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Insurance Company Held Liable Even When Policy Never Issued

Most business people I know are too busy to read their insurance policies.  So, they rely on their insurance agents to make sure that they buy the kind of insurance coverage which they need.  Insurance agents and insurance companies are quite capable of miscommunicating and making mistakes.  So, sometimes, insureds make claims only to be told by the insurance company that they did not purchase the type of coverage or amount of coverage which they thought that they had purchased.

Luckily for those who purchase insurance policies in Tennessee and don’t read them, Tennessee courts can step in and help an insured who thought it had purchased coverage which it needed when it turns out that it did not.  Two cases in which insurance companies were held liable to insureds even when the lack of coverage could have been discovered by the insureds had the insureds read their policies are Allstate Ins. Co. v. Tarrant (Tenn. 2012) and Cleveland Custom Stone v. Acuity Mutual Ins. Co. (Tenn. Ct. App. 2014).

In the Tarrant case, the insured told his agent to place his business vans under his commercial policy.  The agent goofed and added the vans to the insured’s personal policy which had lower limits.  The Supreme Court held that the insurance company was required to provide the higher limits of coverage under the commercial policy because the agent had made the mistake.  The insurance company argued, unsuccessfully, that the mistake of the agent could have been discovered by the insured if only the insured had read his policies.

In Cleveland Custom Stone, the plaintiff (“Plaintiff”) was a business which leased space for its operations.  When it became more successful, the Plaintiff decided to buy the building next to the building it leased and to run its operations from there.  In order to buy the new building, the Plaintiff had to obtain a loan.  In order to close the loan, the Plaintiff had to buy insurance for the building.

The Plaintiff informed its insurance agent (“Agent”) of its need for insurance for the building.  Agent visited the property Plaintiff was purchasing and provided a quote to Plaintiff for insurance coverage for the building. The Plaintiff thereafter notified Agent that it accepted the quote for the building insurance.

Prior to the closing of the loan, Agent sent a Certificate of Insurance to the bank which was providing the loan.  That Certificate stated that “THE INSURANCE POLICIES LISTED BELOW HAVE BEEN ISSUED. . . .”  The Certificate also listed the bank as an additional insured and mortgagee of the building.  The policy referred to in the Certificate did not include coverage for the building.   An underwriter for the insurance company admitted that the Certificate reflected that Plaintiff did have coverage for the building.

The Plaintiff’s officer admitted that he had never read the policy.  He also admitted that he was never personally told that the business had received insurance coverage for the building.

Agent admitted that, if coverage had been obtained for the Plaintiff’s building, she would have received an endorsement, but never did.  She also testified that either she or the insurance company made a mistake.

A few years after the closing of the loan, Plaintiff’s building was destroyed by fire.  At that time, Agent was defunct and judgment proof.  Plaintiff filed a breach of contract action and a bad faith failure to pay action against the insurance company.  The jury found for the Plaintiff and the Court of Appeals of Tennessee affirmed the jury verdict relying heavily on the Tarrant case.

In addition to other defenses and arguments, the insurance company in the Cleveland Custom Stone case denied that Agent was its legal agent and denied that it was responsible for Agent’s acts.  The jury found that the Agent was the legal agent of the insurance company.  That finding by the jury was made easier by Tenn. Code Ann. §56-6-115(b).

For lawyers who handle insurance cases, that statute is crucial.  In a nutshell, it provides that an “insurance producer” who solicits or negotiates for insurance must be considered the agent of the insurance company and not of the person purchasing the insurance.  That statute is very effective at preventing insurance companies from escaping responsibility by denying coverage and trying to pass the blame for some clerical error or oversight to insurance agents.