### IN THE COURT OF APPEALS OF TENNESSEE AT KNOX VILLE D ec em be r 1, 200 3 S es sio n
FARMERS MUTUAL OF TENNES SEE v . ATHENS I NSURANCE AGENCY, CHARLES W . SPURLING a nd w ife , CAROLYN SPURLING

Direc t Appeal from the Circ uit Court for Bradley County No. V-00- 172 Hon. Joh n B. H agler, Cir cuit Judge

F ILED FEBRUARY24, 2004

No. E2003-01258-COA- R3-CV

I n a dec laratory

judgme nt action by

the insuranc e compa

ny , the Trial Court held insure d was e ntitled to r e c o v e r u n d e r th e p o li c y an d aw ar d e d p r e ju d g me n t i n te r e s t a

n d im p o s e d b a d f a it h p e n a lt y
. We
a ff ir m in pa rt and re ve rs e in p art

.

Te nn. R . A pp. P .3 App e al a s o f Rig ht ; J udgm e n t of th e Ci rcu itCo ur t A ffirm e d in P ar t a nd Reve rsed in Par t.

H ER SCH EL P I CKE N S F RAN KS , J . delivere d the opinion of the court, in which H OUS TON M. G O D D A RD , P.J ., and C H A RLES D. S US ANO , J R ., J ., joined.

W. G e ra ld T idw e ll, Jr., Chatta no og a , T e nn e sse e , f

or Ap pe lla nt.
Wil liam B. McK enzie, Dec atur, Te nnessee , for Appe llee.

OP IN ION

I n this declaratory

judgme nt actio n fi led by Fa rmers Mutual of

Tenne ssee (“ Fa rm e r s ”) , aga i n s tAt h en s I n s u ra n ce Age n cy (“ Age n cy ”) , an d

C h ar l es an d

C ar o l y nS p u rl i n g, (“Insureds” ), the Tr ial Court ordere d Fa rm er s t o p ay insureds for

their loss under the policy and d i s m i s s e d F ar m e r s ’ c l a i m a g a i n s tt h e a g e n c y.-2- Fa rm er s al l ege d

t h at i n s u re d s p u rc h as ed h o m eo wn er s i n s u

ran ce fr o m F ar

m e r s t h r o u gh the ag ency

and that the a

pplication for insurance c ontained seve ral mate rial misrepre sentations of materia l f act. The insured house was destroy ed by fire on June 29, 1999, and F arme rs bec ame a war e of t he mi srepr esentations during its investigation of t he fire loss. Plainti ff a lso asserted that if the
a g e nc y wa s r e sp on sib le fo r t

he mis re pr e se ntatio n, the n it sh ou ld i nd e mni fy

F arm e rs

. Following an evide ntiary hear ing, the Trial Court ruled that t h e i nsured, Char les Spurl ing , d id n ot s ig n th e a pp lic a tio n f

or the ins ur anc e po lic y , a

nd that th e ins ur e ds we re no t g uil ty of any fault or mate rial re prese ntations relating to the taking of t he application for insurance or the issuance of the pol icy

. He de clar ed the insure ds were entitled to full policy benef its of $75,000.00 plus pre-judg ment interest in the amount of $13,722.00. H e ultimately denied rec overy by Fa rmers ag ainst the ag ency , and also a war ded a ba d faith pena lty to the insureds for

their attorne y ’s fe es. The evidenc e does not pre ponderate ag ainst the Trial Court’s finding s of fac t. Tenn. R. A pp. P. 13(d).

On a pp e a l, F arm e rs ha s r a ise d th e se iss ue s:
1. Di d th e Tr ia l Co ur t e rr in h old ing th a t F arm e rs wa s n ot e nti tle d to i n d e m n i f i c a t i o nf r o m t h e a g e n c y?

2. Di d th e Tr ia l Co ur t e rr in g ra nti ngpr e -j ud g me nt i nte re st t o th e ins ur e ds ?

3. Di d th e Tr ia l Co ur t e rr in a sse ssi nga

ba d f a ithpe na lty

a g a ins t F arm e rs ?

F ar m e r s i n s i s tt h e T r i a l C o u rt e r r e d i n d e n yi n g i n d e m n i f

i c a t i o na g a i n s tt h e a g e n c y, be c a us e the Tr ia l Co ur

t f ound tha t th e ins ur e ds we re no t g uil ty of any fa ult or mis re pr e se ntatio n w ith reg ard to the a

pplication or issuance of the policy , and the Court further found that the sig nature on the application was not Spurling’s. Thu s , the ar g ument g oes that the a g ency was guilty

of the misrepre sentation and should indemnify Fa rmers in this action.

No c on tr a c t f

or ind e mni fi c a tio n w a s off e re d in e vid e nc e , h ow e ve r, our S up re me Court has long rec og nized that indemnific at ion can r esult from an e x press c ontrac t betwee n the parties, or

an oblig ation to indemnify can “ar ise by implication from the re lationship of the parties”

. Ho us e bo ati ng

Cor p. of A me ric a v . M

ar sh all , 553 S.W .2d 588 (Tenn. 1977)

. The Tr ial Court decided this issue on the ba sis of comparat i v e fa u lt, however , the issue for c onsideration is whethe r there is an implied right of ind em n i fi cation base d upon the p ri n ci p al / age n tre l at i o n s h i p b et we en Fa rm er s an d At h en s

. As ex p l ai n edi n4 3 Am

. J u r. 2 d I n s u ra n ce, §135, p. 218:

An insuranc e ag ent who fails to make a full disclosure of all matters c oncer ning the risks and hazards of

a prospe ctive insurable interest, or to re port th e i s s u an ce of a policy as dire ct ed i n his contrac t of ag ency , may incur liability

to the insurer f

or e xpos ingthe ins ur e r t o li a bil ity fo r c la ims of

los s und e r p oli c ie s, wh e re su c h c la ims-3- natura lly result from the a g ent’s wr ong ful conduc t. I t must be proved, howe ver, that the ag ent’s conduc t w as the proximate cause of the loss to the insurer, a nd wher e the ins ur e r w a s n ot p re

jud ic e d b y

the fa ilure to r e po rt

the po li cy iss ua

nc e or to f ull y assess the ri s k i n v olved, and would have done nothingdiffer ently or incurr ed no g re a te r l os s w ithor

wi tho ut s uc h k

no wl e dg e, th e ag e nt m ay e sc a pe lia bil ity fo r h is
wr on g fu l c on du c t.
Acc ord: Virginia Surety Co., Inc. v. Lee , 402 S.W. 2d 71 4 (T e nn . Ct. App . 1 96 4) ; Tra ns am e ric a I ns

. Co. v . P arro tt , 531 S.W .2d 306 (Tenn. Ct. App. 1975).

As a rule , the ca ses demonstrate an ag ent m ay be held liable t o an ins uranc e compa ny when his conduc t cause s the i n s u rance c ompany to suffer a loss that it otherwise would not have suffe red. In t h i s ca s e, t he only proof f rom Fa rmers on this issue was f rom Rufus Watson, the
mark e tin g mana g e r f

or F arm e rs . H e state d that he fe lt F arm e rs wo uld no t ha ve iss ue d th e po lic y

if they had see n the “be fore ” photos of the house. H oweve r, F arme rs did issue the policy without having seen a

ny photos, b as ed upon the application, which cle arly contained misre prese ntations about the prope rty . Watson admitt ed, however, that he could not say Fa rmers would not have issued t h e p o l i c y i f

t h e r o o f w a s n o tl i s t e d a s n e w , o r i f t h e a p p l i c a t i o nd i d

n o ts ay t h e h o u s e h a d

v i n yl siding. He further testified t hat he assumed from the application that the $75,000.00 value wa s the purcha se price plus the cost of renovations, a s the cove rag e soug ht was $75,000.00. Ther e wa s no proof introduc ed at tria l that Far mers would not have issued the policy if the application had been
corr ect. Watson admitted that the application repre sented the house was be ing c ompletely g utted, y et Fa rmers still issued the policy with no photos of the house and ha ving done no inspection.

Moreove r, at the time of the loss, the information contained on the application wa s then substantially corr ect, as all of the renovations ha d been completed by that time. T h e i nsured testified that every

thing in the hous e had been renovated and that he had, in f act, put on a ne w roof, installed new wiring , a bre aker box , and new

viny l siding. He g ave the opinion that the house wa s worth a t le a s t $ 7 5 , 0 0 0

. 0 0

. T h e e v id e n c e s h o w s th a t F ar me r s f a il e d to e s ta

b li s h th a t it ’ s loss was
so le ly a ttr ibuta ble to t he mis c on du c t of

the a g e nt. The Supreme Court has also re cog nized t h e “u n i versa l rule that there can be no rec overy wher e ther e wa s concur rent ne g lige nce of

both indemnitor an d i n d em nitee unless the indemnity

contra ct provides f

or indemnification in such case by ‘cle ar a nd unequivoca l terms’”. K r o ger Co. v. Giem , 387 S.W .2d 620 (Tenn. 1964) . Whil e Kroger inv o lv e d anin d e mn it

y issue betwee n joint tortfeasors, its teac hing is a pplicable he re, a

nd further bolsters the rule that the ag ent should not be held liable in indemnity to an insuranc e compa

ny , wher e the insura

nce c ompany ’s own neg lige nce c ontributed to the issuance of the policy and t h e ensuingloss. W e af firm the Tria l Court’s ruling for the r easons state d.

Fa rmers a rg ues that the Tr ial C o u rt err ed in g rantingprejudg ment interest to the Spurlings, al le g in g

that the Spurlings r ece ived a “ windfall” be cause their prope rty was “ g rossly

overinsured” a

nd they would be more than made whole.-4- Fa rmers argues that the house was not w orth $75,000.00, and reli ed u p o n the testimony of an a djuster who estimated that t h e house wa s only approximately

1000-1200 squar e fe e t, a nd ho us e s o f t

hat are a we re on ly

wo rt h $ 30 .0 0 to $4 0. 00 pe r s qu are fe e t. H e of fe re d n o b a sis for this belief, a

nd o ff er ed no compa

rable listi ng s in that area . The insure d testified that he purc ha se d th e ho us e fo r $22, 50 0. 00, a nd sp e nt a pp ro xima te ly

$3 8, 00 0. 00 fo r m a te ri a ls a nd so me l a b o r , h a v i n g d o n e m o s to f t h e l a b o r h i m s e l f o r w i t h t h e h e l p o f

f a m i l y m e mb e r s

. A d d i t i o n a l l y, Watson admitt ed that the house could have been worth $75,000.00 afte r the re novations were done.

Whil e F arm ers in iti a te d th e de c larator y jud g me nt a c tio n, the ins ur e ds ha d to wa it
near ly four y ear s to be paid for

the loss of their home, throug h no fault of their own. Prejudg ment interest is a

n element of damag es to be awa rded in a ccor dance with principles of e quity

. See Ot is v. Cambridge Mut. Fire I ns. Co. , 850 S.W .2d 439 (Tenn. 1992). The Trial Court in awa rding prejudgme nt interest did not abuse its discretion, and w e af firm the pre -judg ment interest aw ard. Finally , Fa

rmers a rg ues t h at the Trial Court wa s in error to order it to pay

the insureds’ attorney s fee s as a ba d faith pena lty , since it broug ht the decla rator y j u dg ment action seekinga dete rmination of the rig hts and responsibilities of the pa rt i es. The insureds soug ht an
awa rd of attorney ’s fe es, pursua nt to Tenn. Code Ann. § 56-7-105. We have pr eviously rec og nized that the statute is penal in natur e, and must be stric tly construed. Hu rle

y v

. Te nn esse e Fa rm e rs M ut. Ins. Co. , 922 S.W .2d 887 (Tenn. Ct. App. 1995). I n Hurley , we sa id:

Under the holding of

our cour ts, before there can be a recove ry of pena lty

under T.C.A. § 56-7-105, (1) the policy of insuranc e must, by

its terms, have be come due and payable, ( 2) a f

ormal dema

nd for pa y ment must have bee n made, ( 3) the insure d must have wa ited 60 day s after making his demand bef

ore f iling sui t (u n l es s there
was a ref usal to pay

prior to the expiration of the 60 day s), and ( 4) the re fusal to pay must not have bee n in good f aith. (Emphasis supplied).

This c ase is f

actua lly simil ar to the c ase of Sisk v. Vall ey Forge Ins. Co. , 640 S.W .2d 844 (Tenn. Ct. App. 1982). I n Sis k , the plaintiff soug ht auto insurance from her ag ent, who obtained
cover ag e fr om the I nsuranc e Company . She suffe red a loss and cover ag e wa s den i ed

. The Tr ial Court held the insuranc e compa ny li ab l e, an d as sessed a

bad fa ith penalty , explaining that the pla int if f h a d to br ing su it to re c ov e r and the Court too k ju dic ia l no tic e that su c h a c tio n e nta ils c os t, attorney ’s fe es, etc

. Id. at 851.

On app eal we said: “incur ring the expense of a

n Attorney

is not a fac tor to be considere d in determining whether the re fusal to pay

was in ‘ba d faith’” , and fur ther:

The burde n of provingbad fa ith of an insuranc e compa ny is on the plaintiff . . .. The bad fa ith penalty

is not recove rable in e very ref usal of an insurance company to pay
a los s. An ins ur anc e c omp any

is e nti tle d to re ly

up on a va ila ble de fe ns e s and

re fu se p ay m en t i f t h er e i s s u

b s t an t i al l ega l gro u n d s t h at t h e p o l i cy d o es n o t af fo rdco v er age-5- for the a lleg ed loss. I f an insura nce c ompany

unsucce ssfully

asser ts a d ef en s e and the def ense w as made in g ood faith, the statute does not pe rmit the imposing of the b a d f a i t h p e n a l t y.
Id. at 852.

T h e C o u rt t h e n h e l d t h er e w as a f

ac tu al b as i s fo r r ai s i n g t h e i s s u e o f n o n -c o v er age and the ba d fa i t h p enalty was not base d upon misconduct of the insura nce c ompany , but on
ec o n o m i c h ar d s h i p t o t h e i n s u re d , wh i ch wa s i mp ro p er u n d er t h e s t at u t e. I n t h i s ca s e t h e T ri al J u d ge in a wa rd inga tto rn e y ’s fe e s, sa id: . . . [t ]he concurr ent neg lige nce of the principa l and its ag ent has re su l t ed in the laws uit and the a dd iti on a l e xpe ns e (i n th e natur e of a tto rn e y ’s fe e s) to t

he le g a lly fa ult le ss i ns ur e d. Ne g lig e nc e is a fact or , a nd in t his c a se the c on tr oll ingfa c tor , in deter mining whe ther the insura nce c ompany

acte d in bad fa ith.
Thus, while the Tria l Court stated that neg lige nce w as the c ontroll i n g factor, the actua l controlling f

actor was the Court’s c oncer

n for the “leg ally faultless” insure ds, having to pay attorney ’s fe es, espe cially since e arlier

the Court had obser

ved that the i ssues raised by Fa rmers w ere “leg itimate”.

The re cord de monstrates that F arme rs did have a leg itimate i s sue conc erningthe mis re pr e se ntatio ns on

the a pp lic a tio n a

nd wh o ma de the m. It c ann ot b e sa id t hat F arm e rs a c te d in b a d f a i t h i nf i l i n g t h e d e c l ar a t o r

y j u d g m e n ta c t i o nt o h a v e th e C o u rtd e c i d e t h a ti s s u e

. A c c o r d i n g l y, we hold that the Court improper ly assessed a

bad fa ith penalty

and the a war d is rever sed.

The c ost of the appe al is assessed to F arme rs Mutual of Te nnessee

.

_________________________ H ER SCH EL P I CKE N S F RAN KS , J.