# FILED
December 21, 1998 Cecil Crowson, Jr. Appellate Cou rt Clerk IN THE SUPREME COUR T OF TENNESSEE AT KNOXVILLE

FOR PUBLICATION DAVID ALCAZAR, ) Filed: December 21,1998 ) Plaintiff-Appellant, ) BRADLEY COUNTY ) v. ) Hon. Earle G. Murphy ) Judge CHRISTOPHER HAYES, ) ) Defendant, ) Supreme Court ) No. 03-S01-9804-CV-00035 ) and ) ) GOVERNMENT EMPLOYEES ) INSURANCE COMPANY, ) Defendant-Appellee, ) Uninsured Motorist Car rier )

FOR APPELLANT : FOR APPELLEE: Jimmy W. Bilbo Donald W. Strickland Logan, Thompson, Miller, Bi lbo, Steven W. Grant Thompson & Fisher, P.C. Grant, Konvalinka & Harrison, P.C. Cleveland, TN Chattanooga, TN
FOR AMICUS CURIAE Tennessee Defense Lawyers Assoc. Tennessee Trial Lawyers Assoc. Brian H. Trammell Thomas Stratton Scott, Jr. Knoxvill e, TN Knoxvill e, TN National Association of Independent Insurers G. Brian Jackson Amanda Haynes Young Nashvill e, TN



## O P I N I O N
TRIAL COURT AND COURT OF APPEALS REVERSED; CASE REMANDEDTO TRIAL COURT DROWOTA, J.-2- OPINION

This suit arose from a motor vehi cle accident in which plaintiff David Alcaza r was injured. Alcazar

appeals from the Court of Appeal’s affir mance of the trial court’s award of summary judgment to defendant Governme nt Employees Insurance Company

(“GEICO”). The sole issue for our determination is whether an insurance policyis autom atically forfeited when the insured does not comply with the policy’s notice provision, regar

dless of whether the

insurer has been prejudic ed by the d elay. For the reasonsstated hereinafter, we rev erse the judgments of the low er courtsand remand the case to the trial c ourt.

I. FACTS & PROCEDURAL HISTORY

On Novembe r 3, 1995, plainti ff Al cazar and defendant Christopher Hayes were working in chicken houses on a farm in Bradley County owned by Alcazar’s mother. Alcazar asked Hayes

for a ride to pick up Alcazar’s t ruck. Hayes agreed under the cond ition that Alcazar ride on the trunk of the car, since he w as extremely dirty

. Alcazar acquiesced and during the drive Alcazar was flung from the trunk, striking his head on the paved roadway. Alcazar, who w as eighteen years old a nd living with his mother, was hospitalized fo r a couple of days and then retu rned home. Alcazar allegesthat he suffers injuries as a r esult ofthe accident, including permanent brain damage.

At the time of the accident, Alcaz ar was covered under

a “Family Automobile Insurance Policy” issu ed by GEICO to Alcaza r’s mot her, Deborah Wheatley. An “uninsured motorist coverage” provision in this policy includes the following clauses: 1. Notice As soon as po ssible

aft er an accident notice must be g iven us or our authorized agen t stating: (a) the identity of the

insured ;1 Haye s is no t a pa rty to th is app eal. -3- (b) the time, place and detail s of the accident; and (c) the names and addresses of the injured, and of any witnesses.

* * * 3. Action Against Us Suit will not lie against us unless the insured or his legal repr esentat ive have fully complied with all the policy terms. (Italics in original). It is undisputed that Alcaz ar qualified as an “insur ed” under the policy.
Although the exact date that GEICO r eceived notice of the accident is somewhat

uncertain, it is clear

that notice was not provi ded until approximately one year after the accident. At

this time, Alcazar filed a Co mplaint seeking damages for his personal injuries suffered as a result of the accident. Hay es 1 was listed as a defend ant and GEICO was added as a party d efenda nt in acco rdance wi t h Tennesse e’s uninsured motorist statute, Tenn. Code Ann. §§ 56-7-1201 et seq. (Repl. 1994 & Supp. 1998). Alcazar an d Whe atley testified that notice was no t provided to GEICO earlier because they mistakenly assu med that the policy did not appl y s ince Alcazar was not the driver of the automobil e involved in the accident. Wheatley also testified that she did not int end to make a claim on the insurance policyuntil nearly a year after the accident, because she did not l earn until this time the exten t of Alca zar’s brain injury.

GEICO filed a motion for summary judgment, as serting th at under the t erms of the p olicy, they could no t be sued since the notice prov ision was breached. Alcazar insisted that notice was provided “as soon as p ossibl e” and, al ternative ly, argued that the policy could not be forfeited since there was no evidence that GEICO
was prejudiced by the delay . The trial court grant ed sum m ary judgment to GEICO and Alcazar appealed. The Court of Appeals affirmed, f inding that GEICO could not be listed as a party defendant s ince Alcazar breached the notice provision. Although finding plaintiff’s “no prejudice” argument “appealing,” the Court of Appeals, citing2 For the reasons ar ticul ated by t he Court of Appeal s, it i s clear tha t there i s no genuine issu e of material f

act that Alcazar di d not provi de notice “as soon as possibl e” in acc orda nce with th e polic y. First of all , the p laint iff’ s ign orance that he was not incl uded withi n the coverage i s not a legal justif icati on. Se condly, the record does not contain any evidence sugge sting that his brain injury prohibited him fro m co mplying w ith the notice provision. -4- case law precedent

in this State, held that prejudi ce to the insurer is immater ial to the issue, stating: “It is not our prerogative to overrule controlling Supreme Court precedent.”

II. ANALYSIS

The sole issue for our rev iew concerns whether

an insured, who

fails to comply with the notice provision of his or her insurance policy , may nevertheless enforc e the policyin the event that the insurer has not been preju diced by the d elay. 2 While conducting this review, w e must r eexamin e established precedent in thi s State holding that prejudice to the insurer is irrel evant to the inquiry

.

A. Standard o

f Review Summary judgment is appropriate i f the m o vant, GEICO, demonstrates that
no genuine issues

of material fact exist and that GEICO is entitled to a judgment as
a matter o

f law . Tenn. R. Civ. P. 56.03. We must take the strongest view of the evidence in favor of the nonmoving par ty, Alcazar, all owing all reasonable inferences in favor of Alcazar and

discarding all counter

vailing evidence

. Shadrick v. Coker , 963 S.W.2d 726, 731 (Ten n. 1998) (citing Byrd v. Hall , 847 S.W.2d 208, 210-11 (Tenn. 1993)). Since our

review concerns only questions of law, the trial cour

t’s judgment is not presumed correct, and our review is de novo on the record before this Court

. Warren v. Estate of Kir k , 9 54S. W. 2d 722, 723 (Tenn. 1997); Bain v. Wells , 936 S.W.2d 618, 622 (Tenn. 1997).

B. Construction of Insurance Contracts In general, c

ourts shoul d construe i nsurance contracts in the samemanner as any other contract. McKimm v. Bell , 790 S.W.2d 526, 527 (Tenn. 1990); Draper v.-5-

GreatAm. Ins. Co. , 458 S.W.2d 428, 432 (Tenn. 1970). In Bob Pearsall Motors, Inc. v. Regal Chrysler-Plymouth, Inc. , 521 S.W.2d 578 (Tenn. 1975), we stated: The cardinal rule for interpr etation of con tracts is to ascertain the intention of the parties and to give effect to that in tention, consistent with legal principles. It is the Cou rt's duty to enforce contr acts according t o their p lain terms. Further, the language used must be taken and understood in its plain,ordinary and popular sen se. T he courts, of course, are prec luded from creating a new c ontract for the parties. Id

. at 580 (internal citation s omitt ed); see als o Galyon v. First Tenn. Bank , 803 S.W.2d 218, 219 (Tenn. 1991); Whaley v. Underwood , 922 S.W.2d 110, 112 (Tenn. App. 1995).

Tennessee, like most states, recognizes the validity of conditions precedent forinsurance coverage, including uninsured motor ist coverage. McKimm , 790 S.W.2d at 528; Phoenix Cotton Oil Co. v. Royal Indem. Co. , 140 Tenn. 438, 442, 205 S. W. 128, 130 (1918). In the instant case, GE ICO cont ends that Alcazar’s compliance with the notice provision w as a condition precedent for cov erage. Because Alcazar failed to prov ide n otice “a s soon as possible” pursua nt to the insurance contract, GEICO asserts that coverag e was automatically for feited.

C. Traditional A

pproach For years Tennessee has consis tently adhered to the traditional common law approach that: (1) notice is a condition precedent to reco very under the polic

y and (2) there need not be any showi ng of prejudice. Hartford Acc. & Indem. Co. v. Creasy , 530 S.W.2d 7 78 , 779 (Tenn. 1975) (citing Phoenix Cotton , 205 Tenn. 438, 205 S.W . 128). Although this approach i s grounded
on a strict contractual i nte rpr etation methodology, this Court has acknowledge d underlyingpublic policy rati onales that serve as the basis for the inclusion of this “v ital and indis pensabl e conditi on prece dent” in a n insuran ce policy: [W]e recognize that the noti ce requirement of an insuran ce p olicy providinguninsured motorist coverage bas ed on hit-and-run incidents, wh i le founded in contract, also are deeply rooted in public policy considerations. Notonly is the insuror entitled to notice in order that it maymake prompt investigati on and prepare for the defense of the3 A prompt notice r equirement has al so been justi fied becau se it enab les the insu rer to preserve an adeq uate res erve fun d. Utica M ut. Ins. v. Fireman’s Fund Ins. Co. , 748 F.2d 118, 121 (2d Cir. 1984). Furt hermore, in cert ain cir cumstances in which an i nsur ed’s conduc t is harming the environm ent, prompt notice benefits t he public by enabling the insur er to preven t the in sure d’s continued condu ct. See Com me rcial U nion I ns. v. Int’l Flavors & Fragr ances , 822 F.2d 267, 271 (2d Cir. 1987 ). -6- claim, it is entitled

to protect its interests i n an area susceptible to the presentation of spurious claims. Also, it is i n the public interest that litigation be minimized and, to this end, it is ess ential that theinsurance company be in a position to settle claims on a knowledgeable basis. Creasy , 530 S.W.2d at 779; see also Allstate Ins. Co. v. Fitzgerald , 743 F. Supp. 539, 542 (W.D. Tenn. 1993). One commentator has noted: The purpos e of a policy provisi on requiring the ins ured to give the company

prompt notice of an accident or claim is to give theinsurer an opportunity

to make a timely and adequate investigat ion of al l the circumstances. An adequate investig ation often c an not be made where notice is long delayed, because of the possible removal or lapse of memory on the part of witnes ses, t he loss of opportunity for examination of the physica l su rroundings and making phot ographs thereof for use at the trial, and the possi ble operation of fraud, collusion, or cupidity. Such a requirement tends to

protect the insurer against fraudulent claims, andalso against invalid claims made in good faith. If the i nsurer is given th e opportunity for a timely investigation, reasona ble c ompromises and settlements may be made, thereby avoiding prolonged an d unnecessary litig ation. 1 Eric Mills Holmes

& Mark S. Rhodes, Appleman on Insurance § 4.30 (2d ed. 1996);
see also 13A George J. Couch, et al ., Couch on Insurance § 49:50 (2d rev. ed. 1982); Richard L. Suter, Insurer Prejudice: An Anal ysis of an Expanding

Doctrine in Insurance

Coverage Law

, 46 Me. L. Rev. 221, 223-24 (19 9 4); F. W arren Jac oby, Comment, The Materiality of Prej udice to t

he Insurer a s a Res ult o f the Insu red’s Failure to Give Timely Notice , 74 Dick. L. Rev. 260, 262-63 (1970); Comment, 68 Harv. L. Rev. 1436, 1436-38 (1955)

. Conversely, the public is harmed by untimely claims due to in creased premiums and in adequate insurance administr ation. 3 Waters
v. American Auto. Ins. Co. , 363 F.2d 684, 687 (D.C. Cir. 1966); Yorkshire Indem. Co.
v. Roosth & Genecov Prod. C o. , 252 F.2d 650, 656-57 (5thCir. 1958); Comment, 74 Dick. L. Rev. at 263.

These sentiments have been echoed by courts in other

jurisdictions

that have ad he red to the traditional approach. See , e.g. , American Home Assur. Co. v. Int’l Ins. , 684 N.E.2d 14, 16 (N.Y. 1997) (“[I]t is sett led law in New York that ‘[a]bsent a4 Although the Arkansas Court of Appeals, sitting en banc, held that prejudi ce is irrelevant w ith regard to clai ms-made policies, it suggested t hat a dif ferent ou tco me would apply t o occurrence polici es. Id

. at 288. Under a “clai ms-made” policy , coverage i s only pr ovided i f a claim is made during the policy

period. Under an “occurrence” pol icy, coverage is pr ovided i f the qual ifyi ng incident occurs within the peri od of the pol icy, regardless of when the clai m is filed. Id . at 285. A federal district court has subsequently

held that

Arkansas law still applies the tra ditional rule to o ccurre nce po licies. State Farm Fire & Cas. Co. v. Michael , 822 F. S upp. 575 , 581 (W .D. Ark. 1 993). -7- valid excuse, a

failure to sati sfy

the notice requirement v itiates the policy . .. and the insurer need not show prejudice befor e it can assert the defense of noncompliance.’”) (internal citationsomitted)); Marez v. Dairy land Ins. Co. , 638 P.2d 286 (Colo. 1981); Public Service Co. v. Wallis , 955 P.2d 564, (Colo. App. 1997); Viani v. Aetna Ins. Co. , 501 P.2d 706 (Idaho 1972), overruled on other gr ounds , 565 P.2d 564 (1977); State Farm Mut. Auto. Ins. Co. v. Cassinelli , 216 P.2d 606 (Nev. 1950); Campbell & Co. v. Utica Mut. Ins. Co. , 820 S.W.2d 284 (Ark. App. 1991) 4 ; Hartfor d Ins. Gro up v. Liberty Mut. Ins. Co. , 311 A.2d 506 (D.C. App. 1973).

D. Modern Trend While once the ov e rwhelming majority approach in this country , the number of jurisdicti ons t hat still follow the tr aditional view has dwindled dramatically

. See Charles C. Marvel, Annotation, Modern Status of Rules Requiring

Liability Insurer to Show Preju dice to Esc ape L iabi lity B ecau se of Insu red’s Failure or

Delay In Giving Notice of Accident or Claim, or in Forwarding Suit Papers , 32 A.L.R. 4th 141, § 3[a] (1984 & Supp. 1997); 13A Couch on Insurance §§ 49:338 & 49:50; 1 Appleman on Insurance § 4.30. In recent years a “mo dern trend” has developed, and a vast majority of jurisdictions now c

onsider whether

the insurer has been prejudiced by the insured’s untimely notice. See id .; 32 A.L.R. 4th 1 41, §§ 3[b]-5; 13A Couch on Insurance §§ 49:339 & 49:50. Al thoug h these courts have enumerated various public policy justifications to support this shift, a

review of these cases indicates that three rationales ar

e partic ularly pervasive: 1) the adhesive nature of insurance contr acts; 2 ) the public policy o bjective of compensating tor t victims; and 3) the inequity o f the ins urer rece iving a windf all due to a technic ality.
Many states ha ve recognized the adhesiv e nature of insurance contracts as-8-

a justification for a more liberal approach. In reality, most insurance policies are form contractsdrafted by the insu rer, and t he insure d has litt le, if an y, bargaining power. When adopting the modern trend, the Supreme Court of Pennsylv ania in Brakeman v. Potomac Ins. Co. , 371 A.2d 193 (Pa. 1977), cogently arti culated this justification as follows: The rationale underlying the strict contractual approach reflected in our past decisions is that courts should not presume to interfere w ith t h e f ree dom of private contracts and r edraft insurance policy pr ovisions where the intent of the parties is expressed by cl ear

and unambiguous language. We are of the opinion, however, that this argument, based on the view that insur ance pol ici es are private contrac ts in the tradition al sense, is no longer persuasive. Such a position fails t o re cogni ze the true nature of the relationship between insurance companies and their insureds. An in surance contract is no t a negoti ated agreement; rather its con ditions are by and large dictat e d bythe insurance company to t he insured . The only aspect of the contract over whic

h the insured can ‘bargai n’ is the monetary amount of coverage. And . . . notice of accide nt provisions . . . are uniformly found in liability ins urance policies. Indeed, a r eview of cases indicates that often the policies expre ss the condition in identic al language. Id

. at 196 (internal citations omitted); see also Coopera tive Fire In s. v. White Caps, Inc. , 694 A.2d 34, 37 (Vt. 1997); Jones v. Bituminous Cas. Corp. , 821 S.W.2d 798, 801-02 (Ky. 1991); Aetna Cas. & Surety Co . v. Murphy , 538 A.2d 219, 222 (Conn. 1988); Ouellette v. Ma ine Bon ding & Cas. Co. , 495 A.2d 1232, 1235 (Me. 1985); GreatAm. Ins. Co. v. C.G. Tate C onst. , 279 S.E.2d 769, 774 (N.C. 1981); Johnson Controls, Inc. v. Bowes , 409 N.E.2d 185, 187 (Mass. 1980); Suter, 46 Me. L. Rev. at 234-35.

Another predominant basis for the modern trend is that it advances the public po licy goal of compensating accident victims, including innocent third parties. According to the Court i n Brakeman : Insurance contractsare notpurely private matters between insurance co mpanie s and their insureds; rather there is a public interest in automob il e liability insura nce contracts and that is the protection of innocentvictims of

automobile accidents. This publ ic interest would be disserved by a rule that denied an accident victim recov

ery against the in surance company because it receiv ed late notice of the accident, even th ough it

suffered no prej udice as

a conseq uence th ereof. Brakeman , 371 A.2d at 198 n.8 (internal citations omitted); see also C.G. Tate , 279 S.E.2d at 774 (“[A]doption of the mo dern rule . . . promotes the s ocial function of-9-

insurance coverage: provi ding compen satio n for injuries sustained by innocent members of the public.”); Weaver Bros. Inc. v. Chappel , 684 P.2d 123, 125 (Alaska 1984); Mil ler v. Dilts , 463 N.E.2d 257, 265 (Ind. 1984); Oregon Au to. Ins. C o. v. Salzberg , 535 P.2d 816, 820 (Wash. 1975); Cooper v. Government Empl oyees Ins. Co. , 237 A.2d 870, 873-74 (N.J. 1968) ; Fox v. National Sav. Ins. Co. , 424 P.2d 19, 25 (Okl. 1967); Suter, 46 M aine L. Rev. at 235.

A third popular rationale s upporting themodern trend focuses on the intent of the incl usion of the notice provision i n the insurance contract. I t is reasoned that notice requirements are devi sed in order to insulate the insurer from prejudice and, thus, in the absence of

prejudice the notice prov isions should not be stri ctly enforced. One court has noted: The function ofthe notice requirements i s simply to prevent the insurer from being prejudi ced, not to provide a technical escape-hatch by which to deny cove rage in the absence of prejudi ce. . . . Miller v. Marcantel , 221 So.2d 557, 559 (La. App. 1969). Conseque ntly, courts ha ve shifted away from the technical aspects of contractual interpre tati on so that an insurer can not take advantage of “an undeserv ed windfall” as a result of forfeiture. Ouellette , 495 A.2d at 1235 (citing Brakeman , 371 A.2d at 196-97); see also Murphy , 538 A.2d at 420; Weaver Bros. , 684 P.2d at 125.
E. Public Policy Public policyin Tennessee "is to be found in its cons titution, statutes, judici al dec isions an d applicable rules of common law.” State ex rel. Swann v. Pack , 527 S

. W.2d 99, 112 n. 17 (Tenn.1975), cert. denied , 424 U.S. 954, 96 S.Ct. 1429, 47 L.Ed.2d 360 (1976) (citin g Home Ben eficial Ass’n. v. White , 177 S.W.2d 545 (Tenn. 1944)); see also Crawford v. Buckner , 839 S.W.2d 754, 759 (Tenn. 1992). Although the determination of public policy is pr imarily a function of the leg islature, thejudiciary maydetermine public policy in the absence of any constitutional or statutory declaration. Crawford , 839 S.W .2d at 759 (citin g Hyde v. Hyde , 562 S.W.2d 194, 196 (Tenn.1978); Cavender v. Hewitt , 145 Tenn. 471, 475, 239 S.W. 767, 768 (192 1)).-10-

In Speigel v. Thomas, Mann & Smith, P.C. , 811 S.W.2d 528 (Tenn. 1991), this Court stated: Unless a private contract tends to harm the public good, publi c interest, or public we l fare, or to conflict with the constitution, laws,or judicial decisionsof Tennessee, it does not violate public policy. The reverse is also true: A contract w ith a tendency to injure the publ i c violates public policy. Id . at 530 (internal citations omitted).

We believe that the p ublic policy of Tennessee is consistent with the overwhelming

number of our sister states tha t have adopted themodern tr en d. We first note that this Court has explicitly found that “[a]n insurance policy is a contract of adhesion drafted by the insurer.” Bill Brown Const. v. Glens Falls Ins. , 818 S.W.2d 1, 12 (Tenn. 1991). In Brandt v. Mutual Ben. Health & Acc. Ass'n , 202 S.W.2d 827 (Tenn. App. 1947), our Court of Appeal s stated: It is a general princi ple, pervading the law of all forms of insurance, that policiesshall be li berally constr ued in favor of the insured. This because courts do not shut their ey es to realities; they know that the policyis a contract of “adhesion,” i.e. n ot one whic h the part ies have reached by

mutual negotiation and concession, not one which truly expresses

any agreement at whic h they have arriv

ed, but one wh ich has been fixed by the insurer and to which the insured must adhere, if he chooses to have insuranc e. Id

. at 831 ; see al so Harrell v. Minnes ota Mut. Life Ins. Co. , 937 S.W.2d 809, 814 (Tenn. 1996); Tennessee Farmers Mut. Ins. C o. v. Witt , 857 S.W.2d 26, 32 (Tenn. 1993). As such, we attempt to construe insurance contracts so as to pr ovide coverage. Id

.

In addition, the public polic y of this State has

l ong promoted the notion that victims of torts should recover compensation for thei r injuries. See , e.g. , Collins v. East T., V. & G. R.R. Co. , 56 Tenn. (9 Heiskell) 841 ( 1872). Tennessee’s uninsured motorist coverage statute, Tenn. C ode Ann. §§ 56-7-1201 e t seq . (199 4 Repl. & Supp. 1998), was enacted “for the protection of persons insured thereunder who are legally en titled to recover compens atory damages from owners or operators of uninsured motor v eh ic le s. ” Ten n. Co de An n. § 5 6- 7- 12 01 (a ) ( Su pp . 1 99 8) . We b elieve that this public policy may be thwarted by the harsh application o f th e5 In City of Memphis v. Overton , 392 S.W.2d 98, 100 (Tenn. 1965), thi s Court acknowledged that “it i s axiomatic th at thi s State has l ong approved of t he doctrine o f stare de cisis.” However, we also noted Justice Brande is’s di ssent in Burnet v. Coro nado Oil & Gas Co. , 285 U.S. 393, 52 S. Ct. 443, 76 L.Ed . 815 (193 2), qu oting appr oving ly: Stare decisis i s not . . . a universal inexorable command . “The rule of stare decisis, though one tending to consistency and un iformity of decision is not inflexibl e”. Overton , 392 S.W.2d at 100 (quoti ng Burnet , 285 U.S. at 405-06 , 52 S.Ct. at 447 (Bra ndeis, J., dissenti ng) (internal citation s om itted)); see also Planned Parentho od v. Casey , 505 U.S. 833, 982- 83, -11- legalistictraditional approach, parti cularl y since innocent third parties risk being adversely affected.

T hird, we agree with our sister states that it is inequitable for an insure r tha t has not been prejudiced by a de lay in notice to reap the benefits flowing from the forfeiture of the insurance policy. In light of the adhesive nat ure of such contracts as well as our inclination to cons true these con tracts ag ainst the drafter /insurer , we believe that

this State’s public policy disfavors the ability of an insurer to escape its contract ual dutie s due to a t echnica lity.
In fact, case law suggests that this Statehas begun to consider prej udice to the insurer when interpreting an insur ance contract. In McKimm v. Bell , 790 S.W.2d 526 (Tenn. 1990), the plaintiffs/insure ds sough t to enforce an uninsured motorist policy. After concludi ng t hat the plaintiffs had provided notice “as soon as practicable”

in accordance with the p ol icy, we considere d whether the insureds complied with a cla use requiring that the i nsureds timely prov ide the insurer with docum entation, such as proof o f loss, medica l forms, and pr operty damage assessments. Id

. at 529-30. We found: In our opi nion, pl aintiffs

acted reasonably under the circumstances and gave the material required information as it became available and wa s requested. Further, there is no sho wing that any prejudice resulte

d to [the insurer] from the actions, or inaction, of the pla intiffs. Id

. at 530; see also Bush v. Exchange Mut. Ins. Co

. , 866 S .W.2d 575, 577 (Tenn. App. 1993).

On one hand, we are reluctant to overturn established precedent in this State that has followed the traditional approach for years. 5 We note, however, that one of112 S.C t. 2791, 28 75, 120 L .Ed.2d 6 74 (199 2) (Sca lia, J., dissenting ).

6 Judge Franks, writ

ing for t he Court, al so stated: This [the modern trend] i s an appeali ng approach since i nsurance polici es, unlike ot her contracts, are not purel y priv ate agreements but affectthe publi c generall y. The argu men t is persua sive and its applicat ion w ould be fair and manif estly equitabl e since the not ice requirementis for

the b ene fit of th e insu rer an d, un til it i s establi shed that non-com pliance has resulted in detriment to the insure r, t he courts should not

predicate a forfei ture on techni cal non-compli ance. Moreo ver, innoc ent third pa rty beneficiar ies are of te n ad vers ely affected by forfe iture of coverages where premiums have been paid for suc h purpo se. Id . at 335.
-12- the main reasons that prompted this Court in 1918 to embr ace the tra ditional approach in Phoenix Cotton was the fa ct that this was the appr oach adopted by nearlyall, i f not all, of our sister states that had considered the issue. Phoenix Cotton , 140 Tenn. at 443-44, 206 S.W. at130. In North River Ins. C o. v. Johnson , 757 S.W.2d 334 (Tenn. App. 1988), our Court of Appeals, i n dicta, commented: Interest ingly, Creasy , in reaffirm ing Phoenix Cotton Oil Co. , noted the opinion quoted with approval a Massachusetts

case holding "notice is one of the essentials of the caus e of action". 140 Tenn. 444, 205 S.W.2d at 130. In 1980, however, Massachusetts in Johnson Controls, Inc. v. Bowes , 381 Mass. 278, 409 N.E.2d 185 (1980), con ceding that i ts prior decisions were too restrictive, prospectively held an insurer would be req uired to prove the noti ce provision had been breached and the breach resulted in prejudi ce to the insurer in order to avoid its obligati ons on the policy. Id

. at 335-36 6 . In fact, our research indi cates tha t only t wo states whose highest
cour ts have considered the issu e within the last tw enty years have continued t o strictly adhere to the traditional appr oach. See American Home Assur. , 684 N.E.2d 14 (New York); Marez , 638 P.2d 286 (Colorado).

Moreover, our position is support ed by the Restatement (Second) of Contracts . Section 229 of the Restatementstates: T o the extent that the non-occur rence of a condition would c aus e disproportionate

forfeiture, a court may exc use the non-occurrence of that condition unless its occurrence was a materi al part of the agreed exchange. Restatement(Second) of Contracts § 229 (1981). A comment to this s ection elaborates this concept:7 See Central Adj ustment Bureau, I nc. v. I ngram , 678 S.W .2d 28, 37 (Tenn .1984); W arren v. Metro , 955 S.W .2d 618, 6 23 (Te nn. App . 1997). -13- In determining whether

the forfeiture is “dispropor tionate,” a court must weigh the extent of the forfeiture by the obligee against the importance to the obligor of the risk fr om which he sought to be pr otected and the degree to which that protecti on will be lost if the non-occurrence o f the condition is excuse

d to the exte nt require

d to prevent

forfeiture. Th e character

of the ag reement may, as in the c

ase of insu rance agreements, affect the rigor w ith which the requi rement is applied. Id

. § 229 cmt. b. Applying this principle to the circumstances at hand, we find that the notice requirement is immaterial to the insurance contract in the event that the insurer is not prejudiced. Consequently, the insured’s failure to comply with this requirement i n such instance is excus ed, since a “disproporti onate forfeiture” ensues

. Id

. ; se e also Murphy , 538 A.2d at 2 21; Sute r, 46 Me. L . Rev. at 235-36; 5 Samuel Williston, Law of Contracts§§ 769-811 (3d ed. 1961 & Supp. 1998); 3A Arthur Corbin, Corbin on Contracts , § 754 (1960 & Supp. 1998). Though we are hesitant to carv e out an exception to the axiom pr oscribing judicial a lteration o

f the terms

of an unambiguous contract, 7 we have determined, du e to co mpelling public policy justifications, that it is now appropriate to depart from a ri gid application of the traditional ap pr oa ch . We join the vast majority of

jurisdictions whi ch take into consideration the degree to which the insurer has been prejudi ced by the delay in noti ce.

F. Burden of Proof After resolving to joi n the modern trend, we must now determine how to incorporatethe consi deration of preju dice into our analys is. In the process, we must balance the equities between the parties. States that consider prejudice essentially f ollow one o f three different approaches: 1) once it is shown that the insur ed has breached the notice provision, the contract is, nevertheless, effec tive un less the insurer shows that it has bee n prejudi ced by th e delay; 2) once it is shown that the insured has breached thenotice provision, a rebuttable presumption exi sts that the insurer has been prejudiced by the d elay; and 3 ) prejudice to the insurer is considered as a factor in the initial inquiry of whether the insu red pr ovided timely notice. See 32 A.L.R. 4th 141, 13A Couch on Insurance §§ 49:338; 49:339; 49:50;8 North Caroli na has a three-st ep process that makes it somewhat ofa nuance from other states: first , it is determined whether timely notice was given; then t he insured must show th at he or she acted in good faith; and fi nally , if goodfaith i s shown, the burd en shifts t o the insur

er to show that

it has been “materially prejudiced by the delay.” Id . at 776. -14- 1 Appleman on Insurance § 4.30.

A clear plurality of st

ates hold that once it is demonst rated that the insured breached the notice provision, the burden of proof is allocat ed to the insurer to prove that it has been prejudiced by the breach. See , e.g. , National Union Fire Ins. Co. v. F.D.I.C. , 957 P.2d 357, 368 (Kan. 1998); Weaver v. State Farm Mut. Auto. Ins. , 936 S.W.2d 818, 821 (Mo. 1997); White Caps , 69 4 A.2d a t 38 (insurer must show “substantial prejudice”); Vermont Mut. Ins. Co. v. Singleton , 446 S.E.2d 417, 421-22 (S.C. 1994) (insurer must show “substantial prejudice”

); Marquis v. Farm F

amily Mut. Ins. Co. , 628 A.2d 644, 649 (Me. 1993); Jones , 821 S.W.2d at 803; Weaver Bros. , 684 P.2d at 126; C.G. Tate , 279 S.E.2d at 775 8 ; Independent School Dis t. No. 1 v. Jackson , 608 P.2d 1153, 1155 (Okl. 1980); Brakeman , 371 A .2d at 198; Salzberg , 535 P.2 d at 819; Rampy v. State Farm Mut. Auto. Ins. Co. , 278 So.2d 428, 434 (Miss. 1973) (insurer must show “substantial prejudic e” ); Cooper , 237 A.2d at 874; Campbell v. Allstate

Ins. Co. , 384 P.2d 155, 157 (Cal. 1963); 32 A.L.R. 4th § 5. Many of these states reason that it is more equitable to place the burden on the insurer, since the insurer is the entity that seeks to repudiate its obliga tions under an adhesive contract. See , e.g. , Brakeman , 371 A.2d at 198; Cooper , 237 A.2d at 874 n.3; Note, 74 D ick. L. Rev. at 272-73. Furthermore, it is reasoned that the insurer is in a much better position to prov e that it has been prejudiced, especially since the insured would ot her wise be forced to prove a negative: that the insur er was not prejudiced. As the Supreme Cou rt of Kentucky stated in Jones : There are two reasons for imposi ng the burden on the insurance carrier to prove prejudice, rathe r than imposing on the claimant the burden to prove no prejudice resulted. The first is the obvious one: it is virtually impossible to prove a negative, so it would be difficult if not impossible forthe claimant to prove the i nsurance carrier suffered no p rejudice. Secondl y, the insuran ce car rier is in a far superi or position to be knowledgeable about t he facts which establish whether prejudice exists. Indeed, it is difficult to imag ine where the claimant would look for evidence that no prejudice exists. Jones , 821 S.W.2d at 803; see also White Caps , 694 A.2d at 38; Weaver Bros. , 6849 Iowa has a nuance whereby the insur

er bears the bur

den of proof in th e event that the insured demonstrates excuse or l egal just ificat ion. Id . (citi ng Met-Coil Sy s. Corp. v. Columbia Cas. Co. , 524 N.W .2d 650, 654 (Iowa 1994)).

10 Wisconsin ha s a s tatute st ating t hat a poli cy may not be for feited pur

suant to a not ice prov ision if notic e is pr ovide d with in one year o f the tim e pro vided in the p olicy, “u nles s the insur er is prejudiced thereby a nd it was re asonably possi ble to meet the t ime limit. ” Wis. Stat. Ann. § 631.81 (1995). Wisconsin courts have hel d that i f notice is provided more than one yea r afte r the tim e specifiedin the pol icy, “there i s a rebuttabl e presumption of prejudice and the b urden o f proof s hifts to the claimant.” Gerrard , 277 N.W .2d at 872 ; see also Rentmeester v. Wisconsin Lawy ers Mut. Ins. Co. , 473 N .W .2d 160, 1 64 (W is. App. 19 91).

11 Ohio co urts app ear to be split on this iss ue. Cf. Owens-Corning Fiberg las v. American Centennial , 660 N.E.2d 770, 784 (Ohio Com.Pl. 1995) , discussed infra

. -15- P.2d at 126; C. G. Tate , 279 S.E.2d at 776; Campbell , 384 P.2d at 157. Another rationale is that this burden alloc ation will encourag e the insurer to undertake a timely preliminary investigation of the in sured’s cl aim in o rder to protect its ow n interest. C.G. Tate , 279 S.E.2d at 775-76.

Some jurisdictions hold that when the i nsured fails to comply with notice requirements, it is presumed that the insurer is prejudiced by

the breach. Thus, the insured bears the burden of rebutting this presumption. See Simp son v. Uni ted States Fid.& Guar. Co. , 562 N.W.2d 627, 631-32 (Iowa 1997) 9 ; Miller , 463 N.E.2d at 265; Murphy , 538 A.2d at 224; Gerrard Realty Corp. v. American States Ins. Co. , 277 N.W.2d 863, 872 (Wis. 1979) 10 ; Tiedtke v. Fidelity & Cas. Co. , 222 So.2d 206, 209 (Fla. 1969); Champion Spark Plug v. Fidelity & Cas. Co. , 687 N.E.2d 785, 791 (Ohio App. 1996); Fillhart v. Western Res. Mut. Ins. Co. , 684 N.E.2d 1301, 1303 (Ohio App. 1996) 11 , 32 A.L.R. 4th § 3[b]. This approa ch is pred i cated upon the fact that the insured is the party “seeki ng to be excused from the con sequence s of a contract provision with which he has concededly failed to comply.” Murphy , 538 A.2d at 224. It has also been reasoned that the i nsured is in a better position to demonstrate that vital witnesses are stil l available and cruci al informaion has not been lost. See , e.g. , Champion Spark Plug , 687 N.E.2d at 792 (stating that the insu rer is “not in a positi on to discern what information may now be unavailable that they could have discovered with timely notice. ”). Acknowledging

tha t the notice provisions ar e included in policies i n order to
ensure that insu rers may conduct a proper inv estigation, the Supreme Cour t of Indiana explained this rebuttable presumption approa ch as follows:12 These Virgini a cases state t hat the insur er need not show t hat it has been prejudiced in the event that th e violation of th e notice cl ause is “substantialand m aterial.” Id .; Walton , 423 S.E.2d a t 192. -16- This adequate investi gatio n is often frustrated by a delay ed notice. Prejudice to the insurance company’s ability to prepare an a dequate defense can therefore be presumed by an unr eason ab le delay in notifying the company about the accident or about the filing of the lawsuit. This is not in conflict with the public policy theory that the court should seek to prote ct the innocent third parties from attempts by insurance compan ies t o deny liability for some insignificant failure to noti fy. The injured party can est ablish some evidence that pr ejudi c e did not occur in the particular situation. Once such evidence is introduced, the question becomes one for the tri er of fact to determine whether any prejudice a ctually e xisted. The insurance carrier in turn c an present evidence in suppor t of its claim of prejudice. Thus,bo t h parties are able to put forth their respective positions in the legal arena.
Miller , 463 N.E.2d at 265-66. Moreov er, the Supreme Court of Conne cticut has analogized the issue to burden of proof allocation in unjust enrichment situations in which the breaching par ty must show that the other party incurred a g ain: Principles

of unjust enrichment and restit ution bear a family resemblance to those involved in considerations of forfeiture. Und e r both sets of principles, the law has come to per mit a complainant to seek a fair allocation of profit and loss despite the complain ant’s own failure to comply fully with his contract obl igations. The determination of what is fair, as a factual matter, must howev er depend upon aproper showin g by th e compla inant who seeks this ex traordi nary r

elief. Murphy , 538 A.2d at 224.
Finally, a few states

have included prejudice to the insurer as one of several factors to be considered when deter mining whether the ins ur ed provi ded timely notice. Thus, prejudice to the insurer is viewed along with such fact ors as th e insured’s excuse for delay, the l ength of the delay, and the sophi sticat ion of the insured. See , e.g. , Koski v. Allstate Ins . Co. , 572 N.W.2d 636, 639 (Mich. 1998) (citing Wendel v. Swanberg , 185 N.W.2d 348 (Mich. 1971)); State Auto Mut. Ins. Co.
v. Youler , 396 S.E.2d 737 (W.Va. 1990); State Farm Fire & Cas. Co. v. Walton , 423 S.E.2d 188, 192 (Va. 1992) (citing State Fa rm Fire & Ca s. Co. v. Scott , 372 S.E.2d 38 3, 385 (Va. 1988)) 12 ; State Farm Mut. Auto. Ins. Co. v. Burgess , 474 So.2d 634, 637 (Ala. 1985); Lumbermens Mut. Cas. Co. v . Oliver , 335 A.2d 666, 668 (N.H. 1975); American Country -Ins.Co. v. Bruhn , 682 N.E.2d 36 6, 370 (Il l. App. 1997);13 As noted in Foot note No. 11, Ohi o courts appear to be split on this issue. In Owens-Corning , the court note d tha t the O hio Sup rem e Co urt ac kno wled ged the re butta ble pr esu mp tion a ppro ach in Ruby v. Midwestern Indem. Co. , 532 N.E.2d 730 (Ohio 198 8), but opined that since the Supreme Court did no t inclu de th e rule in its sylla bus , it implicitly rejecte d it. Owens-Corning , 660 N.E.2d at 784; but see Champion Spark Plug , 687 N.E.2d at 791; Fillhart , 684 N.E.2d at 1303.

14 Since the i

ssue is not before us , we need not deci de whether this approach shoul d apply to a standard l

iabili ty policy.
15 In Tennessee, the part y seeking rel ief under a theory of quantum meruit bears t he burden of proof. D.T. McCall & Sons v. Seagraves , 796 S.W.2d 457, 464 (Tenn . App. 199 0); John J. Heiri gs Cons t. Co. v. Exid e , 709 S.W.2d 604, 607 (Tenn . App. 198 6) (“If plaintiff is to recover on t he theorie s of q uantum m eruit and unjust enrichment it mus t carry the burden of proving the value of t he wor k performed.”) (citi ng Moyers v. Graham , 83 Ten n. 57 (18 85); Sadler v. Mid dle T enn . Elec . Mem bers hip Corp. , 259 S.W .2d 544 ( Tenn . App.19 52)). -17- Owens-Corning , 660 N.E.2d at 784; 32 A.L.R. 4th § 4. 13 On its face, this approach is analytically

flawed. While prejudice may potentially arise from a n insured’s failure to file notice in accordance with the contract, it is certainly not a factor w hich has any bearing on an insured’s ability to providetimely notice. Another major fallacy of this approach is that consideration of prejudic e could inadvertently

serve to the

detriment of the insured: an insured w ho would otherwise be

adjudged to have provided timely notice may be considered to have acted late since the insur er was prejudiced. See Cooper , 237 A.2d at 873; Comment, 74 Dick.L. Rev. at 268.
G. Tennessee App roach After carefully weighi ng the advantages and disadvantages of each of these approaches, we believe that the rebuttable presumption rule is t he sound est approach in the con text of an uninsured/underinsured motorist policy 14 as it provides the best balance between the competing i nterests. We agree with th e Supreme Court of Connecticut that the instant i ssue is akin to unjust enr ichment law: in both instances, an undeserving party seeks forgiveness for hi s or her own breach. 15 See Murphy , 438 A.2d at224. Therefore, once it is deter mined that the insured has failed to provide timely notice in accordance with the insurance policy, it is presumed that the insurer has been prejudiced by the breach. The insured, however, may rebut this presumption by

proffering competent

evidence that the insurer was not prejudiced by the insured’s delay.
Although summary judgment is not pr oper in the present case, we recognize-18-

that summary judgment may, nev ertheless, be appropriate in somecircumstances. We quote approvingly the following non-exclusive guidelines for determining whether the insurer has been prejudi ced: the availability of

witnesses

to the accident; the ability to discover other infor mation regarding the conditi ons of the locale where the ac cident occurred; any physical chang es in the location of the accident during the period of the delay; the ex istence of official reports concerning the occurrence; the preparation and preserv ation of de monstr ative and illustrat ive evidence, such as the v ehicles involved

in the occurrence, or photographs and diagrams of the scene; the abilit y of experts to reconstruct the scene and the oc currence; and so on. C.G. Tate , 279 S.E.2d at 776(quoting GreatAm. Ins. Co. v. C.G. Tate C onst. , 265 S.E.2d 467, 473 (N.C. App. 1980)). We acknowledge that attempting to prove w

hat information the insurer would have been able to discover had notice been promptly provided would be difficult for either party. See Commen t, 68 Harv. L. Rev. at 1438; Jones , 821 S.W.2d at 803; Brakeman , 371 A.2d at 198; Campbell , 384 P.2d at 157. However, we are less sympathetic to the insured in this instance, since the insured bears sole responsibility for b reachi ng a term of the contract that w as intended to preserve fairness to the i nsurer.

III. CONCLUSION

In sum, we overr ule Creasy , Phoenix Cotton , and other cases in this St ate holding that prejudice to the insurer is irr elevant towhether forfeiture of an insurance contract results from the insured’s breach of a not ice provisi on. Instead, the appropriate inquiry is: 1) Did the insured provide timely noti ce in accordance with the contract? 2) If not, did the insured car ry its burden of provi ng thatthe insurer was not prejudiced by the delay? This stan dard shall apply to (1) all cases tried or r

etried afterth e d ate of this opinion, and (2) all cases pending on appeal in w hich the prejudice issue was r

aised in the trial court

. Conseque ntly, the decisions of thelower courts gr anting summary judgment to GEICO are reversed. This case is remanded to the tr ial co urt for findin gs-19-

consistent

with this opinion. Costs of the appeal are taxed equally to Alca z ar and GEICO.

_____________________________________ Frank F. Drowota, II I, Justice
CONCUR: Anderson, C.J. Birch, Holder, Barker, J.J.