Reeves v Granite State Ins.
| Decision Date | 17 September 1999 |
| Docket Number | 9807-00379 |
| Parties | ED REEVES, d/b/a ED'S IMPORTS, Plaintiff/Appellee, v. GRANITE STATE INSURANCE CO., Defendant/Appellant.IN THE COURT OF APPEALS OF TENNESSEE AT NASHVILLE Filed |
| Court | Tennessee Court of Appeals |
APPEAL FROM THE CHANCERY COURT OF GRUNDY COUNTY TENNESSEE
THE HONORABLE JEFFREY F. STEWART PRESIDING
This is an action to recover upon an insurance policy insuring an automobile against loss. The named insured, Mr. Nance, the owner of the automobile, is not a party to the action. Instead, the suit was brought by Ed Reeves, doing business as Ed's Imports, in his capacity as the loss payee named in the insurance policy. This appeal involves the rights of the loss payee under the loss payable provision of the insurance contract where, after the loss, the insurance company canceled the policy retroactively due to a discovered misrepresentation in the application by the insured. The trial court ruled in favor of the appellee, Ed's Imports. We affirm.
ERNEST D. BENNETT, III, TAYLOR, PHILBIN, PIGUE, MARCHETTI & BENNETT, PLLC, 2908 Poston Avenue, Nashville, Tennessee 37203
Attorney for the Defendant/Appellant
ROBERT S. PETERS, 100 First Avenue S.W., Winchester, Tennessee 37398
Attorney for Plaintiff/Appellee
AFFIRMED AND REMANDED
CONCURS:
DISSENTS IN SEPARATE OPINION:
Ed Reeves, doing business as Ed's Imports, sold a 1992 Nissan Maxima to Mr. Nance and financed this purchase. Mr. Nance gave Mr. Reeves a promissory note, and agreed to maintain insurance coverage on the car. Mr. Nance purchased that insurance from Granite State Insurance Company, the appellant. Granite State issued the policy, which designated Ed's Imports as the loss payee. Also included in the policy was a provision establishing a "deductible" for the loss payee. Ed's Imports received notice of the insurance and its loss payee status from the insurer.
Mr. Nance's car was stolen on June 8, 1996, and a claim was filed. In the course of its investigation, Granite State discovered that Mr. Nance had been convicted of felonious possession of marijuana before he applied for insurance coverage. In his application for insurance, he had answered "no" to the question, "has anyone in household been arrested for any offense other than traffic offenses?" Based upon this misrepresentation by the insured, Granite State denied the claim and canceled the insurance policy retroactively, declaring it void ab initio.
Ed's Imports, the loss payee, does not dispute the insurance company's right to cancel the policy retroactively with regard to the insured. Therefore, we need not consider the validity of the insurance company's retroactive cancellation of the policy as to the insured.
Ed's Imports, the loss payee, attempted to recover from the insurance company, and Granite State denied that claim. Ed's Imports filed suit in the Chancery Court of Grundy County, and the matter was tried by Stipulation of Facts submitted by the parties. The trial court found that, under the terms of the policy, the loss payee was entitled to recover. The court found that the policy should be construed to require notice to the loss payee before cancellation would be effective as to the loss payee, that any ambiguity in this regard should be resolved in favor of the loss payee, and that the loss occurred prior to the notice of cancellation of the policy. The trial court awarded Ed's Imports the stipulated amount, $12,008. Granite State appeals that decision.
Counsel for both parties have clearly and accurately defined the issue for this Court and for the trial court:
Whether Granite State's ab initio cancellation of the policy, subsequent to the loss, prevents recovery by the loss payee, based upon the terms and conditions of the policy and applicable law.
Since the questions raised herein are purely questions of law and not of fact, our review is de novo on the record with no presumption of correctness of the trial court's conclusions of law. See Chrysler Credit Corp. v. Noles, 813 S.W.2d 437, 438 (Tenn. App. 1990); Adams v. Dean Roofing Co., 715 S.W.2d 341, 343 (Tenn. App. 1986).
I.
Both parties rely upon the following provision, which they refer to as the loss payable clause, and the outcome of this case largely turns on the interpretation of this language:
Loss or damage under this policy shall be paid, as interest may appear, to you and the loss payee shown in the Declarations or in this endorsement. This insurance with respect to the interest of the loss payee, shall not become invalid because of your fraudulent acts or omissions unless the loss results from your conversion, secretion or embezzlement of "your covered auto." However, we reserve the right to cancel the policy as permitted by policy terms and cancellation shall terminate this agreement as to the loss payee's interest. We will give the same advance notice of cancellation to the loss payee as we give to the named insured shown in the Declarations.
Under Tennessee law, where an insurance contract includes an "open" or "simple" loss payable clause, a loss payee has no greater right than the insured. See Hocking v. Virginia Fire & Marine Ins. Co., 99 Tenn. 729, 42 S.W. 451 (1897); Central Nat'l Ins. Co. v. Manufacturers Acceptance Corp., 544 S.W.2d 362 (Tenn. 1967). Open or simple clauses designate the loss payee, and declare that the loss, if any, is payable to the mortgagee as its interest may appear. The rights of the mortgagee under a simple loss payee clause are wholly derivative and cannot exceed those of the insured. In Hocking, the court held that the act of the insured in burning down the covered property extinguished her right to recover under the insurance contract as well as the rights of the mortgagee or loss payee. Hocking, 42 S.W. at 451. In Central National Insurance, the chattel mortgagee/loss payee was denied recovery because of the acts of the insured who breached material conditions of the policy. Central Nat'l Ins., 544 S.W.2d at 364. In that case, however, the court noted that the contract in question contained no language "protecting the interest of the mortgagee from acts or omissions of the insured-mortgagor." Id.
A clear majority of jurisdictions recognize the existence of a second type of mortgagee or loss payee clause, the "standard" or "union" clause, which is the type referred to in Central National Insurance as missing from that contract. Standard or union clauses designate the mortgagee, and then go a step further. The signature characteristic of a standard clause is that it contains language insuring that the interest of the mortgagee will not be invalidated by certain acts of the insured. See, e.g., Nationwide Mut. Ins. v. Dempsey, 495 S.E.2d 914 (N.C. App. 1998); see generally 4 Lee R. Russ, Couch on Insurance 3d 65.32 et seq. A standard or union clause appears in a policy obtained by the mortgagor for the benefit of both the mortgagor and the mortgagee. Where an insurance policy contains a standard or union mortgage clause, the mortgagee has an independent contract with the insurer, the rights of a mortgagee can be greater than those of the insured, and the mortgagee's rights are determined by its separate contract with the insurer. Id. at 65.32.
Tennessee courts have long recognized the existence of the two types of mortgagee or loss payee clauses and the difference in the effect of their inclusion in an insurance contract. See Laurenzi v. Atlas Ins. Co., 131 Tenn. 644, 176 S.W. 1022 (1915).
That view is that the contract evidenced by the rider is a separate and distinct one with the mortgagee, designed for his protection, and in operation from the date of its execution; that, in so far as the policy or contract with the mortgagor is in harmony therewith, it is to be referred to, to supplement and complete the terms of the mortgagee's contract, and, in so far as the policy is out of harmony with the rider, such adverse provisions are to be disregarded; and, further, that under such a contract the security of the mortgagee cannot be invalidated, either in whole or in part, by any act or neglect of the mortgagor, either prior or subsequent to the execution of such contract with the mortgagee.
Our courts have consistently held that where the insurance policy contains a standard or union mortgage clause, the mortgagee has an independent contract with the insurer. See Third Nat'l Co. v. Thompson, 28 Tenn. App. 436, 191 S.W.2d 190 (1945); Phoenix Mut. Life Ins. Co. v. Aetna Ins. Co, 59 S.W.2d 517 (Tenn. 1933); Phoenix Mut. Life Ins. Co. v. Greene County Farmers' Mut. Fire Ins. Co., 54 S.W.2d 971 (Tenn. 1932). Although these cases deal with policies insuring real property,1 Tennessee courts have also recognized that a standard mortgage clause contained in an insurance policy for personal property has the same effect. See Union Planters Nat'l Bank v. American Home Assurance Co., 865 S.W.2d 907 (Tenn. App. 1993) (); Noles, 813 S.W.2d at 439 (); Central Nat'l Ins. Co., 544 S.W.2d at 364 ().
In a recent case involving the applicability of the doctrine of res judicata to subrogation claims against the insured by an insurer who had paid the loss payee, this Court noted:
We begin our analysis with the observation that plaintiff [the insurer] was charged with the knowledge that its separate contractual obligation with First Tennessee [the loss payee] would not generally be invalidated by the acts of the...
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