By Lex A. Coleman

It is well settled in Tennessee that property and liability insurance policies as contracts of indemnity are personal, such that the individual with whom the contract is made is a fundamental consideration to the insurance transaction.¹ It is equally well settled that the concept of insurable interest is very broadly defined in Tennessee — such that title in or possession of the insured property is not required for someone to have an insurable interest therein — so long as by the property’s continued existence a party will “gain an advantage,” or by its damage or destruction they will suffer some form of loss.² Perhaps as much a corollary as a consequence of these principles, through industry practice multiple interests may be covered by the same insurance contract when a loss occurs. Examples of such interests include the persons or entities specifically designated as “named insureds” in the policy documents (such as a husband and wife, a corporation or partnership, or other co-owners of the insured property — usually the persons who actually submitted the application for insurance in the first place), identified additional insureds (such as tenants on a rental property, a lessor or lessee, or other persons having an interest in the insured property — usually referenced in the policy documents as “additional insureds”), designated mortgagees or loss payees (creditors with debts secured by the insured property that are specifically identified as having such interests in the policy documents), and definitional insureds (such as an unnamed spouse, other member of the named insured’s household, or other third parties, which due to the definitions of certain terms in the policy derive some assertable interest to recover insurance proceeds). Persons or entities possessing any of these differing interests under a single insurance policy are generally referenced as “coinsureds.”

Multiple interests having recourse against a single insurance agreement unavoidably creates questions of whether such interests are still covered when traditional fraud or intentional act-based coverage defenses (i.e., non-cooperation, breach of conditions precedent, void ab initio/misrepresentation in the application, arson, and misrepresentation in presenting the claim) terminate the contractual rights of another coinsured. The evolving answer to such questions has now become known as the “innocent coinsured” or “innocent spouse” doctrine.

While the innocent coinsured doctrine appears to have been hotly debated nationally during the 1980s and 1990s,³ the doctrine is relatively new to Tennessee — such that its exact contours are still being defined by our courts. As the improper denial of an innocent coinsured’s claim could give rise to first party or third party bad faith liability in different contexts,⁴ however — or worse, a double payment situation⁵ — it is now critical to any responsible coverage assessment for the insurer to have a clear understanding of when an innocent coinsured can recover property insurance proceeds or otherwise demand a defense against third party claims under a liability insurance policy in Tennessee.⁶ Such an understanding is equally important to the claimant coinsured — not just in terms of evaluating his or her ability to collect insurance proceeds, but in similarly avoiding potential additional liability for Tennessee’s reverse bad faith penalty, Tenn. Code Ann. 56-7-106, or Rule 11 sanctions after wrongfully suing the insurance company.

I. Traditional arguments against allowing recovery by innocent coinsureds

The arguments against recovery by innocent coinsureds have always been fairly straightforward. First there was the general public policy aversion to allowing anyone to benefit or profit from another person’s wrongdoing.

Then there was the concern of the culpable insured receiving an indirect benefit from his conduct through the recovery of the innocent coinsured. The extinguishment of a joint debt, having a moral obligation excused, or having a desired joint economic benefit conveyed to another are some examples that immediately come to mind.

In a similar vein, the ability of an innocent coinsured to recover served as an undesirable incentive for collusion by the coinsureds to perpetrate fraud against insurers through arson or some other means. By preventing the innocent coinsured from receiving any insurance proceeds, all coinsureds (innocent and culpable alike) under a given policy had an incentive to police the conduct of the others to their mutual benefit and protection, as well as to the benefit and protection of the insurer and arguably the general public.

Finally, an independent rationale submitted that either as tenants by the entireties or by being jointly named as insureds on the policy, spouses jointly owning property had a joint obligation to refrain from fraud, such that the fraud of one spouse necessarily became the fraud of the other.

II. Evolution of Tennessee’s Innocent Coinsured Doctrine through property insurance coverage cases

Despite the above-stated considerations, after surveying what it called the “Old”⁷ and “New”⁸ dominant rules, the Middle Section Tennessee Court of Appeals readily adopted the innocent coinsured doctrine in Ryan v. MFA Mutual Insurance Company, 610 S.W.2d 428 (MS Tenn. Ct. App. 1980) (Drowota, J.).

In Ryan, a husband and wife were both named insureds possessing a joint interest in a residence structure but still having severable interests in some of their personal property. Supposedly the pertinent policy fraud provision provided that the policy would be “void in any case of fraud by the insured,” although the specific policy language actually read as follows:

This entire policy shall be void if, whether before or after a loss, the insured has willfully concealed or misrepresented any material fact or circumstance concerning this insurance or the subject thereof, of the interest of the insured therein, or in case of any fraud or false swearing by the insured relating thereto.⁹

Apparently without her husband’s knowledge or assistance, Mrs. Ryan deliberately burned down their house. In opting to allow the innocent husband to recover the value of his separate contents claim, the court construed the “the insured” policy language in the fraud provision as ambiguous and lending itself to two different meanings — coverage avoidance as to the culpable insured only, or to all insureds based upon the culpable insured’s conduct. Falling back on the traditional rule of construing contractual ambiguities against the “drafter” insurer in favor of the insured,¹⁰ the Court of Appeals purported to adopt the “new dominant rule” on the recovery of innocent coinsureds by holding:

[t]hat a reasonable person, reading the provisions in the policy at issue here which refer to the fraud of “the insured,” and neglect of “the insured,” etc. would conclude that if an insured was guilty of fraud or neglect or increasing of hazard to property, then he or she may not recover under the policy. If the company wanted to assure its position, i.e. that misconduct of any insured would bar recovery by any other insured, it might have made it clear and unambiguous in the policy and it might have informed prospective applicants for insurance of this position from the start. It did not do so in this case and is bound by the language it unilaterally drafted into the “contract” of insurance between the parties.¹¹

In substance the court adopted a “reasonable person reading the policy” standard, providing that an innocent coinsured could recover if (1) the policy language governing the rights of an innocent coinsured was ambiguous from the standpoint of the reasonable person purchasing insurance (almost an objective consumer expectations test), and (2) if the innocent co-insured could show that he had a sole or separate interest in the property claimed in the proof of loss.¹²

Post-Ryan, property insurers doing business in Tennessee could still arguably write out the innocent coinsured exposure by drafting their policy forms consistent with the qualifications in Ryan — i.e., by expressly stating that the fraud of any insured would result in a denial/voiding/forfeiture of coverage as to all innocent insureds — named or defined — and irrespective of the severability of their interest in the insured property. Toward that end, a technique most notably used by Allstate Insurance Company was to include a joint obligation clause as part of both the homeowners policy insuring grant and intentional acts exclusion making the acts or omissions of any one insured binding on all other insureds.¹³

Between 1980 and 1994, four of five unreported decisions dealing with property insurance policies refused to apply the innocent coinsured doctrine where the covered property was jointly held by both the innocent coinsured and the culpable insured as tenants by the entireties.¹⁴ The one exception came out of the Eastern Section in 1990, holding the innocent coinsured doctrine applied where the claimant wife’s new husband suffered an “insane attack,” assaulted her, and then expended at least 30 rounds from a semi-automatic machine gun into her car. In Musser v. Tennessee Farmers Mutual Ins. Co., C.A. No. 131, 1989 Tenn. App. LEXIS 749 (ES Tenn. Ct. App. 11/9/89), however, there was no finding that the wife had a joint ownership interest in the car with her husband, the wife having purchased and insured the car before they were married.¹⁵

The Tennessee Supreme Court finally weighed in on the innocent coinsured/ innocent spouse doctrine in 1994. Ironically, Justice Drowota, author of the Middle Section’s 1980 decision in Ryan, also drew up the Tennessee Supreme Court’s first and (so far) only ruling dealing with the innocent coinsured issue.

In Spence v. Allstate Ins. Co, 883 S.W.2d 586 (Tenn. 1994), the insured couple experienced marital difficulties after buying a homeowners policy on their principle residence, such that they had legally separated with the wife having filed for divorce at the time of the fire. At least two months prior to the fire, the couple executed a marital dissolution agreement providing for the division of their real and personal marital property which stipulated that the MDA would not become fully effective until entry of a final divorce decree. The house subsequently burned while the husband was out of town, but before the divorce became final. Ultimately the wife was adjudged to have deliberately set the fire, and on that basis her claim was denied. The husband’s claim was also denied, based upon the “concealment or fraud” clause and the “intentional acts” exclusion relative to the joint obligation language in Allstate’s policy. The pertinent portions of the policy provided:

DEFINITIONS.

“You” or “Your” — means the person named on the declarations page as the insured and that person’s resident spouse.

“Insured person” — means you and, if a resident of your household: (a) any relative; and (b) any dependent person in your care.

...

INSURING AGREEMENT.

The terms of this policy impose joint obligations on persons defined as an insured person. This means that the responsibilities, acts and failures to act of a person defined as an insured person will be binding upon another person defined as an insured person.

CONCEALMENT OR FRAUD

This policy is void if it was obtained by misrepresentation, fraud or concealment of the material facts or if you intentionally conceal or misrepresent any material fact or circumstance, before or after loss.

...

LOSSES WE DO NOT COVER

We do not cover loss to the property ... resulting in any manner from:

...

6. Intentional or criminal acts of an insured person, if the loss that occurs: (a) may be reasonably expected to result from such acts; or (b) is in fact the intended result of such acts.

...

TENNESSEE AMENDATORY ENDORSEMENT

...This exclusion [section 6] applies only to those persons who commit, conspire, collude, direct or acquiesce to such acts.¹⁶

After approving Ryan’s analysis, the Tennessee Supreme Court concluded Allstate’s intentional acts exclusion clearly applied to the interests of any innocent coinsured due to the “joint obligation” language in the policy insuring grant. The Tennessee Amendatory Endorsement separately limiting the scope of the intentional acts exclusion, however, introduced “a substantial amount of ambiguity into the status of an innocent co-insured under the policy.”¹⁷ Based upon that structural ambiguity, the court held the innocent coinsured was entitled to coverage.

The Spence court looked to the structure of the policy as much as the plain meaning of particular terms to find an ambiguity, with Justice Drowota’s opinion arguably suggesting that our courts should be more inclined to find such ambiguities are present whenever the policy provisions send “fundamentally contradictory messages concerning the rights of innocent coinsureds when the policy is read in its entirety.”¹⁸ In other words, the understanding concerning the insured’s interpretation of his rights under the policy rather than whether a particular phrase or term was actually subject to more than one meaning was to be the appropriate measure of ambiguity in innocent coinsured cases.

The Tennessee Supreme Court ultimately went on to determine Mr. Spence had a severable interest in the personalty for which he was trying to recover (i.e., which prompted a discussion by the court of how marital property under Tennessee’s domestic relations statutes does not directly translate into joint ownership in terms of property insurance coverage), such that the innocent coinsured doctrine’s application to joint property was not raised in that case.

What Ryan and Spence failed to address was subsequently taken up by the Western Section Court of Appeals in 1997. With Judge Crawford writing for the court, Finch v. Tennessee Farmers Mutual Insurance Company, No. 01A01-9607-CV-00342, 1997 Tenn. App. LEXIS 146 (WS Tenn. Ct. App. 3/6/97), deviated from previous unreported post-Ryan joint property cases and declined to make any distinction between property that is held jointly or separately by the alleged innocent coinsured.

The pertinent policy provisions at issue in Finch provided:

DEFINITIONS USED THROUGHOUT THIS POLICY

....

“You” and “your” means the Policyholder named in the Declarations and spouse if living in the same household.

....

“Insured Person” means:

(a) you;

(b) your spouse or the relatives of either residing in your household; and

....

“Insured Premises” means:

(a) the farm premises or residence premises described in declarations.

....

SECTION I

....

EXCLUSIONS:

We do not cover loss resulting directly or indirectly from:

....

8. An action by or at the direction of an insured person committed with the intent to cause a loss. This exclusion does not apply to loss sustained by an insured person who does not participate in such action nor have knowledge of such action.

....

GENERAL POLICY CONDITIONS APPLYING TO SECTION I AND SECTION II

....

4. Concealment Or Fraud

This entire policy is void as to the insured, if an insured person has intentionally concealed or misrepresented any material fact or circumstances relating to this insurance, or acted fraudulently or made false statements relating to this insurance.¹⁹

Applying the Ryan/Spence analysis, the Finch court first found a reasonable person purchasing insurance would not conclude that the above-quoted policy provisions could only apply to property owned solely and separately by an innocent coinsured. The court also concluded that coverage had not been expressly excluded for loss to jointly held property. While exclusionary clause 8 allowed the innocent coinsured to recover, the Concealment Or Fraud clause evidenced an intent to deny coverage to all insureds for the fraudulent acts of “an insured person” — which created a definite and fatal structural ambiguity with respect to any reasonable insured reading the policy, such that it had to be construed against the carrier in favor of the innocent coinsured.

With respect to public policy considerations, following McCracken v. GEICO, 284 S.C. 66, 325 S.E.2d 62 (1985) and McGory v. Allstate Ins. Co., 527 So.2d 632 (Miss. 1988), the Western Section Court of Appeals also held:

An innocent coinsured can recover under an property insurance policy for loss to jointly owned property, provided the specific language in the insurance contract does not expressly exclude such coverage so that the reasonable person purchasing insurance would expect to be covered in the event of property loss caused intentionally by a co-insured.²⁰

Rather than through a complete bar to recovery, the court reasoned that concerns about fraud and collusion between coinsureds could best be addressed by the trial court making a factual determination as to the true innocence of the claiming coinsured. Where the potential for deception is clearly found to exist, recovery should be denied.²¹

Having stated under what circumstances the innocent coinsured doctrine would apply to joint property interests, the Finch court also addressed the amount the innocent coinsured could recover, holding that amount would still depend upon to what extent the coinsured held a severable interest in the covered property. Where the innocent coinsured spouse’s interest was as a tenant by the entireties, she could only recover one-half of the amount of property damage up to the stated policy limits.²² The rationale underlying this allocation of insurance proceeds was borrowed from St. Paul Fire & Mar. Ins. Co. v. Molloy, 291 Md. 139, 433 A.2d 1135 (1981):

Since “we have regarded the rights of husband and wife [to be] separate under the contract, ... both logic and justice require that the amount recoverable be likewise allocated,” so that the innocent spouse be compensated for one-half the damages within the limits of the policy … Permitting recovery of more would necessitate reliance on the “oneness” legal fiction of marital property which we rejected in determining that the parties here enjoy and assume several, not joint, contractual rights and obligations. Moreover, an award greater than one-half would allow the innocent spouse to recover in excess of that to which she would be entitled upon severance of the tenancy by the entirety, whether by divorce or other action by the parties.²³

III. The void ab initio exception

In light of Spence and Finch, there are three Tennessee cases that hold the innocent coinsured doctrine does not apply where the underlying property insurance policy is rendered void ab initio due to the culpable insured having made material misrepresentations in an insurance application which increased the risk of loss to the insurer under Tenn. Code Ann. 56-7-103.²⁴ This is as opposed to a coverage denial based upon post-procurement fraudulent conduct (such as committing arson or making intentional misrepresentations in presenting the claim), or post-procurement non-fraudulent conduct in the form of excluded intentional acts or which otherwise breaches express conditions precedent to recovery.

The reported case is Woodmen of the World Life Ins. Soc. v. Kinniard, 874 S.W.2d 47 (MS Tenn. Ct. App. 1993), and turned primarily on public policy considerations weighing against innocent coinsured’s being able to recover life insurance benefits where the policy was procured by a beneficiary intending to murder the primary insured. The unreported cases Pack v. Allstate Ins. Co., C.A. No. 1278, 1989 Tenn. App. LEXIS 567 (ES Tenn. Ct. App. 8/25/89), and Tennessee Farmers Mutual Ins. Co. v. Wagner, No. 01A01-9505-Cv-00190, 1995 Tenn. App. LEXIS 773 (MS Tenn. Ct. App. 12/1/95), on the other hand, involved homeowners policies on which the husband and wife were both listed as named insureds.

In denying recovery to the innocent spouse where her husband had omitted a substantial portion of their loss history on the relevant homeowners application, the Pack court held that Ryan would not apply in a void ab initio coverage action where the principle question is whether the policy ever came into existence at all. Upon a finding that the relevant property policy was void ab initio under Tenn. Code Ann. 56-7-103, no coverage was afforded to any named insured. In other words, in this context “void” really does mean void.²⁵

The Wagner court approached the issue from a different perspective, where the husband was the only insured who was asked questions off the application, the only insured who answered questions on the application or otherwise furnished underwriting information to the agent, and who ultimately was the only insured who signed the insurance application. Finding the homeowners policy had been rendered void ab initio under Tenn. Code Ann. 56-7-103 because of the husband’s non-disclosure of several fire and theft losses, which occurred prior to his marriage, Wagner also denied coverage to the innocent spouse on a “duly authorized agent” theory expressed as follows:

“In the absence of a contract or statutory provision to the contrary, an insured is bound by representations contained in an application signed by his own duly authorized agent.” [43 Am. Jur. 2d Insurance Sec. 1038] While this rule of law is most often applied to situations where the agent misrepresents facts in reference to the principal, we think it also applies to the agent’s statements about himself whether the principal and agent jointly own the insured property and the agent signs the application securing coverage for both.

There can be no doubt that Mr. Wagner was acting as agent for Mrs. Wagner. The application was in their joint names, but Mr. Wagner signed it alone. The policy issued in their joint names was, therefore, obtained through the agency of the husband. Either Mr. Wagner was acting as Mrs. Wagner’s agent, or the policy should have been issued to Mr. Wagner alone.²⁶

IV. Innocent coinsureds

under liability coverages

There are three unreported post-Ryan decisions addressing the innocent coinsured doctrine’s application to an insurer’s duty to defend third party claims under a liability insurance policy.

In Tennessee Farmers Mutual Insurance Co. v. Evans, No.1, 1990 Tenn. App. LEXIS 356 (WS Tenn. Ct. App. 5/18/90)(Highers, J.), the Tennessee Court of Appeals held that the phrase “an insured person” — in a policy exclusion “for claims arising out of property damage expected or intended by an insured person” — unambiguously expresses the contractual intent to create joint obligations and to prohibit recovery by an innocent coinsured.

Where the policy also contained the following severability clause,

4. Severability Of Insurance.

This insurance applies separately to each insured person against whom claim is made or suit is brought, subject to our limits of liability for each occurrence,

However, the court further held the latter provision created a reasonable expectation that each insured’s interests were separately covered, such that the exclusionary clause’s provisions were sufficiently inconsistent to create yet another structural ambiguity which required that a defense be provided for the innocent coinsured.²⁷

In contrast to Evans, the Middle Section recently expressed a different interpretation of “any person” as used in an intentional acts exclusion under an automobile liability policy in GRE Insurance Group v. Reed, No. 01A01-9806-CH-00300, 1999 Tenn. App. LEXIS 440 (MS Tenn. Ct. App. 7/12/99). The relevant GRE policy language provided:

EXCLUSIONS:

We do not provide Liability Coverage for any person: 1. Who intentionally causes bodily injury or property damage ...²⁸

In Reed the named insured’s teenage son (also a named driver on the policy) allowed a third party to drive the covered vehicle, even though they had both been drinking. While the permissive driver was behind the wheel, he intentionally hit a pedestrian and left the scene. Subsequently the permissive driver pled guilty to aggravated assault. When the pedestrian filed suit against the permissive user and the named insureds (the latter for negligent entrustment), the carrier refused to defend any of the named defendants claiming there was no coverage due to the permissive user’s intentional acts.²⁹ GRE argued that where there was no coverage, it had no duty to defend. In support of its arguments that claimant’s negligent entrustment claims arose out of the permissive user’s intentional acts, GRE cited Allstate Insurance Company v. Freeman, 432 Mich. 656, 443 N.W.2d 734 (Mich 1989).

Responding to GRE’s arguments, the court first reviewed the accepted duty to defend analysis in Tennessee, which recognizes a carrier’s duty to defend is much broader than its duty to indemnify its insureds.³⁰ The court then focused on the GRE policy’s similarities to the Allstate form litigated in Freeman. In doing so the Middle Section favorably acknowledged that portion of Freeman finding the term “an insured” as used in the exclusion “for any injury or damage intentionally caused by ‘an insured person,’” unambiguously excluded coverage for any damages caused by the intentional wrongful act of any insured under the Allstate policy form. In one of two footnotes, the Middle Section also acknowledged what it characterized as a majority rule that “the insured” in an exclusionary clause is construed to refer to a particular insured and therefore liability coverage may still be extended to an innocent coinsured. It further acknowledged the construction of “any insured” in similar exclusions to mean any insured under the policy — thereby excluding coverage for an innocent coinsured. The court then focused on the distinction between the exclusion of coverage for a person rather than an injury in the GRE policy form and concluded, based upon the structure of the GRE exclusion clause, that “an insured person” as used therein only excluded coverage for a particular person — not all coinsureds relative to a particular injury.

The person excluded is one who “intentionally causes bodily injury ...” In contrast, in Freeman, the policy excluded coverage for an injury “which is … intended by an insured person.³¹

In other words, while the terms “an insured person” and “an insured” have been construed to express a contractual intention to create joint obligations for all coinsureds precluding recovery by an innocent coinsured, where the exclusionary clause itself contains definitional language directing its effects to a specific person — as did the GRE intentional acts exclusion — the other named insureds were still entitled to a defense against the pedestrian’s claims even though the permissive user was not.

Judge Lillard characterized Reed as presenting an issue of first impression in Tennessee with respect to whether an intentional acts exclusion precluded coverage for negligent entrustment claims arising out of the intentional acts of the permissive user.³² Reed also arguably presented an issue of first impression respecting a named potentially culpable insured’s ability to still enforce the carrier’s duty to defend claims arising out of the intentional acts of a definitional insured — the unnamed permissive user. Reed in effect bootstrapped Tennessee’s broad duty to defend analysis onto the innocent coinsured doctrine in order to find sufficient possibility of coverage for GRE to have a duty to defend its allegedly negligent insureds. Just as importantly, Reed collected and then favorably acknowledged the developing interpretations of “an insured,” “the insured,” and “any insured” as they relate to the innocent coinsured doctrine.

Shortly after Reed the Middle Section revisited the innocent coinsured doctrine’s application in the liability coverage context in Allstate Insurance Company v. Jordan, No. 01A01- 9810-CH-00552, 1999 Tenn. App. LEXIS 733 (MS Tenn. Ct. App. 10/28/99), this time plainly articulating “an insured” and “the insured” as terms of art respecting the severability of the innocent coinsured’s interests from the culpable insured’s under the policy. Jordan was similar to Reed in that the claims asserted against the “innocent” coinsureds sounded in negligence (negligent supervision claims), but Jordan arose under the named insured’s homeowners policy (as opposed to the GRE automobile liability policy in Reed) where the insured’s son intentionally killed a pizza delivery boy with a stolen gun. Like GRE in Reed, Allstate denied any defense under the liability coverage part due to its policy intentional acts exclusion. Unlike in Spence, however, Allstate got the policy forms right this time, such that the only pertinent provisions provided:

Definitions Used in This Policy

1. “You” and “your” means the person named on the Policy Declarations as the insured and that person’s resident spouse.

...

3. “Insured person(s)” means you and, if a resident of your household;

a) any relative; and b) and any dependent person in your care.

Insuring Agreement

The terms of this policy impose joint obligations on persons defined as an insured person. This means that the responsibilities, acts and failures to act of a person defined as an insured person will be binding upon another person defined as an insured person.

Losses We Do Not Cover Under Coverage X:

1. We do not cover any bodily injury or property damage intended by, or which may reasonably be expected to result from the intentional or criminal acts or omissions of, any insured person.³³

The Jordan insureds argued the intentional acts exclusion in Allstate’s policy was only specific to claims against the minor shooter. In support of this argument, the Jordans cited Ryan as justifying application of the innocent coinsured doctrine and Allstate Insurance Company v. Watts, 811 S.W.2d 883 (Tenn. 1991) with respect to Tennessee’s concurrent causation doctrine. In rejecting both arguments, the Middle Section distinguished the Ryan policy as concerning acts of “the insured” as opposed to acts of “any insured” or “an insured,” and the Watts policy as being “materially different” from Allstate’s express provision making the act of one insured the act of all insureds that was used in the Jordan case.

After noting that the Allstate policy did not create the same ambiguity that was considered by the Spence court, the Middle Section then concluded that the joint obligation clause in both the insuring grant and intentional acts exclusion satisfied the Ryan requirement that a reasonable purchaser of the policy would be adequately informed that the misconduct of any insured would bar recovery of any other insured. Incident to this holding the Jordan court stated that application of the innocent coinsured doctrine turns on whether the relevant policy language imposes a joint obligation between the insureds and the insurer or whether the policy was several, creating a separate contract with each insured. The severability determination being dependent upon the relevant policy language, the Jordan court followed Allstate Ins. Co. v. McCranie, 716 F. Supp. 1440 (S.D. Fla. 1989) for the proposition that where the pertinent policy language excludes coverage for injuries or damage caused by the intentional acts of “an insured person,” the policy imposed a joint obligation on all named insureds. The Jordan court followed Uniguard Mutual Ins. Co. v. Argonaut Ins. Co., 20 Wash. App. 261, 579 P.2d 1015 (1978), to further hold where coverage and exclusions are defined in terms of “the insured,” the insurance contract between the insurer and the several insureds is severable rather than joint.

What is significant about Reed and Jordan is the shift in the court’s innocent coinsured analysis away from a bright line Ryan-based perception that “the insured” is ambiguous. Rather than just focusing on the actual term’s literal meaning and how a reasonable person buying the policy might interpret it, the Middle Section has now ascribed specific legal definitions to the terms “an insured,” “any insured,” and “the insured.” The court has also focused more upon the identified object of the particular exclusionary clauses — noting the distinction between excluding coverage for injuries or damages arguably resulting from concurrent causes, and excluding coverage with respect to the conduct of certain persons or classes of persons — depending upon their own or another coinsured’s conduct.

The implications for property insurance coverage cases in light of Reed and Jordan could be quite material. If the analytical framework and the constructions of “an insured,” “any insured,” or “the insured” effectively translate over into subsequent property insurance coverage litigation, carriers intending to exclude coverage for the innocent coinsured exposure will finally be able to avoid the post-Ryan roulette wheel as to what policy language will be enforced by Tennessee’s courts, and participants on both sides of the insurance transaction can begin to rely upon legally accepted meanings of “an insured” and “the insured” as they form their reasonable expectations concerning any coverages the insured is actually purchasing from the industry. In doing so, the analytical focus in the property insurance cases should shift away from the often overly elastic and arbitrary “ambiguity/ construction in favor of the insured” test to whether the coinsured’s are joint obligors under a given policy based upon the usage of certain terms of art in the insurance contract. This would reflect the national trend, while allowing a uniform body of case law to develop concerning the standard form clauses and terms typically implicated by the claims of innocent coinsureds. Given this maturing trend in Tennessee’s analysis, therefore, in light of the recent amendments to Supreme Court Rule 4, it is really unfortunate that most of the appellate decisions on Tennessee’s innocent coinsured doctrine remain largely unreported.

V. Summation

In any event, the practical analytical framework to be distilled from Tennessee’s reported and unreported innocent coinsured cases may be best summarized as follows:

The right of an innocent coinsured to coverage under a property insurance policy or a defense under a liability insurance policy is dependent upon whether a party possessing an interest in covered property is actually a named or a defined insured to the particular policy; whether the alleged coinsured is actually “innocent;” and then to what extent the pertinent policy provisions would clearly convey “to a reasonable purchaser reading the policy” that any loss caused by the fraudulent or otherwise excluded conduct of one insured would bar recovery under the policy for all other coinsureds. Where “the insured” is used in the pertinent policy provisions, the trend has been to allow recovery by the innocent coinsured; where “an insured” or “any insured” is used, the trend has been to deny recovery. These rules have been applied both with covered property separately owned by the innocent coinsured, and with covered property jointly owned by the culpable and innocent coinsureds as tenants by the entireties.

The scope of an innocent coinsured’s recovery, in turn, is dependent upon the nature of the coinsured’s interest in the covered property and to what extent that interest is severable from any property interests of the culpable insured at the time of the loss. The innocent coinsured’s measure of recovery in the joint property context would be his or her proportionate share of the value of the covered property loss. It may be reasonably inferred that the measure of recovery in the severable property context would be the entire value of the covered property subject to the other terms and conditions of the applicable property insurance coverage part.

Of course, where coverage is voided ab initio with respect to the conduct of one insured, the apportionment of any recovery to any innocent coinsured will be irrelevant since no insured can recover in connection with this coverage defense.³⁴

Given these basic principles, competently assessing innocent coinsured exposures as part of the initial coverage analysis does not have to be a difficult exercise. This premise should be born out by the innocent coinsured “punch list” (see box on page 34), which is intended to aid both coverage counsel and the claimant insured’s counsel in independently assessing that interest. Arguably, by the time either side gets to the bottom of the list, each should have a pretty good idea where they stand in relation to the innocent coinsured issue.

The reported and unreported cases demonstrate that most of Tennessee’s innocent coinsured decisions are the indirect by-products of failed or failing marital relationships involving joint interests in insured property. Given the continuing statistical increases in both the divorce rate and domestic violence, one does not have to be particularly adept to conclude the “innocent spouse” type fact pattern will continue to arise as marriage relationships fail and emotional attachment to the covered property drops off coinsureds’ priority radar such that a real increase in hazard is presented to the carrier.³⁵ As a consequence, for those insurers doing business in Tennessee who definitely want to avoid the innocent coinsured exposure, Allstate’s post-Ryan joint obligation insuring grant and intentional act exclusion have now been held to satisfy the Ryan “reasonable insured” standard. Careful attention is therefore encouraged to the policy terms and structural drafting techniques utilized by Allstate in Jordan, as well as to the fatal amendatory endorsement goof which produced the result in Spence.³⁶

Notes

1. See e.g. Wattenbarger v. Tullock, 198 Tenn. 402, 280 S.W.2d 925 (1955); American Automobile Ins. Co. v. Jones, 163 Tenn. 605, 45 S.W.2d 52 (1932); Schmid v. Virginia Fire & Mar. Ins. Co., 37 S.W. 1013 (Tenn. Ch. App. 1896)(discussing the concept of moral hazard and its relevance to underwriting considerations).

2. See e.g. Duncan v. State Farm Fire & Cas. Co., 587 S.W.2d 375 (Tenn. 1979); accord, Smith v. Amerisure Ins. Co., No. 03A01-9510-CV-00370 (E.S. Tenn. Ct. App. 5/22/96) (Goddard, J.).

3. See e.g. Paul B. Butler & Bob G. Freeman, Jr., “Innocent Coinsured: He Burns It, She Claims ... Windfall or Technical Injustice?” 17 Forum 187 (1981); “The Problem of the Innocent Coinsured Spouse: Three Theories of Recovery,” 17 Val. U. L. Rev. 849 (1983); Richard K. O’Donnell, “Imputation of Fraud and Bad Faith: The Role of the Public Adjuster, Co-insured, and Independent Adjuster,” 22 Tort & Ins. L.J. 662, 680 (1987); Annotation, “Right of Innocent Insured to Recover Under Fire Policy Covering Property Intentionally Burned By Another Insured,” 11 A.L.R. 4th 1228.

4. See generally Lex A. Coleman, “Just How ‘Formal’ Does An Insured’s ‘Demand’ Have To Be Under Tennessee’s Insurer Bad Faith Statute Anyway? An Argument For Why Written Formal Demand Should Be Required Under Section 56-7-105(a) Of The Tennessee Code,” 30 U. Mem. L. Rev. 239 (2000).

5. See generally, Benton Banking Co. v. Tennessee Farmers Mutual Ins. Co., No. 03A01-9310- CH-00374, 1994 Tenn. App. LEXIS 182 (ES Tenn. Ct. App. 4/6/94), rev’d, 906 S.W.2d 436 (Tenn. 1995); Cowles v. St. Paul Fire & Mar. Ins. Co., 1987 Tenn. App. LEXIS 3111 (WS Tenn. Ct. App. 12/4/87).

6. The subject matter of this article is limited to how Tennessee’s courts have dealt with the interests of named or defined coinsureds who have no security interest in the covered property and who are otherwise not listed in the policy declarations as mortgagees, lender loss payees, or simple loss payees. While there can certainly be listed mortgagee innocent coinsureds, mortgagee rights under property insurance policies in Tennessee are determined by our statutory union mortgage clause, Tenn. Code Ann. 56-7-804, and the terms of the mortgagee clause written into each particular policy form. For a comprehensive overview of an innocent mortgagee’s right to recover, however, see Citizens Tri-County Bank v. Georgia Mutual Ins. Co., 11 S.W.3d 120 (MS Tenn. Ct. App. 1999). For an arguably similar overview of an innocent loss payees’ right to recover, compare Western Express Inc. v. Interested Underwriters at Lloyd’s London, 942 S.W.2d 542 (MS Tenn. Ct. App. 1996); Reeves v. Granite State Ins. Co., C.A. No. 01A01-9807-CH-00398, 1999 Tenn. App. LEXIS 624 (MS Tenn. Ct. App. 9/17/99), perm. to appeal granted, No. M1998-00286-SC-R11-CV (1/24/00). Reeves will be interesting to follow to see to what extent the Supreme Court may impose a common law loss payee union clause similar to the statutory mortgage clause in Tenn. Code Ann. 56-7-804.

7. Ryan v. MFA Mut. Ins. Co., 610 S.W.2d 428, at 429-434 (MS Tenn. Ct. App. 1980).

8. Ryan, supra, n. 8 at 434-437.

9. Id., at 440 (policy form lines 1 – 6).

10. Id. at 437; see generally, Tenn. Juris., Insurance, Sec. 26 (2000).

11. Id., 610 S.W.2d at 437. It can be reasonably inferred from the quotations around the term “contract” in the quoted excerpt that then Judge Drowota was a definite proponent of the “adhesion contract” characterization of insurance agreements. Recent cases suggest he still is.

12. Id. What is interesting about the Ryan court’s analysis is how it injects an apparently objective reasonable man test into issues consistently characterized as legal questions — mainly how a given policy provision should be construed, and whether a policy term or as a whole is ambiguous. See e.g. Tennessee Farmers Mutual Ins. Co. v. Witt, 857 S.W.2d 26 (Tenn. 1993); St. Paul Fire & Mar. Ins. Co. v. Torpoco, 879 S.W.2d 831 (Tenn. 1994); Standard Fire Ins. Co. v. Chester-O’Donley & Assoc. Inc., 972 S.W.2d 1 (ES Tenn. Ct. App. 1998); Sims v. Stewart, C.A. No. 02A01-9901-CV-00008, 1999 Tenn. App. LEXIS 859 (WS Tenn. Ct. App. 12/15/99). So far, however, no one has jumped up to argue the reasonable man test presents a jury issue that would defeat a properly supported summary judgment motion. Irrespective of whether a new jury issue has been injected into the analysis, the fundamental considerations still appear to be a form of consumer expectations test. See generally Roger C. Henderson, “The Doctrine of Reasonable Expectations in Insurance Law After Two Decades,” 51 Ohio St. L.J. 823 (1990). Compare the Ryan court’s lengthy discussion of cases representing the competing lines of authority, with Georgia’s initial adoption of the innocent coinsured doctrine in Richards v. Hanover Ins. Co., 250 Ga. 613, 299 S.E.2d 561 (1983), and its subsequent application in Fireman’s Fund Ins. Co. v. Dean, 212 Ga. App. 262, 441 S.E.2d 436 (1994).

13. Compare the Spence and Jordan decisions discussed infra.

14. See Webb v. Tennessee Farmers Mut. Ins. Co., No. 86-32-II, 1986 Tenn. App. LEXIS 3088 (MS Tenn. Ct. App. 6/18/86)(on the date of the fire loss husband and wife owned home as tenants by the entireties, on which carrier had issued a homeowners policy; on date of fire wife was not residing in home because of the couple’s legal separation; carrier denied claim of husband on grounds of arson; husband and wife divorced after fire loss); Adams v. Aetna Casualty & Surety Co., C.A. No. 78, 1985 Tenn. App. LEXIS 3317 (ES Tenn. Ct. App. 11/19/85)(husband and wife owned home subject to homeowners policy as tenants by the entirety; covered property destroyed after husband deliberately set fire, and then committed suicide; surviving spouse made claim for entire property loss); Snowden v. State Farm Fire & Casualty Co., 8 TAM 29-27 (Tenn. App., 6/8/83); Tennessee Farmers Mutual Ins. Co. v. Billings, 6 TAM 36-8 (Tenn. App. 7/22/81).

During the same period — 1980 to 1994 — in Allstate Ins. Co. v. Wilson, 856 S.W.2d 706 (WS Tenn. Ct. App. 1992)(Crawford, J.) the Western Section rejected application of the innocent coinsured doctrine to the liability coverage part under a homeowners policy, where the insureds were seeking a carrier- provided defense in a third-party wrongful-death suit in the face of the carrier’s late notice coverage defense.

15. 1989 Tenn. App. LEXIS 749, at *3 - *4. One interesting aspect of Musser is that rather than basing its coverage denial on any joint ownership interest defense to the coinsured’s claims, the carrier relied upon language in the insuring grant to the effect it would only pay for direct and accidental loss to the covered auto. The carrier then asserted the husband’s conduct as a named coinsured (added after the wedding) was intentional. Using the test from Central National Ins. Co. of Omaha v. Adams, 45 Tenn. App. 23, 319 S.W.2d 486 (1958), the Musser court defined accidental injuries as those which the insured could not have reasonably expected or anticipated even though they were intentionally inflicted, and then quickly dispensed with Tennessee Farmer’s intentional loss defense holding the wife’s claim was “the classic case in which the ‘Innocent Spouse Rule’ should apply.”

16. 883 S.W.2d 586, 591-592 (Tenn. 1994).

17. Id., at 591 (analyzing Allstate’s Deluxe Plus Homeowners Policy form). Again, as evidenced by the quoted policy excerpts, Allstate took an interesting approach to the post-Ryan innocent coinsured exposure by including the joint obligation provision in the policy insuring grant. The only problem was that Allstate did not check the consistency of the amendatory endorsement before adding it to the policy coverage form, or before it opted to deny the husband’s claim after the loss.

18. Id., at 592.

19. 1997 Tenn. App. LEXIS 146, at *6 - *7.

20. Finch, 1997 Tenn. App. LEXIS 146, at *10 - *22 (quote at *22).

21. Id., at *22.

22. Finch, 1997 Tenn. App. LEXIS 146, at *23 – *25. Accord, Nationwide Mut. Ins. Co. v. Pittman, 82 N.C. App. 756, 348 S.E.2d 350 (1986).

23. Finch, 1997 Tenn. App. LEXIS 146, at *25.

24. See e.g. Giles v Allstate Ins. Co., 871 S.W.2d 154 (ES Tenn. Ct. App. 1993); State Farm Gen. Ins. Co. v. Wood, 1 S.W.3d 658 (ES Tenn. Ct. App. 1999); Vermont Mut. Ins. Co. v. Chui, No. E1999-00892-COA-R3-CV, 2000 Tenn. App. LEXIS 27 (ES Tenn. Ct. App. 1/5/00)(each comprehensively discussing the elements and governing rules affecting the void ab initio coverage defense). Compare, Home Ins. Co. v. Dunn, 963 F.2d 1023, 1026-1027 (7th Cir. 1992)(applying Illinois law).

25. Pack v. Allstate Ins. Co., 1989 Tenn. App. LEXIS 567, at *5 - *6.

26. Tennessee Farmers Mutual Ins. Co. v. Wagner, 1995 Tenn. App. LEXIS 773, at *3 - *4. See Generally, Richard K. O’Donnell, “Imputation of Fraud and Bad Faith: The Role of the Public Adjuster, Co-insured, and Independent Adjuster,” 22 Tort & Ins. L.J. 662 (1987).

27. 1990 Tenn. App. LEXIS 356, at *9 - *10 (citing Travelers Ins. Co. v. Blanchard, 431 So.2d 913 (La. App. 1983); Allstate Ins. Co. v. Freeman, 432 Mich. 656, 443 N.W.2d 734 (1989)); compare with the Reed case discussed infra.

28. 1999 Tenn. App. LEXIS 440, at *8 - *9.

29. Id., at *2 - *3. GRE advanced two separate arguments in support of this position. First, that the claimant’s negligent entrustment claim still arose out of the permissive user’s intentional acts, and that any resulting injuries to the plaintiff were excluded by GRE’s policy. Apparently GRE believed to the extent the named insureds became legally responsible for the permissive user hitting the pedestrian, such would not be due to the accidental cause required by the liability coverage part insurance grant. In the alternative, GRE relied upon its intentional acts exclusion as set forth in the main text.

30. Id. See e.g. Standard Fire Ins. Co. v. Chester-O’Donley & Asso., 972 S.W.2d 1 (ES Tenn. Ct. App. 1998); Planet Rock Inc. v. Regis Ins. Co., 6 S.W.3d 484 (WS Tenn. Ct. App. 1999).

31. Id., at *17.

32. Id., at *1 - *2, *3 - *4.

33. 1999 Tenn. App. LEXIS 733 (MS Tenn. Ct. App. 10/28/99), at *5 – *6.

34. Again, excepting the interests of an innocent mortgagee protected by Tenn. Code Ann. 56-7-804, or loss payee listed on policies containing the hybrid “union” loss payable clauses.

35. Not to pick on individuals with failing personal relationships, the same increase in hazard would arguably accompany a business failure where multiple ownership interests are involved

36. 1999 Tenn App. LEXIS 733, at *5 - *7. For annual surveys of recent developments regarding the effectiveness of carriers’ changing the language in their standardized policy forms from “the insured” to “an insured” or “any insured” in other jurisdictions, see generally Stephen P. Pate, “Recent Developments In Property Insurance Law,” 33 Tort & Ins. L.J. 659 (pt. IV, Innocent Coinsured Issues)(1998); Robert E. Chudakoff, Andrew B. Downs, Susan B. Harwood, William W. Speed, Daniel F. Sullivan, and Wesley Ward, “Recent Developments In Property Insurance Law,” 36 Tort & Ins. L.J. 581 (2000).

Compare Tennessee’s evolving innocent coinsured analysis with the inflexible limitations placed on carriers writing fire loss coverages in jurisdictions enacting statutory standard fire policies. Using Georgia as an example, the Georgia Court of Appeals recently reformed a fire policy using “an insured” in the relevant fraud/intentional acts exclusion to conform to “the insured” as used in Georgia’s statutory standard fire policy fraud/intentional acts clause. Fireman’s Fund Ins. Co. v. Dean, 212 Ga. App. 262, 441 S.E.2d 436 (1994). In Dean, the Georgia Court of Appeals held that under O.C.G.A. Sec. 33-32-1 — requiring all fire insurance policies covering Georgia property to contain language at least as favorable to the insureds as the applicable portions of the standard fire policy — because of the use of “the insured” in the standard fire policy fraud exclusion, the minimum level of coverage allowed by Georgia’s standard fire policy creates several obligations as to each coinsured. The practical consequence of this ruling is that carriers writing fire coverage in Georgia CANNOT avoid the innocent coinsured exposure, no matter how unambiguous the “an insured” exclusionary language in their policies might be. So, as demonstrated just by this simple comparison, in many respects Tennessee still remains a much less hostile jurisdiction in which to write property insurance products — particularly where our General Assembly never enacted a standard fire policy form, and the Department of Insurance resisted even approving the New York standard form for use in Tennessee until 1944.

Further compare Dolcy v. Rhode Island Joint Reinsurance Ass’n, 589 A.2d 313 (R.I. 1991)(following the joint obligation construction of “an insured” in the relevant policy fraud exclusion, even though directly conflicting with separable obligation construction of “the insured” in Rhode Island’s statutory Standard Fire Policy fraud exclusion, and even where Rhode Island requires that insurance contracts not conforming to such statutory requirements must typically be declared void).

Lex A. Coleman is a member with Johnson, Gilbert, Mulroony & Coleman PC in Chattanooga. Following a summer grant to the London School of Economics, he received his bachelor’s degree in economics from Rhodes College in 1986. He received his law degree from the University of Memphis Cecil C. Humphreys School of Law in 1991, where he was on law review and the international moot court team. He served as law clerk for U.S. Magistrate Judge John Y. Powers. Coleman conducts an insurance defense practice, handling first-party coverage issues, employer practices liability, commercial liability and workers’ compensation third-party litigation for self-insureds.