Talley v. State Farm Fire and Casualty

• Decision Date: 21 June 2000
• Docket Number: No. 98-6260,98-6260
• Citation: 223 F.3d 323
• Parties: (6th Cir. 2000) George S. Talley, Plaintiff-Appellant, v. State Farm Fire and Casualty Company; Homeside Lending, Inc., Defendants-Appellees. Submitted:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 323

223 F.3d 323 (6th Cir. 2000)

George S. Talley, Plaintiff-Appellant, v. State Farm Fire and Casualty Company; Homeside Lending, Inc.,

Defendants-Appellees.

No. 98-6260

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Submitted: June 21, 2000

Decided and Filed: August 10, 2000

Appeal from the United States District Court for the Western District of Tennessee at Memphis. No. 97-02639--Bernice B. Donald, District Judge.

Robert A. Wampler, WAMPLER & PIERCE, Memphis, Tennessee, for Appellant.

Russell E. Reviere, Bradford D. Box, RAINEY, KIZER, BUTLER, REVIERE & BELL, Jackson, Tennessee, for Appellees.

Before: RYAN, SILER, and CLAY, Circuit Judges.

OPINION

CLAY, Circuit Judge.

Plaintiff, George S. Talley, appeals the judgment granting a motion for judgment as a matter of law under Fed. R. Civ. P. 50 to Defendants, State Farm Fire and Casualty Company and Homeside Lending, Inc., (collectively "State Farm"). Talley commenced this action to recover under an insurance policy issued by State Farm for losses he sustained in a fire. As an affirmative defense, State Farm asserted that Talley's refusal to submit to an examination under oath constituted a breach of the terms of the insurance policy. Initially, State Farm moved for summary judgment pursuant to Fed. R. Civ. P. 56 which was denied by the district court. The case proceeded to trial and following the close of Talley's case-in-chief, State Farm moved for judgment as a matter of law under Rule 50. The district court granted the motion, finding as a matter of law that Talley breached the terms of the insurance policy. For the following reasons, we VACATE the judgment of the district court and REMAND.

I. Facts

On December 15, 1996, while Talley's property was insured under a State Farm policy, a fire destroyed all of his personal property located on the premises. On December 26, 1996, State Farm adjuster Todd Inman took a recorded statement ("the statement") from Talley. At the time the statement was being taken, Inman explained to Talley the purpose of the statement. Additionally, Inman informed Talley that it would be necessary for Talley to submit to a sworn examination under oath¹. While the statement was being taken, Inman asked Talley various questions concerning his inheritance from his father. Talley refused to provide any information to the questions concerning the inheritance from his father. Inman informed Talley that the refusal to provide the information violated the duty to cooperate under the terms of the policy.

Shortly thereafter, Russell E. Reviere, State Farm's counsel, scheduled Talley's examination under oath and requested that Talley provide various information at the examination. Due to a scheduling conflict on Talley's part, Talley's examination was rescheduled for March 21, 1997. On March 21, 1997, Robert A. Wampler, Talley's attorney, appeared on the record and informed all parties present that Talley would not submit to the examination. Wampler explained that his client was unwilling to provide the sworn statement because of an ongoing criminal investigation of the fire and its cause.² On June 27, 1997, Talley was informed by State Farm that his claim under the policy was denied. At trial, Talley acknowledged his refusal to submit to an examination under oath. He stated that he would not give the statement under oath unless State Farm would guarantee that it would not share the information with law enforcement officials or others.

II. Discussion

Cooperation clauses in liability policies have been universally held to be valid. See Horton v. Employers' Liab. Assur. Corp., 164 S.W.2d 1016, 1017 (Tenn. 1942). "The right of the insurer to take and the obligation of [an insured] to give sworn statements in accordance with the terms of the policy is not questioned. Fire policies . . . almost universally require that the insured cooperate with the insurer in the investigation of the fire as a condition precedent to performance by the company to indemnify the insured for his loss." Shelter Ins. Co. v. Spence, 656 S.W.2d 36, 38 (Tenn. Ct. App. 1983).

The reason for including a cooperation clause in the policy and for conducting examinations pursuant to it is obvious enough. The company is entitled to obtain, promptly and while the information is still fresh, "all knowledge, and all information as to other sources and means of knowledge, in regard to the facts, material to their rights to enable them to decide upon their obligations, and to protect them against false claims. . . ."

Id. at 38 (quoting Claflin v. Commonwealth Ins. Co., 110 U.S. 81, 94-95 (1884)). Moreover, Tennessee courts view these clauses as conditions precedent and, in the absence of waiver or estoppel, hold that a breach of the clause substantially affecting the insurer's interests constitutes a complete defense to liability under the policy. See Pennsylvania Ins. Co. v. Horner, 281 S.W.2d 44, 46 (Tenn. 1955); Hartford Accident & Indem. Co. v. Partridge, 192 S.W.2d 701, 702-03 (Tenn. 1946).

On appeal, Talley argues that the district court erred by granting State Farm's Rule 50 motion. Specifically, Talley contends that State Farm was required to show that it was prejudiced by Talley's failure to submit to an examination under oath. In support of Talley's argument, he primarily relies upon Shelter Insurance Co. v. Spence, 656 S.W.2d 36 (Tenn. Ct. App. 1983); Allstate Insurance Co. v. Auto Owners Insurance Co. Inc., No. 03A01-9706-CH-00225, 1998 WL 102075, at *1 (Tenn. Ct. App. Feb. 27, 1998) (unpublished); and Thaxton v. Allstate Insurance Co., No. 87-251-II, 1988 WL 23922, at *1 (Tenn. Ct. App. Mar. 18, 1988) (unpublished) for the proposition that State Farm must show prejudice. State Farm contends that no showing of prejudice is required.

In granting Defendant's Rule 50 motion, the district court reasoned as follows:

Given the circumstances around this case, the plaintiff says that State Farm was not prejudiced. And I don't find that they have shown any prejudice, but I also find that there is no requirement that they show prejudice in this case. I believe State Farm had a sufficient, reasonable and justified business judgment for pursuing this issue further in light of what I have heard, so I don't find that their actions were unreasonable. As I said before, I don't find that under the prevailing law or under the statute there has to be a showing of prejudice or reasonableness.

(J.A. at 128-29.)

Because the district court was required to "apply state law in accordance with the then controlling decision of the highest state court," Bailey Farms, Inc. v. NOR-AM Chemical. Co., 27 F.3d 188, 191 (6th Cir.1994), the district court properly concluded that Tennessee law did not require Defendant to demonstrate prejudice. See Horner, 281 S.W.2d at 44; Hartford, 192 S.W.2d at 701; Horton, 164 S.W.2d at 1016; Goodner v. Occidental Fire & Cas. Co., 440 S.W.2d 614, 617 (Tenn. Ct. App. 1969); see also Allstate Indem. Co. v. Fifer, 47 F.Supp.2d 913 (W.D. Tenn. 1998) (finding no showing of prejudice required under Tennessee state law where condition precedent breached). However, intervening authority from the Tennessee Supreme Court, Alcazar v. Hayes, 982 S.W.2d 845 (Tenn. 1998) and American Justice Insurance Reciprocal v. Hutchinson, 15 S.W.3d 811 (Tenn. 2000), requires a showing of prejudice in order for an insurance company to defeat liability, even if the insured individual has failed to abide by the terms of the policy.³

In a diversity action involving an insurance contract, a federal court applies the substantive law of the forum state. See Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938); Equitable Life Assur. Soc. of U.S. v. Poe, 143 F.3d 1013, 1016 (6th Cir. 1998). A federal court must follow the decisions of the state's highest court when that court has addressed the relevant issue. See Meridian Mut. Ins. Co. v. Kellman, 197 F.3d 1178, 1181 (6th Cir. 1999). Although the publication of Alcazar and Hutchinson occurred after the district court issued judgment granting State Farm's Rule 50 motion, it is well settled that "a judgment of a federal court ruled by state law and correctly applying that law as authoritatively declared by the state courts when the judgment was rendered, must be reversed on appellate review if in the meantime the state courts have disapproved of their former rulings and adopted different ones." Huddleston v. Dwyer, 322 U.S. 232, 236 (1944); accord Vandenbark v. Owens-Illinois Glass Co. 311 U.S. 538, 543 (1941); Awrey v. Progressive Cas. Ins. Co., 728 F.2d 352, 354 (6th Cir. 1984) (holding that the court of appeals in applying state law on appeal of a diversity action must apply law of the state as it existed at the time of its decision rather than as it stood at the time the case was decided in district court). Thus, an intervening state decision must be given its full effect and treated as though the decision existed during the pendency of the action before the district court. See Huddleston, 322 U.S. at 236 (holding that until the case is no longer sub judice, federal courts must apply state law in accordance with the then controlling decision of the highest state court). Therefore, we must apply both Alcazar and Hutchinson to this case, despite the fact that neither decision was available to the district court at the time it rendered its decision.

In Alcazar, the Tennessee Supreme Court considered whether an uninsured motorist policy is automatically forfeited when the insured does not comply with the notice provision of the insurance policy. The supreme court abandoned the traditional approach, which recognized that notice was a condition precedent to recovery under a policy and required automatic forfeiture without a showing of prejudice to the insurer. 982 S.W.2d at 849-52. In adopting the modern approach requiring a showing of prejudice when a condition precedent has been violated, the Alcazar court articulated three...