State Farm General Insurance Co. v. Wood , 1999 Tenn. App. LEXIS 120 ( 1999 )

IN THE COURT OF APPEALS OF TENNESSEE
FILED
AT KNOXVILLE February 24, 1999
Cecil Crowson, Jr.
Appellate C ourt
STATE FARM GENERAL INSURANCE ) C/A NO Clerk
03A01-9807-CH-00227
COMPANY, )
)
Plaintiff-Appellee, )
)
) APPEAL AS OF RIGHT FROM THE
v. ) HAMILTON COUNTY CHANCERY COURT
)
)
)
)
LEILA JUNE WOOD, )
) HONORABLE HOWELL N. PEOPLES,
Defendant-Appellant. ) CHANCELLOR
For Appellant For Appellee
STUART F. JAMES JOHN D. BARRY
Manuel & James, PLLC Milligan, Barry, Hensley &
Chattanooga, Tennessee Evans
Chattanooga, Tennessee
O P I N IO N
AFFIRMED AND REMANDED Susano, J.
1
This declaratory judgment action was filed by State
Farm General Insurance Company (“State Farm”) against its
insured, the defendant Leila June Wood (“Wood”). It was prompted
by Wood’s filing of a claim for a fire loss to her mobile home.
The trial court found that a misrepresentation regarding the
insured’s prior loss history, made by Wood in her application for
insurance, had increased State Farm’s risk of loss pursuant to
T.C.A. § 56-7-1031; accordingly, the trial court declared the
subject policy void ab initio and held that Wood was not entitled
to a recovery. Wood appeals, contending that the trial court
erred in failing to grant her motion for a directed verdict, and
in finding that State Farm had suffered an increased risk of loss
as a consequence of the misrepresentation. We affirm.
I. Facts
On November 24, 1986, Wood and her husband2 met with
State Farm agent Ed Sorrick (“Sorrick”) and filled out an
application for insurance on their mobile home. The application
contains the following question: “Has the applicant had any
losses, insured or not, in [the] past three years?” On the
Woods’ application, the box “No” was checked next to this
1
T.C.A. § 56-7-103 provides as follows:
No written or oral misrepresentation or warranty
therein made in the negotiations of a contract or
policy of insurance, or in the application therefor,
by the insured or in the insured’s behalf, shall be
deemed material or defeat or void the policy or
prevent its attaching, unless such misrepresentation
or warranty is made with actual intent to deceive, or
unless the matter represented increases the risk of
loss.
2
Mr. Wood passed away in 1990, prior to the fire that led to the filing
of the subject claim.
2
question. Sorrick testified that he had specifically asked the
Woods whether they had suffered any losses within the last three
years, and that they had responded that they had not. Wood, on
the other hand, testified that Sorrick had not asked that
particular question, but that she voluntarily had told him about
the earlier fire. In any event, the question is clearly answered
in the negative on the application. The parties stipulated that
either Mr. or Mrs. Wood signed the application.3
Contrary to the representation in the application, the
Woods had suffered a loss approximately five weeks earlier, on
October 19, 1986, when their home was destroyed by fire. Sorrick
testified that he was unaware of any earlier fire losses by the
Woods.4 State Farm approved the application and issued a policy
of insurance on the subject property.
On April 23, 1993, Wood’s home burned. Wood
subsequently filed a claim with State Farm for approximately
$82,000. In the course of State Farm’s adjusting of the claim,
which included a routine investigation into Wood’s loss history,
Wood informed State Farm of the October, 1986 fire loss.
II. Procedural History
3
Wood suggests in her brief that the application may have been signed in
blank. However, she fails to point to any evidence in the record to support
this contention; nor do we find any. The only evidence relevant to this point
is found in the testimony of Sorrick, who specifically stated, “[w]e had
completed all the questions on the application before they signed it.” Wood’s
argument on this issue is without merit.
4
Apparently, the Woods had had another fire in 1979. However, the
question on the application asked only about losses within the past three
years. The 1979 fire was outside the temporal scope of the question.
3
State Farm denied Wood’s claim and filed this action to
have the policy declared void ab initio. Wood filed a
counterclaim seeking, among other things, full payment under the
policy and recovery for State Farm’s alleged bad faith in denying
the claim. Following the resolution of various pre-trial
matters, the case proceeded to trial before a jury. As indicated
earlier, Sorrick testified that the Woods had signed the
completed application after stating that they had not sustained
any fire losses within the prior three-year period. Pat Hughes,
a supervisor in underwriting and operations for State Farm, also
testified on behalf of the insurance company. He maintained that
the most important question on the application is the one
regarding prior losses. Hughes testified that a policyholder who
has suffered prior fire losses is more likely to have additional
fire losses in the future. He stated that State Farm needs all
relevant information to make its decision as to whether to issue
a particular policy; thus, if the agent is unaware of prior
losses, he or she does not have all of the material facts and
cannot make an informed decision. Therefore, according to
Hughes, a lack of information regarding prior losses would
materially affect the decision whether to issue the policy.
At the close of State Farm’s proof, Wood moved for a
directed verdict. The trial court denied her motion. Wood then
took the stand to testify on her own behalf; shortly thereafter,
however, she violated a pretrial order by stating, in the
presence of the jury, that she had cancer. As a result, the
trial court declared a mistrial. The parties nevertheless agreed
to proceed with the issue of whether the representation in the
4
application had increased State Farm’s risk of loss.5 The
following discussion took place among the trial judge and counsel
for both sides:
THE COURT: We’re going to take a ten-minute
recess and then is there any reason why we
can’t go ahead and proceed with the issue for
the court only, and that is, the issue
concerning the increased risk?
MR. JAMES [attorney for Wood]: I don’t see
why not, Your Honor.
MR. BARRY [attorney for State Farm]: No. I
think we can go ahead and do that.
THE COURT: All right.
Following this colloquy, Wood offered her own testimony, as well
as that of Phillip Braswell, the State Farm claims representative
who had spoken with Wood after the April, 1993 fire.
As indicated earlier, the trial court determined that
“the misrepresentation of past loss history did cause an increase
in the insurer’s risk of loss in this case.” It held that the
subject policy was void from its inception and that Wood thus was
precluded from recovery. The trial court also dismissed Wood’s
counterclaim, and Wood appealed.
III. Applicable Law
5
Whether a misrepresentation increased the risk of loss pursuant to
T.C.A. § 56-7-103 is a question of law for the court. Sine v. Tennessee
Farmers Mut. Ins. Co., 861 S.W.2d 838, 839 (Tenn.App. 1993); Loyd v. Farmers
Mut. Fire Ins. Co., 838 S.W.2d 542, 545 (Tenn.App. 1992). Conversely, whether
a misrepresentation was made with the intent to deceive is a question of fact.
Womack v. Blue Cross and Blue Shield of Tennessee, 593 S.W.2d 294, 295 (Tenn.
1980); Spellmeyer v. Tennessee Farmers Mut. Ins. Co., 879 S.W.2d 843, 848
(Tenn.App. 1993).
5
T.C.A. § 56-7-103 provides that
[n]o written or oral misrepresentation or
warranty therein made in the negotiations of
a contract or policy of insurance, or in the
application therefor, by the insured or in
the insured’s behalf, shall be deemed
material or defeat or void the policy or
prevent its attaching, unless such
misrepresentation or warranty is made with
actual intent to deceive, or unless the
matter represented increases the risk of
loss.
(Emphasis added.) It is clear that the language of the statute
is disjunctive, i.e., the insurer may show either 1) that the
misrepresentation was made with the intent to deceive, or 2) that
the matter represented increased the risk of loss. Id.; see
Clingan v. Vulcan Life Ins. Co., 694 S.W.2d 327, 331 (Tenn.App.
1985). In this case, it is not disputed that the representation
in the application regarding prior losses was false; thus, the
question for the court was whether, as a matter of law, the
misrepresentation increased State Farm’s risk of loss.
A misrepresentation made in an application for
insurance increases the risk of loss “when it is of such
importance that it ‘naturally and reasonably influences the
judgment of the insuror in making the contract.’” Sine v.
Tennessee Farmers Mut. Ins. Co., 861 S.W.2d 838, 839 (Tenn.App.
1993)(quoting Seaton v. National Grange Mut. Ins. Co., 732 S.W.2d
288, 288-89 (Tenn.App. 1987)); Loyd v. Farmers Mut. Fire Ins.
Co., 838 S.W.2d 542, 545 (Tenn.App. 1992). As stated in Loyd,
[i]t is not necessary to find that the policy
6
would not have been issued if the truth had
been disclosed. It is sufficient that the
insurer was denied information which it
sought in good faith and which was deemed
necessary to an honest appraisal of
insurability.
Id. In Loyd, this Court held that the insurer was justified in
denying coverage on a fire insurance claim, based upon a material
misrepresentation regarding prior losses that was made by the
insured in the application for insurance. Id. at 545-46. We
quoted with approval the following statement from 45 C.J.S.,
Insurance § 534: “...untrue statements as to prior losses by fire
are material, and will preclude recovery....” Loyd, 838 S.W.2d
at 545.
IV. Analysis
Upon review of the record in this case, we are of the
opinion that the trial court correctly determined that the
misrepresentation in the application for insurance increased
State Farm’s risk of loss within the meaning of T.C.A. § 56-7-
103. This conclusion is supported by the testimony of Pat
Hughes, who maintained that State Farm cannot make an informed
decision whether to issue a policy without information regarding
a potential insured’s prior loss history. Hughes testified that
the inquiry regarding prior losses is the most important question
on the application. He also testified that a homeowner with a
history of fire losses is more likely to suffer additional fire
losses in the future. This testimony was uncontradicted.
Wood contends that some of Hughes’ testimony was
7
improperly predicated on a hypothetical question that was not
based upon the correct set of facts. Specifically, she takes
issue with the question in which counsel for State Farm asked
Hughes what would have happened if he had learned that the
potential insured had suffered a $50,000 fire loss approximately
six weeks earlier, as well as two other fire losses between 1979
and 1986. Hughes responded that he would have recommended
against issuing the policy. Wood insists that because the
application only requested information on losses that had
occurred within the last three years, she would not have been
required to disclose any information regarding losses prior to
1983; thus, so the argument goes, Hughes’ testimony does not
establish that State Farm was harmed by Wood’s failure to reveal
the earlier 1986 loss.
We cannot agree with this contention. In our opinion,
regardless of whether the hypothetical was based on a correct set
of facts, Hughes’ overall testimony establishes that Wood’s
failure to disclose the October 19, 1986, fire loss, standing
alone, increased State Farm’s risk of loss. This is true even
without considering Hughes’ response to the hypothetical question
at issue.
Under the circumstances of this case, it is clear that
the information -- or lack thereof -- regarding Wood’s prior fire
loss on October 19, 1986, was of such importance as to “naturally
and reasonably” influence the judgment of State Farm in issuing
the subject policy. See Sine, 861 S.W.2d at 839; Loyd, 838
S.W.2d at 545. Thus, Wood’s failure to disclose the prior loss
8
had the effect of increasing State Farm’s risk of loss, in
accordance with T.C.A. § 56-7-103. We therefore hold that the
trial court correctly determined, based upon the increase in
State Farm’s risk of loss, that Wood was not entitled to recover
and that the subject policy was void from its inception. See
T.C.A. § 56-7-103.
Wood also takes issue with the trial court’s denial of
her motion for a directed verdict. In this connection, she
argues that the record does not contain competent testimony that
the misrepresentation was intentional, or that there was an
increase in the risk of loss.
Our standard of review of a trial court’s decision on a
motion for directed verdict is well-settled. A directed verdict
is appropriate only when the evidence is susceptible to but one
conclusion. Eaton v. McLain, 891 S.W.2d 587, 590 (Tenn. 1994);
Long v. Mattingly, 797 S.W.2d 889, 892 (Tenn.App. 1990). We must
“take the strongest legitimate view of the evidence favoring the
opponent of the motion.” Id. In addition, all reasonable
inferences in favor of the opponent of the motion must be
allowed, and all evidence contrary to the opponent’s position
must be disregarded. Eaton, 891 S.W.2d at 590; Long, 797 S.W.2d
at 892.
Our review of the record persuades us that the trial
court correctly denied Wood’s motion for a directed verdict. We
have already found that the record, as of the time when the
motion was made, supports a finding that the misrepresentation
9
did in fact increase State Farm’s risk of loss. Clearly,
therefore, a directed verdict in Wood’s favor on this issue was
not warranted. As to the question of Wood’s intent, we cannot
say -- allowing all reasonable inferences in State Farm’s favor -
- that the evidence supports only the conclusion that her
misrepresentation was unintentional. Eaton, 891 S.W.2d at 590;
Long, 797 S.W.2d at 892. On the contrary, the evidence is
susceptible to several reasonable conclusions, one of which is
that Wood intentionally concealed the existence of a fire loss
that had occurred only five weeks earlier. Under such
circumstances, a directed verdict in Wood’s favor would have been
inappropriate. In any event, the trial court found in favor of
State Farm based upon the second prong of T.C.A. § 56-7-103 -- an
increase in the risk of loss -- without making any findings as to
whether the misrepresentation was intentional. We find and hold
that this basis is sufficient to sustain the judgment of the
trial court, and that a directed verdict was not warranted in
this case.
V. Conclusion
The judgment of the trial court is affirmed in all
respects.6 Costs on appeal are taxed to the appellant. This
case is remanded to the trial court for enforcement of the
judgment and the collection of costs assessed there, all pursuant
to applicable law.
6
State Farm’s motion to consider post-judgment facts is denied. The
facts which the motion seeks to raise are not directly relevant to the
appellant’s issue on appeal.
10
__________________________
Charles D. Susano, Jr., J.
11
CONCUR:
________________________
Houston M. Goddard, P.J.
________________________
Herschel P. Franks, J.
12