Craig Williams v. State Farm Mutual Automobile Insurance Company ( 2020 )

11/20/2020
IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
September 15, 2020 Session
CRAIG WILLIAMS ET AL. v. STATE FARM MUTUAL AUTOMOBILE
INSURANCE COMPANY ET AL.
Appeal from the Chancery Court for Shelby County
No. CH-14-0777 JoeDae L. Jenkins, Chancellor
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No. W2019-00851-COA-R3-CV
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Appellant was injured in an accident involving a vehicle owned by Lexus of Memphis
and insured under a policy issued by Appellee insurance company. The at-fault driver
entered into a rental agreement with Lexus of Memphis for use of the subject vehicle.
After a jury entered a verdict in favor of Appellant against the at-fault driver, Appellant
sought to collect the judgment under a policy issued by Appellee. The trial court held
that the at-fault driver, as a renter of the vehicle, was exempt from coverage under the
policy. Discerning no error, we affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed and Remanded
KENNY ARMSTRONG, J., delivered the opinion of the court, in which J. STEVEN
STAFFORD, P.J., W.S., and CARMA DENNIS MCGEE, J., joined.
Matthew V. Porter, Memphis, Tennessee, for the appellants, Craig Williams and Melissa
Williams.
M. Clark Spoden and Kathryn Grundy, Nashville, Tennessee, and Timothy M. Thornton,
Encino, California, for the appellee, Tokio Marine America Insurance Company.
OPINION
I. Background
The underlying car accident occurred on May 18, 2008. Craig Williams was
seriously injured when his vehicle collided with a vehicle driven by Kreston Smith. The
vehicle driven by Mr. Smith was owned by Avenir Partners d/b/a Lexus of Memphis
(“Lexus of Memphis”). On May 13, 2008, Mr. Smith brought his personal vehicle to
Lexus of Memphis for service. While at the dealership, Mr. Smith signed a written
“Rental Agreement” to drive a 2008 Lexus ES Sedan. After signing the Rental
Agreement, Mr. Smith saw a 2008 Lexus RX 350 SUV in the queue of “loaner” vehicles.
Mr. Smith advised a Lexus of Memphis employee that he was considering purchasing a
used Lexus SUV vehicle and inquired whether he could drive the RX 350 SUV instead of
the 2008 Lexus ES 350 Sedan. Lexus of Memphis agreed to Mr. Smith’s request to
substitute the RX 350 SUV for the ES 350 Sedan and provided Mr. Smith a yellow copy
of the written Rental Agreement with the vehicle reference number (436) for the RX 350
SUV substituted for the vehicle reference number (446) for the ES 350 Sedan. On this
yellow copy, in the box marked “Vehicle Number,” the original typewritten number
“446” has a line drawn through it (i.e., “446”) and the handwritten number “436” with a
circle around it is written in the same box. Mr. Smith was driving the RX 350 SUV
(Lexus of Memphis vehicle number 436) at the time of the subject accident. After Mr.
Smith left the dealership in the RX 350 SUV, a Lexus of Memphis employee wrote the
word “SWAP” and the number “436” at the top of the original white written Rental
Agreement, which Mr. Smith had signed prior to leaving the dealership. In addition, after
Mr. Smith left, Lexus of Memphis made certain entries into its internal computer system
to confirm that the vehicle used by Mr. Smith was the Lexus RX 350 SUV.
Following the accident, Mr. Williams and his wife Melissa (together,
“Appellants”) filed suit against Mr. Smith and others. On February 7, 2014, a jury found
that Mr. Smith was 100% at fault for the accident. The jury returned verdicts in favor of
Mr. Williams in the amount of $275,000.00 and in favor of Mrs. Williams in the amount
of $50,000.00. At the trial, Mr. Smith testified that he understood he was using the RX
350 SUV because it was part of the “loaner” program. In his deposition, Mr. Smith
conceded that his operation of the RX 350 SUV was governed by the Rental Agreement.
The jury rendered a verdict in favor of Lexus of Memphis, finding that Lexus of
Memphis was not liable for the injuries sustained by Mr. Williams. As is relevant to this
appeal, the jury found that Mr. Smith was not test driving the RX 350 SUV at the time of
the accident. Mr. Smith subsequently filed bankruptcy.
The instant appeal arises from Appellants’ complaint for declaratory judgment,
which was filed on May 15, 2014 in the Shelby County Chancery Court (“trial court”).
The complaint was filed against several corporate defendants, some of which were
subsequently dismissed. The remaining defendant, Tokio Marine American Insurance
Co. (“Tokio”), is the Appellee in this appeal. Tokio issued three automobile policies
(i.e., Primary Policy, Rental Excess Policy, and Excess Policy) to Toyota Motor North
America, Inc. for the policy period of April 1, 2008 to April 1, 2009. In said policies, the
Named Insured Endorsement as amended includes “All Participating Toyota and Lexus
Dealerships and Subsidiaries.” Lexus of Memphis was a named insured under these
policies. By their complaint, Appellants sought a determination as to whether Mr. Smith
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was an insured under any of the policies issued by Tokio.
After the trial court denied Tokio’s motion for summary judgment, the declaratory
judgment action proceeded to hearing on December 4, 2018. As discussed in further
detail below, by order of April 17, 2019, the trial court held that: (1) the Tokio policies
were neither ambiguous nor illusory; (2) the exclusions in the policies were not precluded
under the Tennessee Financial Responsibility Law of 1977; (3) “[a]s a permissive user of
the service loan car under a written rental agreement, Kreston Smith was not an
additional insured under the Primary Policy, Rental Excess Policy, or Excess Policy;”
and, as such, (4) the Tokio policy would not cover the judgment entered against Mr.
Smith in the underlying jury case. Appellants appeal.
II. Issues
Appellants raise four issues for review as stated in their brief:
1. Whether there was a valid rental agreement involving the vehicle at
issue in the underlying accident.
2. Whether the relevant insurance policies are patently ambiguous.
3. Whether the relevant insurance policies appear to be illusory.
4. Whether the insurance policies run afoul of Tennessee statutory
laws.
III. Standard of Review
This case involves a dispute over the scope of coverage under an insurance
contract, which presents a question of law involving the interpretation of contractual
language. Clark v. Sputniks LLC, 368 S.W.3d 431, 44 (Tenn. 2012); see also Cracker
Barrel Old Country Store, Inc. v. Epperson, 284 S.W.3d 303, 308 (Tenn. 2009) (“The
interpretation of a written agreement is a question of law and not of fact.”). A trial
court’s conclusions of law are subject to de novo review with no presumption of
correctness. See Regions Bank v. Thomas, 532 S.W.3d 330, 336 (Tenn. 2017). Issues
related to the admission or exclusion of evidence at trial are reviewed for an abuse of
discretion. Id. (quoting Otis v. Cambridge Mut. Fire Ins. Co., 850 S.W.2d 439, 442
(Tenn. 1992)).
Courts interpret insurance policies using the same tenets that guide the
construction of any other contract. Garrison v. Bickford, 377 S.W.3d 659, 664 (Tenn.
2012) (citing Am. Justice Ins. Reciprocal v. Hutchison, 15 S.W.3d 811, 814 (Tenn.
2000)). Thus, the terms of an insurance policy “‘should be given their plain and ordinary
meaning, for the primary rule of contract interpretation is to ascertain and give effect to
the intent of the parties.’” Id. (quoting Clark, 368 S.W.3d at 441). The insured has the
burden to prove that a loss falls within the insuring agreement. Mass. Mut. Life Ins. v.
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Jefferson, 104 S.W. 3d 13, 22 (Tenn. Ct. App. 2002). An insurance company has the
burden of proving that an exclusion in its policy applies to a claim. Interstate Life &
Accident Ins. Co. v. Gammons, 408 S.W.2d 397, 399 (Tenn. Ct. App. 1966). Once an
insurance company demonstrates that an exclusion applies, the burden shifts to the
insured to demonstrate that its claim fits within an exception to the exclusion. Standard
Fire Ins. Co. v. Chester O’Donley & Assocs., 972 S.W.2d 1, 8 (Tenn. Ct. App. 1998).
The insuring agreement sets the outer limits of an insurer’s contractual liability. If
coverage cannot be found in the insuring agreement, it will not be found elsewhere in the
policy. Id. at 7. “Exclusions help define and shape the scope of coverage, but they must
be read in terms of the insuring agreement to which they apply. Exclusions can only
decrease coverage; they cannot increase it.” Id. at 7-8. Exclusions should not be
construed broadly in favor of the insurer, nor should they be construed so narrowly as to
defeat their intended purpose. Id. at 8.
IV. Rental Agreement
As discussed above, while at the Lexus of Memphis dealership, Mr. Smith signed
a “Rental Agreement.” In its April 17, 2019 order, the trial court held that, “Mr. Smith
was operating the Subject Auto under a written rental agreement and was thus excluded
from coverage by the Amendatory Endorsement to Tokio Marine’s primary policy.” We
will discuss the specific provisions of the insurance policies below. However, as an
initial matter, Appellants challenge the trial court’s holding that Mr. Smith was operating
the RX 350 SUV under a written Rental Agreement. As noted above, after signing the
rental agreement to drive the ES 350 Sedan, Mr. Smith requested to change the “loaner”
vehicle to the RX 350 SUV. Lexus of Memphis obliged, and the Rental Agreement was
modified with the RX 350 SUV number 436 substituted for the ES 350 Sedan number
446. This change was noted on the yellow copy of the Rental Agreement that was given
to Mr. Smith before he left the dealership. On appeal, Appellants contend that because
Lexus of Memphis either failed to execute a new Rental Agreement specifying that Mr.
Smith was loaned the RX 350 SUV, or because Lexus of Memphis unilaterally changed
the vehicles on the Rental Agreement without Mr. Smith’s consent, there is no written
agreement governing Mr. Smith’s use of the RX 350 SUV. This argument rests on
whether Mr. Smith and Lexus of Memphis achieved a modification of the original Rental
Agreement. Concerning that question, the trial court held that:
28. Kreston Smith then drove the RX 350 off the Lexus of Memphis
dealership lot with the yellow copy of the written rental agreement with the
reference number crossed out for the ES 350 and the vehicle reference
number for the RX 350 handwritten on the yellow copy of the rental
agreement.
29. In so doing, Kreston Smith assented to the modification memorialized
in writing on the yellow copy of the written rental agreement by driving off
the dealership lot with the Lexus RX 350.
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In reaching its conclusion that Mr. Smith assented to the modification of the Rental
Agreement, the trial court relied on evidence admitted in the underlying lawsuit, to-wit:
71. At the trial in the Underlying Case, Mr. Smith testified he had visited
Lexus of Memphis sometime prior to the May 13, 2018 visit to inquire
about a possible purchase of a used Lexus SUV vehicle. However, Lexus
of Memphis disputes this account. Mr. Smith further testified that on the
day of the Subject Accident, and after signing the Rental Agreement, he
advised a Lexus of Memphis employee—who served as a valet in the
garage that he was considering purchasing a used Lexus SUV vehicle. Mr.
Smith saw a Lexus RX 350 in the queue of vehicles lined up to be used as
loaners by Lexus of Memphis customers, and asked to drive a Lexus RX
350 SUV instead of the ES 350 Sedan. The Lexus of Memphis employee
testified at the trial (i) that he did not recall being told that Mr. Smith was
considering buying a used Lexus SUV, (ii) that no customer had ever asked
to use as loaner car to test-drive, and (iii) that he was not authorized to
allow someone to road-test a loaner vehicle. Shortly after signing the Rental
Agreement, Lexus of Memphis provided Mr. Smith the Lexus RX 350
SUV and gave him a yellow copy of the written Rental Agreement. The
vehicle reference number (436) for the RX 350 was substituted for the
vehicle reference number (446) for the ES 350 sedan. Agreed Trial Exhibit
7.
72. No separate written Rental Agreement for this SUV was tendered to
Mr. Smith, but Mr. Smith was given a yellow copy of the original Rental
Agreement. On this yellow copy, in the box marked “Vehicle Number,” the
original typewritten number “446’ has a line drawn through it . . . and the
handwritten number “436” with a circle around it is written in.
73. The number 446 is the identification number used by Lexus of
Memphis to identify the ES 350 Sedan while the number 436 is the number
used to identify the RX 350 SUV. Trial Exhibit 13, Stip. Fact 14.
***
76. Mr. Smith testified at trial that he understood he was in th[e] RX 350
because it was part of the Loaner Program that he signed up for by signing
the Rental Agreement. Mr. Smith also testified in his deposition in this case
that he assumed his operation of the RX 350 was governed by the Rental
Agreement that he signed. Trial Exhibit 13, Stip. Fact 12.
On appeal, Appellants contend that the trial court erred in admitting the stipulated
evidence from the jury trial concerning the facts surrounding Mr. Smith and Lexus of
Memphis’ agreement to swap the ES 350 Sedan for the RX 350 SUV. In the absence of
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the foregoing parol evidence, Appellants contend that there is insufficient evidence to
support the trial court’s conclusion that the original Rental Agreement was successfully
modified to cover Mr. Smith’s use of the RX 350 SUV. In its order, the trial court first
held that “because [Appellants] were not parties to the written rental agreement between
Kreston Smith and Lexus of Memphis, [Appellants] may not use the parol evidence rule
to exclude extraneous evidence regarding [the Rental] [A]greement.” The trial court
further held that, “Parol evidence is admissible to explain such conduct [i.e., modification
of the Rental Agreement], and therefore, [Appellants’] objections are overruled.”
We first address the trial court’s decision to allow parol evidence concerning the
changes to the Rental Agreement. Under Tennessee law, the parol evidence rule
“‘applies only between the parties to the written contract and strangers cannot raise the
question of the admissibility of parol evidence to vary a written contract.’” Consumers
Ins. USA v. Smith, No. E2002-00724-COA-R3-CV, 2002 WL 31863300, at *6 (Tenn.
Ct. App. Dec. 23, 2002) (quoting Evans v. Tillett Bros. Constr. Co., 545 S.W.2d 8, 12
(Tenn. Ct. App. 1976)). As such, Tennessee courts have consistently disallowed use of
the parol evidence rule by an entity or individual that was not a party to the written
contract at issue. See, e.g., Lancaster v. Ferrell Paving, 397 S.W.3d 606, 613 (Tenn. Ct.
App. 2011) (holding that an insurance company, who was not a party to the disputed
contract, could not use the parol evidence rule to exclude facts surrounding an oral
modification of the disputed contract, which was made by and between a security
services company and a property owner); Consumers Ins. USA, 2002 WL 3186330 at *6.
(holding that an insurer could not block the admission of evidence concerning a disputed
date on a bill of sale entered by and between the insured and a third party); Evans, 545
S.W.2d at 12 (citations omitted) (“The parol evidence rule applies only between the
parties to the written contract and strangers cannot raise the question of the admissibility
of parol evidence to vary a written contract.”); Isabell v. Aetna Insur. Co., Inc., 495
S.W.2d 821 (Tenn. Ct. App. 1972) (holding that the parol evidence rule could not be used
to exclude extraneous evidence regarding a written contract between a builder and a
property owner). In each of the foregoing cases, the gravamen of the ruling concerning
the applicability of the parol evidence rule rests on the fact that the parties attempting to
use the parol evidence were “strangers” (i.e., not parties) to the contract at issue. Here,
the disputed Rental Agreement was made by and between Mr. Smith and Lexus of
Memphis. Neither appellant is a party to this agreement. As such, Appellants may not
use the parol evidence rule to exclude evidence regarding the Rental Agreement between
Mr. Smith and Lexus of Memphis. The trial court did not err in overruling Appellants’
objection to the admission of parol evidence.
Although Appellants may not rely on the parol evidence rule to exclude evidence
from the underlying lawsuit, this fact does not, ipso facto, mean that parol evidence was
properly admitted in this case. Tennessee courts have held that parol evidence can be
used to show acceptance of terms in a contract and to define non-obvious terms in an
agreement. See, e.g., Jones v. Brooks, 696 S.W.2d 885, 886 (Tenn. 1985) (finding that
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parol evidence could be considered where a contract provision was subject to two
reasonable interpretations); Hillard v. Franklin, 41 S.W.3d 106, 112 (Tenn. Ct. App.
2000) (holding that parol evidence can be used to show acceptance); Coble Systems, Inc.
v. Gifford Co., 627 S.W.2d 359, 362 (Tenn. Ct. App. 1981) (noting that parol evidence
may be used to clarify latent ambiguities in written agreements); Patterson v. Davis, 192
S.W.2d 227, 229 (Tenn. Ct. App. 1945) (noting that acceptance may be demonstrated by
parol evidence even for contracts where the statute of frauds applies and a writing is
required). Furthermore, this Court has explained that, although
the parol evidence rule prevents contracting parties from using extraneous
evidence to alter or vary the terms of an integrated, unambiguous contract[,]
[s]ee GRW Enters., Inc. v. Davis, 797 S.W.2d 606, 610-11
(Tenn.Ct.App.1990) (citing Jones v. Brooks, 696 S.W.2d 885, 886
(Tenn.1985))[,] [t]he rule does not . . . prevent the use of extraneous
evidence to prove a separate agreement made after the written one. Id.(citing Brunson v. Gladish, 174 Tenn. 309, 125 S.W.2d 144, 147
(Tenn.1939)). Parol evidence is admissible to prove a subsequent
modification to a written contract, as it is itself a separate contract. Id.In re Estate of Nelson, 2007 WL 851265, at *17; see also Smith v. Hi-Speed, Inc., 536
S.W.3d 458, 471 (Tenn. Ct. App. 2016) (allowing evidence of conduct occurring after
the execution of a written lease agreement to show the basis for modification of a written
contract) (emphasis added); Schwartz v. Diagnostix Network All., LLC, No. M2014-
00006-COA-R3-CV, 2014 WL 6453676, at *10 (Tenn. Ct. App. Nov. 17, 2014) perm.
app. denied (Tenn. April 10, 2015) (citing Brunson v. Gladish, 125 S.W.2d 144, 147
(Tenn. 1939)) (“[E]vidence of an agreement made subsequent to the execution of the
written agreement, even though it may have the effect of adding to, changing, modifying,
or altogether abrogating the parties’ written agreement, is not barred by the parol
evidence rule.”).
We can glean from the foregoing authority that parol evidence is admissible to: (1)
show a party’s acceptance of the terms of a contract; (2) evidence a modification of the
original agreement; and (3) clarify vague or ambiguous terms in the contract. In the
instant case, parol evidence was properly admitted to: (1) establish Mr. Smith’s
acceptance of the Rental Agreement; (2) evidence the modification of the original Rental
Agreement to include the RX 350 SUV instead of the ES 350 Sedan; and (3) clarify the
ambiguity concerning the numbers Lexus of Memphis used to reference the RX 350 SUV
and the ES 350.
Concerning Mr. Smith’s acceptance of the Rental Agreement, the evidence
establishes that Mr. Smith received a yellow copy of the written Rental Agreement. The
parol evidence also establishes that the number 446 (i.e., Lexus’ number for the ES 350
Sedan) was struck and the number 436 (i.e., Lexus number for the RX 350 SUV) was
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written on the yellow copy of the Rental Agreement. Mr. Smith left the Lexus dealership
in the RX 350 SUV. Parol evidence establishes that Mr. Smith had in his possession the
modified yellow copy of the rental agreement when he left the dealership. Furthermore,
Mr. Smith testified that he understood that his use of the RX 350 SUV was governed by
the Rental Agreement. Based on this evidence, the trial court held that, “Kreston Smith
assented to the modification memorialized in writing on the yellow copy of the written
rental agreement by driving off the dealership lot with the Lexus RX 350 . . . .”
Concerning the modification of the Rental Agreement to cover the RX 350 SUV,
“[a] modification to a contract is a change to one or more contract terms which introduces
new elements into the details of the contract, or cancels some of them, but leaves the
general purpose and effect of the contract undisturbed.” Lancaster, 397 S.W.3d at 611.
In Tennessee, parties to a written contract may modify their agreement in writing or
orally, so long as both parties consent to such modifications. Id. A party’s agreement to
a modification may be implied from a course of conduct and need not be in writing. Id. at
611; see also R. Mills Contractors, Inc., v. WRH Enterprises, LLC, 93 S.W.3d 861, 866
(Tenn. Ct. App. 2002); Jerry T. Beech Concrete Contractors, Inc. v. Powell Builders,
Inc., 2001 WL 487574, at *2 (Tenn. Ct. App. May 9, 2001).
Here, it is undisputed that Mr. Smith and Lexus of Memphis entered into a written
Rental Agreement with regard to the 2008 Lexus ES Sedan, Vehicle Number 446. This
was a written Rental Agreement prepared by the service advisor and signed by Kreston
Smith. Lexus of Memphis retained the white original of the written Rental Agreement
and gave Mr. Smith the yellow copy of the written Rental Agreement. Mr. Smith then
requested to drive the RX 350 SUV. A Lexus of Memphis employ took the sedan keys
back, gave Mr. Smith the keys to an SUV, and crossed out, on the yellow copy of the
Rental Agreement, the reference number of the sedan – “446” – and wrote in “436”
immediately beside the crossed out reference in the “the vehicle number” portion of the
yellow copy of the Rental Agreement. Mr. Smith then left the dealership in the RX 350
SUV with the modified yellow copy of the Rental Agreement.
After Mr. Smith left the dealership, Lexus of Memphis recorded the exchange of
vehicles with the notation “SWAP 436” on the signed original of the Rental Agreement
(i.e., the white copy) and noted the modification in its computer records. On appeal,
Appellants contend that any modification of the Rental Agreement was made unilaterally
by Lexus of Memphis, and, thus, no written rental agreement exists for the RX 350 SUV.
This argument is not supported by the evidence. Based on the parties’ conduct, Mr.
Smith requested the RX 350 SUV and took the yellow copy of the Rental Agreement
when he left the dealership in that vehicle. The mere fact that Mr. Smith left the
dealership in the RX 350 SUV indicates his consent to drive that vehicle. Furthermore,
his testimony that his use of the “loaner” vehicle was governed by the Rental Agreement
indicates his consent to the inclusion of the RX 350 SUV on that document. The fact that
Lexus of Memphis entered the notation “Swap 436” on its copy of the Rental Agreement
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and also changed the vehicle in its computer system does not evidence a unilateral
modification of the Rental Agreement. Rather, these actions constitute Lexus of
Memphis’ internal bookkeeping to evidence Lexus of Memphis and Mr. Smith’s
agreement to modify the Rental Agreement. Parol evidence of the requested
modification is admissible because it occurred after Mr. Smith signed the original Rental
Agreement. See Schwartz, 2014 WL 6453676, at *10; GRW Enter., 797 S.W.2d at 610;
Hi-Speed, Inc., 536 S.W.3d at 471.
Finally, as discussed above, the Rental Agreement that Mr. Smith signed
references number 446 for the Lexus ES 350 Sedan. The yellow copy of the Rental
Agreement, which was given to Mr. Smith, has the number 446 marked out, with vehicle
reference 436 handwritten in its place. The yellow copy of the Rental Agreement does
not reference the specific vehicles to which these numbers refer. Accordingly, the
written Rental Agreement contains a latent ambiguity, which may be resolved through
parol evidence. A “latent ambiguity” that may be removed by parol evidence is one
resulting not from the words themselves, but from the “ambiguous state of extrinsic
circumstances to which the words of the instrument refer, and which is susceptible of
explanation by the mere development of extraneous facts, without altering or adding to
the written language . . . .” Cobble Systems, Inc. v. Gifford Co., 627 S.W.2d 359, 362
(Tenn. Ct. App. 1981) (citing Teague v. Sowder, 114 S.W. 484 (Tenn. 1908)). Because
Lexus of Memphis’ use of numbers to identify its vehicles presents a latent ambiguity in
the context of this case, the trial court properly overruled Appellants’ objection regarding
the admissibility of parol evidence to determine that the use of “436” on the Rental
Agreement was a reference to the RX 350 SUV that Mr. Smith was driving at the time of
the accident. See Jones 696 S.W.2d at 886; In re Estate of Nelson, 2007 WL 851265;
Gifford Co., 627 S.W.2d at 362.
Based on the foregoing analysis, the trial court did not err in allowing parol
evidence concerning Mr. Smith and Lexus of Memphis’ modification of the original
signed Rental Agreement to substitute the RX 350 SUV for the ES 350 Sedan. Following
modification, the Rental Agreement clearly covered the RX 350 SUV, and Mr. Smith was
using that vehicle as a renter at the time of the subject accident. We now turn to the
question of whether the Tokio insurance policies cover Mr. Smith under these
circumstances.
V. Tokio Insurance Policies
As noted above, Tokio issued three policies to Toyota Motor North America, Inc.
for the relevant policy period of April 1, 2008 to April 1, 2009. The Named Insured
Endorsement (as amended) includes, “All Participating Toyota and Lexus Dealerships
and Subsidiaries.” It is undisputed that Lexus of Memphis is a named insured under the
Tokio policies. We now turn to the provisions of each of the subject policies:
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A. The Primary Policy (CA 859000403)
The Primary Policy contains both a Common Declarations Page and a Business Auto
Form Declarations page. Section II of the Business Auto Policy states that Tokio will
pay “all sums an insured legally must pay as damages to which the insurance applies
caused by an accident and resulting from the ownership, maintenance or use of a covered
auto.” The Business Auto Policy defines “covered auto” (for liability coverage) as,
“Only those ‘autos’ you own that are ‘enrolled’ in the TOYOTA RENT A CAR (TRAC)
SYSTEM and the LEXUS CUSTOMER CONVENIENCE SYSTEM (LCCS).”
(Emphases in original). “You” is defined as the Named Insured and, so, would include
Lexus of Memphis. “Enrolled” is defined, in part, as a vehicle listed in the monthly
LCCS VIN tape. It is undisputed that the RX 350 SUV at issue here was enrolled in the
LCCS system.
Under the “Who is An Insured” section, the Business Auto Policy provides:
The following are “insureds”:
a. You for any covered “auto”
b. Anyone else while using with your permission a covered “auto” you
own, hire or borrow except:
(1) The owner or anyone else from whom you hire or borrow a covered
“auto”. This exception does not apply if the covered “auto” is a
“trailer” connected to a covered “auto” you own.
(2) Your “employee” if the covered “auto” is owned by that “employee”
or a member of his or her household.
(3) Someone using a covered “auto” while he or she is working in a
business of selling, servicing, repairing, parking or storing “autos”
unless that business is yours.
(4) Anyone other than your “employees,” partners (if you are in a
partnership), member (if you are in a limited liability company), or a
lessee or borrower of any of their “employees,” while moving
property to or from a covered “auto.”
(5) A partner (if you are a partnership), or a member (if you are a
limited liability company) for a covered “auto” owned by him or her
or a member of his or her household.
(emphasis added). In its April 17, 2019 order, the trial court held that these “five
exceptions do not apply to Kreston Smith.” From the plain language of the policy, we
agree. However, the Amendatory Endorsement Form, CA9 99 001 07 97, at section B,
adds a sixth exception to the foregoing list of covered permissive users. The additional
language excepts from coverage, “Anyone who rents a covered ‘auto’ from a named
insured under a written ‘rental agreement’ or operates, drives or in any way uses a
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covered ‘auto’ rented under such ‘rental agreement’.” The Amendatory Endorsement
Form defines the term “Rental Agreement,” in relevant part, as “an automobile rental or
lease agreement whereby a named insured rents an auto to a renter for a term less than 30
days. . . .” The Amendatory Endorsement further provides that:
For “bodily injury,” death or “property damage” assumed by a named
insured under a “rental agreement” for rental of an auto in a named
insured’s daily “auto” rental business, when the “rental agreement” is in
compliance with all the terms and conditions of the rental agreement.
Appellants cite the foregoing provision, arguing that this “provision states that a renter,
under a rental agreement, is covered.” Accordingly, Appellants argue that this provision
[u]nequivocally, on its face . . . states that a renter, under a rental
agreement, is covered. Tokio insists that Mr. Smith was a renter under the
rental agreement. But, Tokio also contends that the foregoing provision,
placed in context actually means that a renter is not covered. Its very
argument renders the amendatory endorsement inherently ambiguous.
Appellants further argue that the Primary Policy is ambiguous based on the fact
that “the exclusionary sections . . . are found in separate areas of Tokio’s primary
insurance policy and are not clearly or conspicuously made available to both parties of
the insurance agreement. This is because the amendments are not integrated into the
policy itself, and contain ambiguous and contradictory language.” This argument ignores
the fact that the Amendatory Endorsement specifically states that the additional
exception, i.e., for “[a]nyone who rents a covered ‘auto’ from a named insured under a
written ‘rental agreement’ or operates, drives or in any way uses a covered ‘auto’ rented
under such ‘rental agreement’,” should be “added” to “subparagraph b,” of the Primary
Policy. As set out above, subparagraph b of the Primary Policy sets out five enumerated
exceptions. Based on the instruction in the Amendatory Endorsement, i.e., that the
additional exception be added at “subparagraph b,” the only interpretation is that the
additional exception for renters is meant to be added to this list of exceptions. The trial
court held that:
[t]he interpretation argued by [Appellants] is simply implausible. It would
require the Court to ignore specific language in the Amendatory
Endorsement that directs the reader where to insert the new provision. The
Amendatory Endorsement specifically states that the language is “added” to
“subparagraph b,” which says that “[a]nyone else while using with your
permission a covered ‘auto’ you own, hire or borrow except . . . .”
[Appellants] argument would eliminate language that appears plainly in the
policy and such construction is not reasonable or warranted.
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(footnote omitted; emphasis in original). As such, the trial court held that, “The plain
meaning of Tokio Marine’s Primary Policy [] is that the Amendatory Endorsement added
an additional provision excepting renters under written Rental Agreements from
coverage.” From our review of the plain language of the policy, we agree. The
Amendatory Endorsement clearly expands the exclusions provision of the Primary Policy
to also exclude “[a]nyone who rents a covered ‘auto’ from a named insured under a
written ‘rental agreement’ or operates, drives or in any way uses a covered ‘auto’ rented
under such ‘rental agreement.’” In this regard, the policy is neither illusory nor
ambiguous.
Having determined above that Mr. Smith was operating the RX 350 SUV under the
terms of the Rental Agreement, he is clearly excepted from coverage under the Primary
Policy’s exclusion for persons “who rent[] a covered auto . . . under a written rental
agreement.” In short, Mr. Smith was a renter and not a covered permissive user of the
subject vehicle. Accordingly, we affirm the trial court’s holding that Mr. Smith “falls
within the scope of [the exclusion provisions of the Primary Policy] because Mr. Smith
rented a covered auto under the terms of a written rental agreement that was orally
modified by the parties [to cover the RX 350 SUV]. . . . Therefore, Mr. Smith is not a
covered permissive user under this policy provision.”
B. Rental Excess Policy (CA 859000503)
In relevant part, the Rental Excess Policy provides:
A. In addition to all of the exclusions contained in the “primary insurance,”
this insurance does not apply to any of the following:
1. The “renter” or a permitted user of a covered “auto” under the “rental
agreement.”
2. Any other person or organization using a covered “auto” with the
permission of the “renter,” including any liability imposed upon the
“renter” or a permissive user when such liability arises out of the use,
possession or control of a covered “auto” by a “renter” or permissive
user.
Like the Primary Policy, the Rental Excess Policy specifically excludes “renter[s],” who
are operating a covered auto under a “rental agreement.” For the reasons discussed
above, Mr. Smith meets the criteria for this exclusion. In addition, the Excess Rental
Policy provides that, “We will pay all sums an ‘insured’ legally must pay as damages in
excess of the ‘primary insurance’ . . . . We will not provide coverage if the ‘loss’ is not
covered under the ‘primary insurance.’” Relying on these provisions, the trial court held
that Mr. Smith, as a renter, was not only excluded under the plain language of the Rental
Excess Policy, but also concluded that because “Mr. Smith is not covered under the
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Primary Policy, there is no coverage under the Rental Excess Policy.” We agree. The
language in the Rental Excess Policy is unambiguous. Mr. Smith, a renter, is specifically
excluded from coverage. Furthermore, having determined above that Mr. Smith is
excluded from coverage under the Primary Policy, he is also excluded under the limiting
language of the Rental Excess Policy, i.e., “We will not provide coverage if the ‘loss’ is
not covered under the ‘primary insurance.’”
C. Excess Policy (E 010 2072)
The Excess Policy provides, in relevant part:
The following is added to the Additional Exclusions:
The policy does not apply to:
Liability of any rental customer of a rented auto whether or not said rental
customer is operating the auto with the permission of a named insured.
(emphasis in original). The Excess Policy further provides that “[e]xcept as may be
otherwise stated in this Excess Policy, the coverage provided by this Excess Policy is
subject to all the agreements, limitations, exclusions, conditions . . . of the ‘underlying
insurance.’” Having determined that Mr. Smith is excluded from coverage under both
the Primary Policy and the Rental Excess Policy, under the plain language of the Excess
Policy, he is also specifically excluded from coverage thereunder.
V. Compliance with Tennessee Financial Responsibility Law
As discussed above, while at the Lexus of Memphis dealership, Mr. Smith signed
a “Rental Agreement.” Paragraph 5 on the reverse side of the Rental Agreement states:
Vehicle Insurance. We have procured a Rental Auto Coverage Policy of
Insurance which provides coverage for damages because of bodily injury or
property damage caused by an accident resulting from the use of the
Vehicle by an authorized driver, as provided in Paragraph 1, who has not
engaged in a prohibited use, as provided in Paragraph 2, at the time of the
loss (and not otherwise). THE LIMITS OF LIABILITY AVAILABLE
FOR PAYMENT OF A LOSS WHICH OUR RENTAL AUTO
COVERAGE POLICY COVERS IS EQUAL TO THE MINIMUM
REQUIREMENTS OF ANY APPLICABLE STATE FINANCIAL
RESPONSIBILITY LAW OR OTHER SIMILAR LAW OR STATUTE.
Unless required by law, the policy does not include No-Fault, Supplemental
No-Fault, Uninsured/Underinsured Motorist coverage or other optional
coverages. . . . You warrant that all drivers identified in Paragraph 1 above
have a valid and collectible automobile liability insurance policy in effect,
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which provides coverage for the driver’s use and operation of the Vehicle
we rent to you. By signing this agreement you agree to be bound by all of
the provisions and terms found in our Rental Auto Coverage Policy of
Insurance. You agree that all policy provisions which exclude coverage
contained therein apply to you as renter, and to any driver you authorize or
permit to drive the Vehicle.
(emphasis in original). Appellants contend that paragraph 5 of the Rental Agreement is
contrary to the Tennessee Financial Responsibility Law of 1977, Tennessee Code
Annotated section 55-12-101, et seq. (“TFRL”). At section 55-12-122, the TFRL
provides:
(a) An owner’s policy of liability insurance shall designate, by explicit
description or by appropriate reference, all motor vehicles with respect to
which coverage is thereby granted; and shall insure the person named
therein, and any other person using the motor vehicle or motor vehicles
with the express or implied permission of the named insured, against loss
from the liability imposed by law for damages arising out of the ownership,
maintenance, or use of the motor vehicle or motor vehicles within the
United States or the Dominion of Canada, subject to limits, exclusive of
interest and costs, with respect to each such motor vehicle, which are set
forth in § 55-12-102.
(b) An operator’s policy of liability insurance shall insure the person named
as insured therein against loss from the liability imposed upon the insured
by law for damages arising out of the use by the insured of any motor
vehicle not owned by the insured within the same territorial limits and
subject to the same limits of liability as are set forth above with respect to
an owner's policy of liability insurance.1
At section 55-12-102(12)(C), the TFRL further provides:
(12) “Proof of financial responsibility” or “proof of financial security”
means:
(A)(i) If proof is required after December 31, 1989, but prior to January 1,
2009, such proof means:
(a) A written proof of liability insurance coverage provided by a single
limit policy with a limit of not less than sixty thousand dollars ($60,000)
1
We note that the TFRL applies only to primary policies with Minimum Financial Responsibility
Limits and does not apply to excess policies. Tenn. Code Ann. § 55-12-122(f).
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applicable to one (1) accident;
(b) A split-limit policy with a limit of not less than twenty-five thousand
dollars ($25,000) for bodily injury to or death of one (1) person, not less
than fifty thousand dollars ($50,000) for bodily injury to or death of two (2)
or more persons in any one (1) accident, and not less than ten thousand
dollars ($10,000) for damage to property in any one (1) accident;
(c) A deposit of cash with the commissioner in the amount of sixty
thousand dollars ($60,000); or
(d) The execution and filing of a bond with the commissioner in the amount
of sixty thousand dollars ($60,000);
(ii) An insured holding a policy that complies with the insurance
requirements of the financial responsibility law on December 31, 1989, will
not be deemed to be in violation of the law if the policy meets the limits
specified in subdivisions (12)(A)(i)(a)-(d) as of the first renewal after that
date;
In their brief, Appellants argue that
Tokio has not proffered any evidence of a bond, cash deposit or certificate
of self-insurance. The only possible compliance of record is through the
policies at issue. If Tokio is correct that the primary policy’s amendatory
endorsement excludes coverage when the vehicle’s use is subject to a
“rental agreement,” then the Proof of Financial Responsibility statutes
would be violated. . . .
Appellants’ argument overlooks the fact that the TFRL contemplates certain exceptions
for rental vehicles. Specifically, section 55-12-106(10) of the TFRL provides:
Any person licensed and engaged in the business of renting or leasing
motor vehicles to be operated on the public highways shall be required only
to furnish proof of financial ability to satisfy any judgment or judgments
rendered against the person in the person’s capacity as owner of the motor
vehicle, and shall not be required to furnish proof of its financial ability to
satisfy any judgment or judgments rendered against the person to whom the
motor vehicle was rented or leased at the time of the accident[.]
In its April 17, 2019 order, the trial court correctly explained that the TFRL
draws a distinction as to renters and lessors of automobiles and other
businesses that provide automobiles to the public, and other automobile
owners; and between “renter risks” and “owner risks.” The concern to have
the automobile insured in those circumstances is, in common experience,
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resolved by those businesses requiring a member of the public to carry
liability insurance sufficient to meet the requirements of the [TFRL].
Those businesses must insure their own exposure (e.g. use by officers and
employees of such a business) (the “Owner Risk”). The customers insure
their own exposure . . . .
The trial court’s analysis is in line with the Tennessee Supreme Court’s holding in
Martin v. Powers, 505 S.W.3d 512, wherein it explained, in relevant part, that
Section 55-12-106(10) [of the TFRL] recognizes that a car rental company .
. . faces two distinct classes of risks arising from the operation of its fleet of
rental vehicles. The first class of risks, which we shall refer to as “Owner
Risks,” includes those accidents that may occur from the operation of [a
rental company’s] vehicle by [a rental company’s employee] while in the
course of her employment, or that may occur from the negligent
maintenance of its vehicles . . . . The second class of risks, which we shall
refer to as “Renter Risks,” includes those accidents that may arise from the
operation of one of [the rental company’s] vehicles by one of its rental
customers. As to Renter Risks, section 55-12-106(10) of the [TFRL]
specifically exempts [the rental company] from demonstrating proof of
financial security.
Martin, 505 S.W.3d at 534-25.
Contrary to Appellants’ argument, the TFRL does not require Lexus of Memphis
to “furnish proof of its financial ability to satisfy any judgment or judgments rendered
against the person to whom the motor vehicle was rented or leased at the time of the
accident[.]” Tenn. Code Ann. § 55-12-106(10). Rather, the TFRL only requires Lexus of
Memphis to “furnish proof of financial ability to satisfy any judgment or judgments
rendered against [it] in [its] capacity as owner of the motor vehicle.” Id. Furthermore,
Lexus of Memphis’ requirements under the TFRL may be fulfilled “by policies of one (1)
or more insurance carriers which policies together meet these requirements.” Tenn.
Code Ann. § 55-12-122 (emphasis added). As set out above, the Rental Agreement
between Mr. Smith and Lexus of Memphis clearly satisfies the requirements of the TFRL
in that Lexus of Memphis warrants that it has “procured a Rental Auto Coverage Policy
of Insurance which provides coverage for damages because of bodily injury or property
damage caused by an accident resulting from the use of the Vehicle by an authorized
driver,” and that “the limits available for payment of a loss . . . is equal to the minimum
requirements of any applicable state financial responsibility law . . . .” The plain
language of the Rental Agreement covers Lexus of Memphis’ financial responsibility
requirement, i.e., its “Owner Risks.” As to the “Renter Risks,” in signing the rental
agreement, Mr. Smith warranted “that all drivers identified in Paragraph 1 . . . have a
valid and collectible automobile liability insurance policy in effect, which provides
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coverage for the driver’s use and operation of the Vehicle we rent to you.” Together, Mr.
Smith’s policy and Lexus of Memphis’ policy satisfy the requirements of the TFRL
concerning rented vehicles. Tenn. Code Ann. § 55-12-122.
VI. Conclusion
For the foregoing reasons, we affirm the trial court’s order. The case is remanded
for such further proceedings as may be necessary and are consistent with this opinion.
Costs of the appeal are assessed to the Appellants, Craig Williams and Melissa Williams,
for all of which execution may issue if necessary.
_________________________________
KENNY ARMSTRONG, JUDGE
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