Williams v. State Farm Mut. Auto. Ins. Co.

CRAIG WILLIAMS ET AL. v. STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY ET AL.

No. W2019-00851-COA-R3-CV

COURT OF APPEALS OF TENNESSEE AT JACKSON

September 15, 2020 Session

November 20, 2020

Appeal from the Chancery Court for Shelby County

No. CH-14-0777

JoeDae L. Jenkins, Chancellor

Appellant was injured in an accident involving a vehicle owned by Lexus of Memphis and insured under a policy issued by Appellee insurance company. The at-fault driver entered into a rental agreement with Lexus of Memphis for use of the subject vehicle. After a jury entered a verdict in favor of Appellant against the at-fault driver, Appellant sought to collect the judgment under a policy issued by Appellee. The trial court held that the at-fault driver, as a renter of the vehicle, was exempt from coverage under the policy. Discerning no error, we affirm.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed and Remanded

KENNY ARMSTRONG, J., delivered the opinion of the court, in which J. STEVEN STAFFORD, P.J., W.S., and CARMA DENNIS MCGEE, J., joined.

Matthew V. Porter, Memphis, Tennessee, for the appellants, Craig Williams and Melissa Williams.

M. Clark Spoden and Kathryn Grundy, Nashville, Tennessee, and Timothy M. Thornton, Encino, California, for the appellee, Tokio Marine America Insurance Company.

OPINION

I. Background

The underlying car accident occurred on May 18, 2008. Craig Williams was seriously injured when his vehicle collided with a vehicle driven by Kreston Smith. The vehicle driven by Mr. Smith was owned by Avenir Partners d/b/a Lexus of Memphis ("Lexus of Memphis"). On May 13, 2008, Mr. Smith brought his personal vehicle to Lexus of Memphis for service. While at the dealership, Mr. Smith signed a written "Rental Agreement" to drive a 2008 Lexus ES Sedan. After signing the Rental Agreement, Mr. Smith saw a 2008 Lexus RX 350 SUV in the queue of "loaner" vehicles. Mr. Smith advised a Lexus of Memphis employee that he was considering purchasing a used Lexus SUV vehicle and inquired whether he could drive the RX 350 SUV instead of the 2008 Lexus ES 350 Sedan. Lexus of Memphis agreed to Mr. Smith's request to substitute the RX 350 SUV for the ES 350 Sedan and provided Mr. Smith a yellow copy of the written Rental Agreement with the vehicle reference number (436) for the RX 350 SUV substituted for the vehicle reference number (446) for the ES 350 Sedan. On this yellow copy, in the box marked "Vehicle Number," the original typewritten number "446" has a line drawn through it (i.e., "446") and the handwritten number "436" with a circle around it is written in the same box. Mr. Smith was driving the RX 350 SUV (Lexus of Memphis vehicle number 436) at the time of the subject accident. After Mr. Smith left the dealership in the RX 350 SUV, a Lexus of Memphis employee wrote the word "SWAP" and the number "436" at the top of the original white written Rental Agreement, which Mr. Smith had signed prior to leaving the dealership. In addition, after Mr. Smith left, Lexus of Memphis made certain entries into its internal computer system to confirm that the vehicle used by Mr. Smith was the Lexus RX 350 SUV.

Following the accident, Mr. Williams and his wife Melissa (together, "Appellants") filed suit against Mr. Smith and others. On February 7, 2014, a jury found that Mr. Smith was 100% at fault for the accident. The jury returned verdicts in favor of Mr. Williams in the amount of $2,000,000.00 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. Smithwas 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.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...