Allstate Insurance Company v. Diana Lynn Tarrant

Citation: Not availableDocket: E2009-02431-COA-R3-CV

Court: Court of Appeals of Tennessee; October 21, 2010; Tennessee; State Appellate Court

Original Court Document: View Document

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Allstate Insurance Company initiated a declaratory judgment action to ascertain which of two insurance policies applied to a 2002 Chrysler Town & Country van involved in an accident. The defendants included Diana Tarrant, John Tarrant, and their business, Blue Ribbon Cleaning, Inc. Following an accident on June 17, 2005, where the van collided with a motorcycle driven by Charles E. Leatherwood, the latter filed a personal injury lawsuit against the Tarrants.

At the time of the accident, the Tarrants owned multiple vehicles insured under an Allstate commercial policy, which provided higher liability limits, while also holding a personal policy with lower limits. In March 2005, the Tarrants requested that several vehicles, including the van, be moved from the commercial policy to the personal policy to reduce premiums. The agency complied, and a policy endorsement was issued on April 4, 2005. The Tarrants, however, disputed this transfer, claiming they never authorized moving the van to the personal policy and believed their coverage should remain at the commercial policy’s limits of $500,000.

The trial court ruled that the Tarrants had ratified the policy change due to notifications and billing from Allstate reflecting the van's coverage under the personal policy. On appeal, the Court of Appeals reversed the trial court's decision and dismissed the case, concluding that the applicable coverage was in question. The appeal emphasized the disagreement over the policy's applicability and the insured's claimed authorization for the change.

The Tarrants denied any intention to switch the coverage of their Chrysler van from a commercial to a personal policy, asserting that the van was leased under Blue Ribbon Cleaning, Inc., paid for by the company, and utilized for business purposes. They claimed they did not authorize any change in coverage, requesting the Court to affirm that the van was covered under their commercial policy and that any alterations made by the Lonnie Jones Agency were due to the agent's mistake, of which they were unaware until after an accident occurred. Their answer included a general prayer for relief but did not seek reformation of the policy. Similarly, defendant Leatherwood also filed an answer without requesting contract reformation, stating that the coverage change was a mistake by the agency and that Tarrant had not instructed the agency to alter the coverage. Leatherwood cited case law indicating that an insurance company cannot benefit from an agent's mistake or negligence regarding policy handling. 

The trial occurred on September 22, 2009, and on October 22, the Court ruled in favor of Allstate’s declaratory judgment, confirming that the van was covered by the Allstate personal policy at the time of the accident, and incorporated its Memorandum Opinion into the judgment. The Tarrants and Leatherwood appealed this decision. At trial, it was noted that the Tarrants were the sole shareholders of Blue Ribbon Cleaning, Inc., which had operated for 28 years and held a personal lines policy with Allstate. Prior to the van's lease, all their vehicles were registered to John Tarrant and insured under the personal policy. Tarrant had been advised by an Allstate agent to place business-related vehicles under the commercial policy, leading to the creation of a commercial policy for Blue Ribbon. 

Allstate obtained necessary details about the van from the dealership, but its records incorrectly indicated the van was owned by John Tarrant instead of leased to Blue Ribbon. In early 2005, Tarrant received a premium increase notice and, consistent with his past practice, contacted agency owner Jones to negotiate a lower rate. Jones noted Tarrant's assertiveness in seeking premium reductions, culminating in a transfer to licensed agent Patricia Smith for further discussions.

Tarrant and Ms. Smith discussed potential methods to reduce insurance premiums, but Ms. Smith testified that she had no recollection of their conversation and could only reference her usual practices, which included taking notes that she would not retain. Tarrant claimed he requested a quote to keep all four vans on the commercial policy while moving other vehicles to his personal policy, and that Ms. Smith provided this quote. He instructed her to retain the vans on the commercial policy, yet Ms. Smith later stated that Tarrant directed her to move the Town & Country van to the personal policy. Despite her lack of recollection regarding the conversations, she acknowledged moving the van based on Tarrant's instruction. The Trial Judge found Tarrant's testimony credible as Ms. Smith and Mr. Jones could not recall the conversations and presented no evidence to contradict him. Ms. Smith admitted during cross-examination that the leased Town & Country van, registered to Blue Ribbon, should not have been placed on a personal policy, but attributed the error to faulty computer records at Allstate. Tarrant did not discover the van's transfer until a lawsuit arose in October 2008, learning then that its coverage was limited to $100,000. Allstate had sent Tarrant a notification about policy changes, which he claimed he did not recall receiving. The notification included a list of changes effective April 4, 2005, indicating increased premiums totaling $573.26.

The letter referenced an Amended Policy Declarations and encouraged the insured to compare it with a previous Policy Declaration to identify changes. It concluded with an invitation for the insured to contact the agent, Lonnie Jones, Jr. The enclosed Amended Policy Declarations identified the 02 Chrysler Town & Country as a covered vehicle. Evidence indicated Mr. Tarrant received and paid multiple premium bills for his Allstate policies between the transfer of the Chrysler van to a personal policy and an accident on June 17, 2005. The commercial policy bills listed other vehicles but excluded the Town & Country van. Mr. Tarrant acknowledged he received and paid the bills without reviewing them, as his daughter and secretary managed the payment process.

The Trial Court's findings included the credibility of witnesses, Mr. Tarrant's instructions to maintain the vans on the commercial policy, and Ms. Smith's transfer of the van to the personal policy. The court suggested a "good faith misunderstanding" regarding the term "van" contributed to the confusion. Mr. Tarrant received notification of the transfer, which he claimed not to recall, and Allstate sent multiple bills showing the van was under the personal policy. The court determined Mr. Tarrant should have recognized the misunderstanding based on these communications and that he ratified it by not acting on the notifications.

The issues for review included whether the Trial Court erred in not reforming the insurance contract, whether it was correct in finding Mr. Tarrant ratified the insurer's mistake, and whether the insurer was estopped from denying coverage due to this ratification. The standard of review in a non-jury trial is de novo, with a presumption of correctness for the trial court's factual findings unless contradicted by a preponderance of evidence. There is no presumption of correctness for legal conclusions.

Credibility determinations made by trial courts receive significant deference from appellate courts due to the trial court's unique ability to observe witness demeanor and appearances. Appellate courts will not re-evaluate these assessments unless clear and convincing evidence contradicts the trial court’s findings. In this case, the appellants argue that the trial court erred by not reforming an insurance contract based on a claimed mutual mistake between the insurer and insured. The law allows for contract reformation when both parties share a mutual mistake regarding a fundamental assumption, or when one party is mistaken due to the other party's fraud. However, the burden of proof lies with the party seeking reformation, requiring clear and convincing evidence of the mistake.

Allstate contends that the reformation issue was not appropriate for appeal since it was never raised in the trial court, a position supported by the record, which indicates the absence of such claims in the pleadings or trial documentation. The trial court found no evidence of mutual mistake or fraud, noting that Mr. Tarrant insisted he instructed Ms. Smith to keep the Town & Country van on the commercial policy, while Ms. Smith believed she was directed to transfer it to the personal policy. This misunderstanding was deemed a one-sided mistake, lacking the mutuality required for reformation. Additionally, the trial court held that Mr. Tarrant ratified Ms. Smith’s actions, a conclusion supported by prior case law establishing principles of agency in similar contexts. Issues not raised in the trial court cannot be introduced on appeal, further reinforcing the trial court's findings in this matter.

For Allstate to establish that Mr. Tarrant ratified Ms. Smith’s transfer of the van to the personal insurance policy, it must first demonstrate an agency relationship between them or show that Ms. Smith included the van for Mr. Tarrant's benefit. However, Tennessee Code Annotated § 56-6-115(b) precludes a principal-agent relationship in this context, designating Ms. Smith, as an insurance producer licensed under state law, as the agent of Allstate, not Mr. Tarrant or Blue Ribbon. This statute aims to ensure insurance companies are accountable for their agents' representations and actions, thereby protecting applicants. Although a principal may ratify contracts made by someone who is not their agent, ratification occurs only when the principal approves or adopts the unauthorized contract. Ratification relates back to provide original authority for the contract, binding the principal to its terms as if they had initially executed it.

Ratification is defined as the confirmation of an act after it has occurred. For an unauthorized transaction to be ratified, the principal must have full knowledge of all relevant facts at the time of ratification. The determination of ratification often hinges on the principal's intent, which is typically a factual question assessed based on surrounding circumstances. Ratification can also be inferred from the principal's conduct indicating consent to the transaction or from actions that imply ratification. Generally, if a principal becomes aware of an unauthorized transaction, they must act promptly to disaffirm it or risk being bound by it; silence can also imply ratification if the principal does not protest within a reasonable time. 

In Mr. Tarrant's case, the Trial Court incorrectly concluded that he ratified Ms. Smith's unauthorized transfer of the Town & Country van to a personal policy. The transfer would need to be shown as being done on Mr. Tarrant's behalf, but evidence indicated that Ms. Smith acted contrary to his instructions to keep the vans on the commercial policy. Ms. Smith did not establish that she was acting in Mr. Tarrant's stead or for his benefit; instead, her actions aimed to reduce his premiums in a manner not agreed upon by him. Consequently, Mr. Tarrant did not ratify the transfer, and the appellee's reliance on the case of Webber v. State Farm is misplaced, as the circumstances in that case differ significantly, notably that Ms. Southard acted for her son-in-law's benefit, unlike the situation with Mr. Tarrant.

Policies in question have been unchanged since 1986. In 1996, Mr. Webber was involved in an accident with an uninsured motorist and sought to claim standard coverage limits under his UM policy, asserting he did not authorize his mother-in-law to obtain minimum limits. The Supreme Court highlighted that ratification of a contract happens when a person approves a contract executed by another on their behalf. The court determined that Ms. Southard's acquisition of the insurance for Mr. Webber was for his benefit, leading to a legal ratification of the contract, despite any lack of authorization. In contrast, the actions of Ms. Smith regarding Mr. Tarrant’s insurance were not for his benefit, resulting in a reversal of the Trial Court's finding of ratification.

Appellants argued that the Trial Court erred in not estopping Allstate from denying coverage under the commercial policy, referencing Tennessee law that prohibits insurance companies from benefiting from their agents' mistakes. The court reiterated that since Allstate did not deny coverage, there was no basis for the Trial Court's ruling on estoppel. Allstate maintained that the Town & Country van was insured under the personal policy, validating the coverage limits. The court noted that an insurance agent is liable for failing to procure the intended insurance. Tennessee law regards insurance agents as representing the insurer, thus holding the insurer accountable for the agent's actions. Evidence indicated Mr. Tarrant instructed Ms. Smith to maintain all vans under the commercial policy, but she mistakenly transferred the Chrysler Town & Country van to a personal policy, diminishing the funds available for a related judgment.

The personal and commercial insurance policies differed by $400,000. Allstate is liable for Ms. Smith's actions or inactions, which affected coverage under the commercial policy for the Leatherwood suit. Despite Mr. Tarrant's awareness of the Town & Country van's transfer and his payment of invoices indicating personal policy coverage, this does not exempt Allstate from liability. The court referenced Allstate Ins. Co. v. Fox, affirming that an insured's failure to read the liability policy does not obstruct recovery. It acknowledged the common practice of insureds accepting policies without reading or fully understanding them, underscoring reliance on agents for proper coverage. Mr. Tarrant's credible testimony indicated he trusted the Lonnie Jones agency, which did not follow his instructions regarding the van's insurance. The evidence supports that Allstate's agent neglected to insure the van as directed. Consequently, the Trial Court's judgment is reversed, and the case is dismissed without prejudice, with appeal costs imposed on Allstate.