Kentucky Nat. Ins. Co. v. Gardner

• Decision Date: 18 October 1999
• Citation: 6 S.W.3d 493
• Parties: KENTUCKY NATIONAL INSURANCE CO., Plaintiff/Counter-Defendant/Appellant. v. Robert G. GARDNER and, Sandra L. Gardner, Defendants/Counter-Plaintiffs/Appellees.
• Court: Tennessee Court of Appeals

6 S.W.3d 493

KENTUCKY NATIONAL INSURANCE CO., Plaintiff/Counter-Defendant/Appellant. v. Robert G. GARDNER and, Sandra L. Gardner, Defendants/Counter-Plaintiffs/Appellees.

Court of Appeals of Tennessee, at Nashville.

June 11, 1999.

Application for Permission to Appeal Denied October 18, 1999.

COPYRIGHT MATERIAL OMITTED

J.R. Slobey, Blackburn, Slobey, Freeman & Happell, P.C., Nashville, for Plaintiff/Counter-Defendant/Appellant.

F. Dulin Kelly, Clinton L. Kelly, Andy L. Allman, Kelly & Kelly, Hendersonville, for Defendants/Counter-Plaintiffs/Appellees.

Application for Permission to Appeal Denied by Supreme Court October 18, 1999.

FARMER, Judge.

Plaintiff Kentucky National Insurance Company appeals the trial court's judgment awarding Defendants/Appellees Robert G. and Sandra L. Gardner the sum of $56,750 under a commercial property insurance policy that Kentucky National previously had issued to the Gardners. The trial court's judgment also awarded the Gardners $14,062.50 in prejudgment interest. We reverse the trial court's judgment based upon our conclusion that the court erred in failing to enforce a provision of the insurance policy which prohibited the Gardners from taking any action after a loss that would impair Kentucky National's subrogation rights.

The Gardners owned a commercial building in Hendersonville, Tennessee, from which they operated a wholesale business. Among other uses, the Gardners used the building to house their inventory, live land hermit crabs, which they sold to retail stores, pet shops, and souvenir resort stores. In late 1994, the Gardners contracted with S.A. Perry Heating and Cooling to install three new HVAC units on the roof of their building. Prior to that time, the building's one HVAC unit was located on the floor of the building. S.A. Perry finished installing the HVAC units on January 2, 1995. On January 4, 1995, the city of Hendersonville experienced a large amount of rainfall. Water collected on the roof of the Gardners' building and entered the building around the new HVAC units, causing substantial damage to both the structure and contents of the building.

The Gardners subsequently learned the cause of the damage to their building. The building's flat roof originally was designed to collect and retain rainwater until it slowly passed through a drain in the back of the building. The weight of the new HVAC units, however, caused depressions in the roof. Instead of draining down the back of the building, the rainwater collected in pools around the HVAC units and entered the building. A portion of the ceiling fell down, including saturated insulation, light fixtures, and a metal brace that supported the ceiling.

After their loss, the Gardners contacted Kentucky National, which previously had issued a commercial property insurance policy on the Gardners' building. As pertinent, the policy provided coverage for

loss or damage caused by or resulting from risks of direct physical loss involving collapse of a building or any part of a building caused ... by ...

....

4. Weight of people or personal property;

5. Weight of rain that collects on a roof;

6. Use of defective material or methods in construction, remodeling or renovation if the collapse occurs during the course of the construction, remodeling or renovation.

The policy also contained a provision which required the Gardners to "do everything necessary to secure Kentucky National's subrogation rights" and to "do nothing after loss to impair them."

In late January 1995, Mike Smith, an adjuster for Kentucky National, visited the building to inspect the damage. By that time, S.A. Perry's insurance carrier had arranged for temporary repairs to be made to the building's roof. Based on this action, Robert Gardner believed that S.A. Perry's insurance carrier would cover the loss, and he conveyed this information to Mike Smith. The Gardners did not have any subsequent contact with Smith.

Contrary to Robert Gardner's belief, S.A. Perry's insurance carrier did not pay for the damage to the building. Instead, in April 1995, S.A. Perry sued the Gardners in General Sessions Court, claiming that the Gardners had not paid for installation of the HVAC units. The Gardners hired an attorney to represent them, and they countersued, claiming that S.A. Perry negligently installed the HVAC units. In August 1995, the General Sessions Court entered a judgment in favor of S.A. Perry in the amount of $9,999.99. The Gardners appealed the judgment to the Circuit Court.

In September 1995, Kentucky National assigned the Gardners' claim to another adjuster, Donnie Cogburn. When he contacted Robert Gardner, Cogburn learned that the Gardners were pursuing a counterclaim against S.A. Perry. Specifically, Robert Gardner told Cogburn that the Gardners had lost their lawsuit in General Sessions Court but that they had appealed the adverse judgment to the Circuit Court. Gardner also told Cogburn that the Gardners had hired an attorney to pursue their counterclaim against S.A. Perry in the Circuit Court. In response, Cogburn indicated that Kentucky National might want to "join" in the litigation.

Cogburn informed Kentucky National of the Gardners' litigation in a report dated September 28, 1995. In his report, Cogburn suggested that Kentucky National instruct its local defense attorney in Nashville to work with the Gardners' attorney to pursue its subrogation claim against S.A. Perry's insurance carrier.

On October 12, 1995, Cogburn sent a handwritten letter to the Gardners informing them that Kentucky National had agreed to pay the sum of $8250 for the damage to the Gardners' building. The letter indicated that, once the Gardners returned a signed and notarized proof of loss, Cogburn then could send the Gardners a check and Kentucky National would "proceed" against S.A. Perry's insurance carrier.

When Kentucky National's attorney, Larry McMillan, learned of the litigation between the Gardners and S.A. Perry, he feared that the lawsuit might impair Kentucky National's subrogation rights. Accordingly, McMillan asked Kentucky National to withhold any payments to the Gardners until he was able to review the claim and speak with the Gardners' attorney. McMillan contacted the Gardners' attorney, Mark Henderson, on January 9, 1996. At that time, Henderson assured McMillan that the Gardners had appealed the General Sessions Court judgment to the Circuit Court and that both S.A. Perry's claim and the Gardners' counterclaim were still pending. McMillan did not take any action on behalf of Kentucky National, but he asked Henderson to send him copies of the pleadings and to keep him updated on the litigation's progress. Despite this request, Henderson subsequently did not inform McMillan of the litigation's progress, and he did not return McMillan's phone calls.

In January 1996, Robert Gardner filed a complaint against Kentucky National with the Tennessee Department of Commerce and Insurance based upon Kentucky National's failure to pay the Gardners' claim. Assistant Division Manager David Hawk responded to the complaint on behalf of Kentucky National. After providing a brief history of the Gardners' insurance claim and their litigation with S.A. Perry, Hawk's letter to the Department of Commerce and Insurance indicated that "upon researching the court file and conversations between Mr. McMillan and Mr. Gardner's attorney, Mark Henderson, it was determined that Kentucky National's subrogation was not jeopardized." The letter also indicated that Kentucky National had issued payment to the Gardners in the amount of $8250 on January 29, 1996.

The Gardners received Kentucky National's check for $8250 during the first week of February 1996, and they promptly deposited it. The Gardners sought further payment from Kentucky National, however, because this amount covered only the temporary repairs that had been made to the building shortly after the loss. The total damage to the building exceeded $110,000, and Kentucky National's policy provided coverage of $65,000.

On April 30, 1996, Larry McMillan learned that the Gardners had permitted their appeal and counterclaim against S.A. Perry to be dismissed with prejudice. The Circuit Court's order, entered on March 1, 1996, indicated that the case was being dismissed due to the Gardners' failure to comply with previous court orders compelling discovery.¹ Thus, the trial court's order dismissing the action operated as an adjudication upon the merits.² The order of dismissal became final on May 6, 1996, when the trial court entered an order denying the Gardners' motion to alter or amend the judgment or for a new trial.

Taking the position that the dismissal of the Gardners' lawsuit had impaired its subrogation rights, Kentucky National subsequently filed this action for declaratory relief in which it sought a determination that it owed no further obligation to the Gardners under the insurance policy due to the Gardners' breach of the policy's subrogation provision. In its complaint, Kentucky National also took the position, apparently for the first time, that its policy did not cover the Gardners' loss, that the Gardners had failed to submit a signed, sworn statement of loss, and that the Gardners had failed to comply with the policy's cooperation clause. The Gardners answered the complaint and filed counterclaims seeking declaratory relief, damages, prejudgment interest, and the imposition of a bad faith penalty.³

At the conclusion of trial, the trial court entered a judgment awarding the Gardners the sum of $56,750, plus prejudgment interest in the amount of $14,062.50. In support of its judgment, the trial court found (1) that the structural loss to the Gardners' commercial building was covered by the insurance policy issued by Kentucky National, (2) that Kentucky National was estopped from denying coverage because it impliedly waived its right to assert this defense, and (3) that Kentucky National, by its...