnibus Clause" in the policy issued to Hub City. That clause defined "insured" in relevant part as follows:

. . . (a) With respect to the insurance for bodily injury liability and for property damage liability the unqualified word "insured" includes the named insured and . . . also includes any person while using the automobile; and any person or organization legally responsible for the use thereof, provided the actual use of the automobile is by the named insured or such spouse or with the permission of either.

Because Brazil Gin was an "organization legally responsible for the use" of the Hub City tractor, INA argued that Brazil was an additional insured under the policy.

On the other hand, Federated contended that Allen, and not Brazil Gin, was legally responsible for the use of the tractor, and that even if Brazil Gin were legally responsible as employer of the driver, and was therefore an additional insured, Federated's policy did not cover the claim because of an exclusion clause. The pertinent portion of this clause provides:

This policy does not apply:

(c) under coverages A and B, while the automobile (tractor) is used for the towing of any trailer owned or hired by the insured and not covered by like insurance in the company. . . .

The heart of Federated's argument is that because the tractor was leased by Allen who was an additional insured and was pulling a trailer owned by Allen and not insured by Federated, the trailer was a "trailer owned or hired by the insured and not covered by like insurance" with Federated within the meaning of the exclusion clause.

INA contended first, that because Brazil Gin neither owned nor hired the Allen trailer, the exclusion clause did not apply, and second, that Federated should be estopped from relying on the exclusion clause because to give it effect would render coverage of the Hub City tractor virtually nonexistent.

The district court concluded that Brazil Gin was an additional insured because it was legally responsible for the operation of the tractor, and that Brazil Gin was vicariously liable for Hayes' negligence because Hayes, at the direction of Allen as President of Brazil Gin, was transporting the corporation's cargo and was paid by the corporation. It also held that the exclusion clause did not apply to Brazil Gin both because Brazil Gin neither owned nor hired the Allen trailer, and because Federated was estopped from relying upon the clause.

On appeal, Federated contends that the district court erred in holding that Brazil Gin had a relationship of respondeat superior to Hayes; that the exclusion clause could not be applied to this Hub City tractor lessee which neither owned nor hired the trailer attached to the insured tractor; and that Federated was estopped from relying on its exclusion clause.

In Tennessee, an employer is responsible for the torts committed by its employee acting within the scope of his employment. Leeper Hardware Co. v. Kirk, 58 Tenn.App. 549, 434 S.W.2d 620, 623 (1968). The district court determined, and its determination is supported by the record, that Hayes was an employee of Brazil Gin, acting within the scope of his employment at the time of the accident. Accordingly, Brazil Gin was liable under the doctrine of respondeat superior for the tort committed by Hayes, and was, as a lessee of the tractor and as an employer of Hayes, an additional insured under the Federated policy.

We also decide that the district court's determination that the Tennessee Supreme Court would not give effect to the exclusion clause is correct.

The courts of Tennessee have considered in only a few cases exclusion clauses identical or substantially similar to the one contained in the Federated policy. In Blue Ridge Insurance Co. v. Haun, 197 Tenn. 527, 276 S.W.2d 711 (1954), where the primary question was whether a "hotrod" was a trailer, the court held that the exclusion clause barred recovery when an insured noncommercial passenger automobile, pulling an insured "hotrod", became involved in an accident. In State Farm Mut. Automobile Ins. Co. v. Bass, 192 Tenn. 558, 241 S.W.2d 568 (1951), the Supreme Court of Tennessee determined that an insurance company that had issued a policy covering a tractor and a trailer was not liable, because of its exclusion clause, for damages arising from a collision occurring while the named insured was using his tractor to pull a different trailer not insured by it.

In neither case was the contention made that the insurance company was aware of facts about the insured's business that rendered the coverage of the insurance policy less comprehensive than the insured might reasonably have expected it to be. However, when an insurer is made aware of the method of operation of the insured, Tennessee courts have not permitted the company to rely on the literal terms of an exclusion clause to avoid coverage reasonably expected by the policyholder. Thus, in Johnson Transfer & Freight Lines, Inc. v. American National Fire Insurance Co., 168 Tenn. 514, 79 S.W.2d 587 (1935), cited by the district court, the court considered the assertion of the insurance company that because its policy covered only property carried on a tractor insured by it, it was not liable for damages to goods transported on a trailer that it had not insured when the trailer was being towed by the insured tractor. In refusing to give effect to the exclusion clause it stated:

The bill sets out that the particular automobile above described (the one involved in the accident) has no facilities for hauling property of itself, but is a tractor designed to bear a portion of the weight of a semitrailer. The insurance company must accordingly have contemplated when it issued a policy to cover goods transported by this particular automobile that the goods would be transported in some vehicle attached to the machine. The motor number and letters by which the machine is described in the policy would disclose to an automobile insurer, no doubt, the nature of the automobile that it was only a tractor not designed to carry goods. . . . (Accordingly, the insurer had knowledge of the nature of the equipment.)

The insurer certainly intended to execute a valid contract in return for the premium received, not to issue a cargo policy and confine its coverage to a vehicle that could carry no cargo.

It is a familiar rule that where the insurer, at the time of the issuance of a policy, has knowledge of existing facts which, if insisted upon, would render nugatory the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with the known facts, and the insurer is estopped thereafter from asserting the breach of such conditions. (Citations omitted.)

In T. H. Hayes & Sons v. Stuyvesant Ins. Co., 194 Tenn. 35, 250 S.W.2d 7 (1952), also cited by the district court, the Supreme Court of Tennessee held that when an automobile dealer wrote insurance for the vehicles he sold, he became an agent of the defendant insurance company and that his acquiescence in the purchaser's conversion of a truck into an ambulance bound the insurance company that had issued a policy for the truck.

Finally, in Henry v. Southern Fire & Casualty Co., 46 Tenn.App. 335, 330 S.W.2d 18 (Tenn.Ct.App.1958), cert. denied by the Tennessee Supreme Court (1959), the court considered a claim for damages arising from the collision of an automobile and an uninsured trailer that had broken loose from an insured tractor being used to transport logging equipment. The insurance company had refused to pay the claim relying on an exclusion clause identical to the one contained in the policy issued...