Tennessee Supreme Court Holds That Insurance Contracts are to be Strictly Construed Against the Insurer

Tennessee’s appellate courts have, for years, tended to favor insurance companies over consumers. Finally, the Tennessee Supreme Court has come down firmly on the side of the insured consumers, in a case with broader significance than the narrow issue presented by the facts of the case, Lammert, et al. v. Auto-Owners (Mutual) Insurance Co., No. M2017-02546-SC-R23-CV, (4/15/19).

On a certified question from the U.S. District Court for the Middle District, the Tennessee Supreme Court held that the language in the policies was ambiguous and therefore must be construed in favor of the insured parties.  The homeowners sued Auto-Owners after it tried to reduce payments to them after a loss by depreciating labor costs associated with replacing the damaged components of their homes.  Under the specific facts of these cases, the Supreme Court held that labor may not be depreciated when the insurance company calculates the actual cash value of property using the replacement cost less depreciation method.

Both sides presented “plausible interpretations” of language in the policies, which did not explicitly state that Auto-Owners could depreciate labor expenses when determining the actual cash value of the damaged property.  There is a split of authority on this issue in other states.

The Supreme Court realistically assessed the case from the point of view of the policy holder, the consumer:

“[I]t is reasonable that a homeowner would understand that depreciation would only be applicable to material goods that can age and experience wear and tear. It is also reasonable that a homeowner, knowing that replacement costs include both labor and materials to rebuild a roof, would believe that the insurance company would only apply depreciation to the physical materials, those things that actually deteriorated.”

“In reaching our conclusion, we must keep in mind that “the terms of a contract of insurance are to be construed according to their plain, ordinary, popular sense unless they have acquired a technical sense in commercial usage.” Swindler v. St. Paul Fire & Marine Ins. Co., 444 S.W.2d 147, 148 (Tenn. 1969) (citations omitted). However, the technical sense must be clearly conveyed in the policy itself: In our view, an insured should not have to consult a long line of case law or law review articles and treatises to determine the coverage he or she is purchasing under an insurance policy. Policy language should be given its plain meaning, unless a technical meaning is clearly provided in the insurance policy.”

The Court ruled in favor of the insured homeowners, and concluded that, “[u]nder Tennessee law, ambiguities in insurance contracts are strictly construed against the insurance companies and in favor of the insured.”

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