Tate v. Trialco Scrap, Inc.

Decision Date15 June 1989
Docket NumberNo. 3-88-0593.,3-88-0593.
Citation745 F. Supp. 458
PartiesHarold TATE, Jr., Ronnie Tate, Individually, and d/b/a Tate Fabricating Company, and Reliance Insurance Company v. TRIALCO SCRAP, INC., and CDM Holding Corporation, d/b/a Drossmet, and the Hartford Accident and Indemnity Company.
CourtU.S. District Court — Middle District of Tennessee

Jon E. Jones, Moore, Jones, Rader & Clift, Cookeville, Tenn., for plaintiffs.

B. Morris Martin, Pat Huddleston, II, McKenzie & McPhail, Atlanta, Ga., James D. Madewell, Madewell & Jared, Cookeville, Tenn., for defendants.

MEMORANDUM

MORTON, Senior District Judge.

In this action, a lessor and its subrogated insurer seek damages from a tenant who negligently caused a fire which damaged the leased building. This court has jurisdiction based upon diversity of citizenship. The law to be applied is that of the State of Tennessee. Since there is no Tennessee law directly on point, this court's duty is to predict what law the Tennessee Supreme Court would apply under the same circumstances. In making this prediction, the court must rely first of all upon what limited guidance is available in Tennessee case law. To the extent that Tennessee case law alone does not shed enough light on the subject, the court will consider the persuasive authority of other jurisdictions as well as the policy rationale underlying the competing positions. As explained below, this court concludes that Tennessee law does not allow recovery against the negligent tenant under the circumstances present in this case. The sparse Tennessee case law relevant to the issue suggests this result. Furthermore, this result would be in accord with the greater weight of authority in other jurisdictions. Finally, the court also believes this result to be the better public policy. Accordingly, judgment is entered in favor of the defendants. As will also be explained below, however, the court rejects the defendants' counterclaim.

FACTUAL BACKGROUND

Plaintiffs Harold Tate, Jr., and Ronnie Tate, doing business as Tate Fabricating Company, own an industrial building and lot in White House, Tennessee. On April 3, 1984, the Tates leased this building to Trialco Scrap, Inc., and Drossmet. Although named as separate defendants, Trialco Scrap and Drossmet are actually one party. Drossmet is simply the trade name by which Trialco Scrap does business.

The arguably pertinent portions of the Tate-Trialco lease provided as follows:

8. MAINTENANCE & OPERATIONS. Maintenance of the Building, grounds, and storage buildings shall be the responsibility of the Lessee. Any structural damage inflicted by the Lessee shall be repaired by and at the expense of the Lessee. The Lessor agrees to correct or repair defects in the building structure during the first year of this Agreement. Thereafter, repairs shall be the responsibility of the Lessee unless caused by faulty construction or defective design of the Building or the grounds.
....
10. LIABILITY OF LESSEE. The Lessee shall indemnify Lessor and hold Lessor harmless for all loss, damage, expense and/or penalty arising from any claim or allegations of personal injury or damage to property. In the event the Lessor sells or assigns this lease, the terms of this Agreement shall remain applicable and shall be applied and administered as written and signed by current Lessor.
11. DEFAULT. Lessee shall be in default if it fails to make monthly rental payment within ten (10) days of receiving notice of failure to pay from Lessor or if Lessee fails to maintain or insure the Building as herein provided. Upon default, Lessor shall have the right, in addition to any and all other rights it may have, to terminate this lease and take possession of the Building.
....
13. DESTRUCTION OF THE BUILDING. In the event the Building is damaged or destroyed through no fault or negligence of the Lessee and the Lessee's production is reduced by 30% as a result thereof, the Lessee shall be permitted to move and cease rental payments without being in default. In the event Lessee's production is not thereby reduced by 30% or Lessee elects to continue this Lease Agreement despite reduction in production by 30% or more, the rent payable under this lease shall be abated proportionately according to the floor area of the Building which is unusable by the Lessee. Such abatement shall continue for the period commencing with such damage or destruction and ending with the completion by the Lessor of such work or repair and/or construction to make the Building, or the damaged portion thereof, usuable by the Lessee.
14. INSURANCE. Throughout the terms of this lease, the Lessor shall pay premiums for insurance coverage on the Building only. Any damage caused by the Lessee shall be paid for by the Lessee. The Lessee shall provide Certificate of General Liability Insurance up to $500,000.00 with one million dollar umbrella.

In accordance with the lease, the Tates subsequently insured the building with plaintiff Reliance Insurance Company. The policy included fire coverage. Tate Fabricating Co., Inc., was the only named insured. Like most policies, this one granted Reliance subrogation rights, but it also granted the insured the right to foreclose subrogation rights against any tenant even after a loss had already occurred.

Defendant Drossmet purchased insurance from The Hartford Accident and Indemnity Company. This policy provided general liability coverage as well as protection for Drossmet's personal property and improvements.

On June 12, 1987, the defendants negligently caused a fire which substantially damaged the leased building. After a delay caused by questions concerning which insurance company was responsible, Reliance paid $141,500 to have the building repaired. The Tates also paid $1,000 since this was the amount of their deductible under the policy. Now, the Tates and Reliance seek to recoup their losses from Drossmet and Trialco. The defendants deny liability on the ground that the parties intended for the Reliance insurance policy to be procured for the mutual benefit of the lessor and lessee. The defendants also counterclaim for lost profits and property damages allegedly caused by the delay in beginning repair. Additionally, the defendant seeks approximately $17,000 as reimbursement for costs allegedly incurred for repair of the basic lighting in the building.

TENNESSEE LAW
A. Basic Propositions

The key question is whether the provision requiring the lessor to purchase insurance coverage for the building when viewed as part of the whole lease, relieves the lessee from liability for the fire it negligently started. The lessee's theory is that this provision expressed an intent that the lessor would look only to the insurance for recovery from a fire even if negligently caused by the tenant. In other words, the tenant contends that it is a coinsured or that the parties contracted for the insurance to be for their mutual benefit. The lessor and the insurer, on the other hand, argue that the insurance was only for the lessor's benefit and that the lease as a whole expresses an intent that the lessee be liable for any damage inflicted by the lessee regardless of whether the lessor's insurance covered the damage. Unfortunately, Tennessee case law does not directly address the issue.

The plaintiffs contend that "the controlling law in this case is set forth in Anderson v. Miller, 96 Tenn. 35, 33 S.W. 615 (1896)." In Anderson, a landlord's fire insurance company was allowed to recover from a tenant responsible for a fire loss. Thus, Anderson demonstrates that a tenant may be held responsible for his negligent destruction of leased premises. Certainly the court has no quarrel with this as a general rule of law, but it does not address the critical inquiry in this case. Anderson involved no contract which could even arguably be construed to have shifted this responsibility. In the case at bar, however, the parties entered into a contract which at least arguably expresses an intent that the tenant be excused from the traditional liability for negligent burning of the building. Anderson says nothing about such contracts.

Likewise, Miller v. Russell, 674 S.W.2d 290 (Tenn.App.1983), cited by the defendants, is of little help. The Miller court denied an insurer's attempt to subrogate against an allegedly negligent defendant who was also a named loss payee on the insurance policy. The court held that a named loss payee is an "insured" under the policy and that "no right of subrogation exists where the wrongdoer is also an insured under the same policy." Id. at 291. Again, the court certainly finds no fault with the general proposition that an insurance company may not seek subrogation against an insured. Indeed, the plaintiffs apparently even concede this point. That principle in itself, however, says nothing about whether under the facts of this case, the defendants may be considered an implied coinsured under Reliance's policy. If the defendants are implied coinsureds, then, of course, judgment must be entered in their favor. Likewise, if the plaintiffs otherwise contracted to relieve the defendants of liability for their negligent damage to the leased structure, then judgment must be in favor of the defendants. Miller, however, involved a completely different contractual arrangement than that present in this case. Most importantly, the Miller defendant was a named loss payee. Accordingly, Miller does not help answer the questions of whether the present defendants are coinsureds or whether the lease relieves the defendants of responsibility for negligent destruction of the leased premises.

The lease at issue in this case contains two critical components. First, the lease on more than one occasion speaks of the lessee being responsible for damage inflicted by the lessee. For future reference, this will be deemed generally as the repair obligation. Second, the lease requires the lessor to purchase insurance...

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