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

___________________________________

No. W2019-00851-COA-R3-CV

___________________________________

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 

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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.
- 12 -

(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 
- 13 -

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).
- 15 -

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