                   IN THE COURT OF APPEALS OF TENNESSEE
                          FOR THE WESTERN SECTION
                                AT JACKSON



MUNFORD UNION BANK,                          )
                                             )
      Plaintiff/Appellee,                    )       No. 02A01-9810-CV-00297
                                             )       Appealed from Tipton
v.                                           )       County
                                             )       Circuit No. 4868
AMERICAN AMBASSADOR CASUALTY                 )
COMPANY,                                     )

      Defendant/Appellant.
                                             )
                                             )
                                                              FILED
                                             )
                                                               August 23, 1999

From the Circuit Court of Tipton County, Tennessee           Cecil Crowson, Jr.
Honorable Joseph H. Walker, III, Judge                      Appellate Court Clerk



William C. Cole, Millington, Tennessee
Attorney for Plaintiff/Appellee.



Bruce A. McMullen, Memphis, Tennessee
THOMASON, HENDRIX, HARVEY, JOHNSON & MITCHELL, Memphis, Tennessee
Attorney for Defendant/Appellant.




OPINION FILED:


REVERSED and DISMISSED


                                   TATUM, S.J.

HIGHERS, J.: (Concurs)
FARMER, J.: (Concurs)
                                       OPINION


       Plaintiff/Appellee, Munford Union Bank, filed suit in General Sessions court against

Defendant/Appellant, American Ambassador Casualty Company, for “recovery under loss

payee provisions of automobile insurance policy No. 175843 insuring a 1997 KIA Sephia

automobile --- owned by Kelvin Jones, which was totaled on about September 11, 1997.”

The General Session’s judge entered judgment in favor of the Plaintiff in the sum of

$13,409.13 and the insurance company appealed to Circuit Court.

       The case was tried by the circuit judge without intervention of a jury. The circuit

judge rendered judgment in favor of the Plaintiff in the sum of $13,409.13, stating, in part,

as follows:

              The court finds that by accepting payment for the vehicle knowing it
       was a total loss before the renewal payment is inconsistent with providing
       coverage with a lapse; therefore, the insurance company waived the lapse
       in coverage and provided continuous coverage. The court finds the clause
       in question created a separate and distinct contract for plaintiff Bank’s
       benefit, that no notice of cancellation was sent to Bank or received, that the
       premium was paid and accepted by defendant insurance company, and that
       coverage was provided to the loss payee for the vehicle.

              IT APPEARING TO THE COURT that the Plaintiff, Munford Union
       Bank, was the loss payee under a contract of insurance between the
       Defendant and Kelvin Jones, that the Plaintiff did not receive the required
       notice of cancellation to discharge the Defendant’s obligations under the
       contract of insurance, that the Defendant waived any lapse in coverage by
       accepting the renewal premium from Kelvin Jones, and therefore coverage
       was provided to the Plaintiff under the afore-referenced insurance policy.

       The appellant insurance company presents the following issues:

       1.     Did the trial judge err in holding that Ambassador breached its
              contract with Munford when Ambassador did not give notice to
              Munford ten (10) days before the insurance policy expired?

       2.     Did the trial judge err in holding that Ambassador waived the
              lapse of coverage when Ambassador reinstated the policy of
              insurance effective one day after the loss?


       In April 1997, Kelvin Jones (Insured) purchased a 1997 KIA Sephia automobile.

Munford Union Bank (Bank) financed the purchase and obtained a lien on the automobile

to secure the loan to Jones. On May 14, 1997, Jones purchased a policy of collision

insurance from American Ambassador Casualty Company (Insurance Company) through

its agent, CEC Insurance Agency. On June 10, 1997, an “additional interest notice” was

issued by the Insurance Company to the Bank stating that the coverage effective date was


                                             2
“from 05/14/1997 to 08/20/1997.” Among other things, the additional interest notice stated:

              “Policy period is continuous. A final notice of cancellation will
              be mailed to you if this policy has been canceled.”

       The Bank was also issued a loss payable clause annexed to the additional interest

notice. The loss payable clause provided:

              “loss or damage, if any, under the policy shall be payable as
              interest may appear to the loss payee “lienholder” as named
              in the declarations and this insurance as to the interest of the
              [lienholder] shall not be invalidated by any act or neglect of the
              lessee, mortgagor, owner of the within described automobile
              or other data nor by any change in the title or ownership of the
              property ---.”

                                       * * * * * * *

              “The company reserves the right to cancel such policy at any
              time as provided by its terms, but in such case the company
              shall notify the lienholder when not less than 10 days
              thereafter such cancellation shall be effective as to the interest
              of said lienholder therein, and the company shall have the
              right, on like notice, to cancel this agreement.”


       A second “additional interest notice” (with identical loss payable clause) was issued

to the Bank by the Insurance Company on September 8, 1997, giving “coverage effective

date from “:07/29/1997 to :08/20/1997.”1 The second additional interest notice was

identical to the first additional interest notice except for the dates, and the second notice

did not contain the statement:

              “Policy period is continuous. A final notice of cancellation will
              be mailed to you if this policy has been canceled.”


       The Insured, Kelvin Jones, did not renew or extend the term of the policy after

August 20, 1997, and it expired on that day. On September 11, 1997, Mr. Jones was

involved in a wreck with the KIA vehicle. The day after the accident, September 12, 1997,

Mr. Jones went to CEC Insurance Agency, the agent for the appellant Insurance Company,

to pay his renewal premium. Mr. Jones told the agent, Mr. Don Edgar, that the vehicle had

been wrecked. Mr. Jones was informed by Mr. Edgar that the policy on the financed

vehicle had lapsed. Mr. Jones tendered payment to Mr. Don Edgar, in the sum of $350.54

to renew the lapsed policy on the vehicle that had been wrecked, and upon another vehicle


       1
      The second notice was apparently issued when the insured had a second
automobile added to the policy, upon which the Bank did not have a lien.

                                              3
that had been acquired by Mr. Jones. Mr. Edgar contacted the Insurance Company and

was told that the premium could be accepted, but there would not be coverage for Mr.

Jones on the accident of September 11, and that the policy would be reinstated as of

midnight the night of September 12. The premium was paid, and another additional

interest notice with loss payable clause was issued to the Bank for a period from 9/13/97

to 9/13/98 and containing the language “renewal with lapse.” At no time before the

accident was Munford Bank notified that the vehicle had no insurance on it or that the

policy had lapsed.

      In considering the issues, we must keep the following rules in mind. In Ballard v.

North American Life & Casualty Co., 667 S.W.2d 79, 82-83 Ct. App. (Tenn. 1983), this

Court said:

              In the absence of fraud or mistake, a contract must be
              interpreted and enforced as written even though it contains
              terms which may be thought harsh and unjust. E.O. Bailey &
              Co. v. Union Planters Title Guaranty Co., 33 Tenn. App. 439,
              232 S.W.2d 309 (1949).

              In construing contracts, the words expressing the party’s
              intention should be given the usual, natural and ordinary
              meaning. Moore v. Life & Casualty Ins. Co., 162 Tenn. 682,
              40 S.W.2d 403 (1931).

              In Guardian Life Ins. Co. of America v. Richardson, 23 Tenn.
              App. 194, 129 S.W.2d 1107 (1939), the court set out the rule
              for construction of insurance contracts as:

              “Contracts of insurance, like other contracts, are to be
              construed according to the sense and meaning of the terms
              which the parties have used, and if they are clear and
              unambiguous, their terms are to be taken and understood in
              their plain, ordinary, and popular sense. The rule of strict
              construction does not authorize a perversion of language, or
              the exercise of inventive powers for the purpose of creating an
              ambiguity where none exists, nor does it authorize the court to
              make a new contract for the parties or disregard the evidence
              (intention) as expressed, or to refine away terms of a contract
              expressed with sufficient clearness to convey the plain
              meaning of the parties and embodying requirements,
              compliance with which is made the condition to liability
              thereon. Neither does the rule prevent the application of the
              principle that policies of insurance, like other contracts, must
              receive a reasonable interpretation consonant with the
              apparent object and plain intent of the parties.” (Citations
              omitted).

              Id. 129 S.W.2d at 1115, 1116.

              Where there is no ambiguity, it is the duty of the court to apply
              to the words used their ordinary meaning and neither party is

                                             4
              to be favored in their construction. Brown v. Tennessee
              Automobile Ins. Co., 192 Tenn. 60, 237 S.W.2d 553 (1951).


       We now address the first issue. The trial judge held that the Insurance Company

was required to give the loss payee Bank notice of cancellation to discharge its obligations

to the bank under the contract of insurance. The Insurance Company cites Gibson v.

Tennessee Farmers Mutual Insurance Co., 719 S.W.2d 299 (Tenn. Ct. App. 1986), in

support of its contention that the above mentioned provisions in the loss payable clause,

requiring notice to a lienor when the insurer cancels a policy, are not applicable when the

policy expires or terminates by its own terms. In the Gibson case, the term of the plaintiff’s

insurance policy ended on April 20, 1983. The policy was not renewed, and the insurance

company did not send notice to the plaintiff that the policy had terminated. After the

termination of the policy, the plaintiff was involved in an automobile accident on May 5,

1983, and sued the insurance company under the policy. The plaintiff’s theory was that

he was entitled to notice of cancellation pursuant to cancellation statutes in Tenn. Code

Ann. § 56-7-1301, et seq. In holding that there was no breach of any contractual duties

owed by the insurance company to its insured, the court stated:

              There is no evidence of cancellation in the record and the case
              was tried on the issue of cancellation; however, all the
              evidence establishes there was no policy in force at the time of
              the accident. The policy was exhibited to the complaint and by
              its own terms terminated on April 20 when no premium was
              paid by plaintiff for a renewal policy.

                                            * * *

              The general rule in all jurisdictions appears to be that statutes
              prescribing methods of cancelling insurance policies are not
              applicable where the insured simply fails to pay the renewal
              premium by the due date on the basis the policy has lapsed
              and expired by its own terms. State Farm Mutual Ins. Co. v.
              White, 563 F.2d 971 (9th Cir. 1977); Nationwide Mutual Ins.
              Co. v. Williams, 55 Or. App. 442, 638 P.2d 487 (1982);
              American Family Mutual Ins. Co. v. Ramsey, 425 N.E.2d 243
              (Ind. App. 1981); Edwards v. York, 370 So. 2d 641 (La. App.
              1979); Williams v. Security Mutual Cas. Co., 377 So. 2d 733
              (Fla. App. 1979).

       Gibson, 719 S.W.2d at 301.

       It is the theory of the appellee Bank that after an insurance policy is terminated by

its own terms, the Insurance Company has the duty to give notice to a lienholder that the

policy has been “canceled,” pursuant to the cancellation and notice clauses, as in this

                                              5
policy. In support of this contention, the Bank cites Chrysler Credit Corp. v. Noles, 813

S.W.2d 437 (Tenn. Ct. App. 1990). The loss payable clause in the Noles case was similar

to that in the case before us.

       In the Noles case, the renewal date for the insurance policy was May 19, 1987, but

it was not renewed by the insured. However, in Noles, the insurer gave notice to the

lienholder that it was covered for ten (10) days after the notice was given.2 Within the ten

day period, the insured wrecked the automobile, and the insurance company paid the

lienholder for the loss. The insurance company then sued the insured under a subrogation

clause in the policy to recover the amount paid to the lienholder. The Noles court held that

the subrogation claim could be maintained by the insurer against its insured, saying:

               Since Chrysler Credit’s rights under the loss payable provision
               could not be affected by the appellee’s neglect, it is clear that
               even after appellees allowed the policy to lapse, Chrysler
               Credit still had the remedy provided.

       Noles, 813 S.W.2d at 439.

       As we understand the above holding, it is that the insurance carrier, strictly under

the facts of that case and in spite of the fact of the insured’s neglect, still had the right to

pursue the subrogation claim against this insured, this being a remedy provided in the loss

payable clause. We do not think that the Noles court intended to obliterate the distinctions

in the Gibson court between the terms “cancellation” and “expiration.” We adhere to the

Gibson holding.

       There being no Tennessee case factually in point with the case now before us, we

have looked to authority from other jurisdictions. We have found three cases with the

same facts as in this case and with which we are in full agreement: First National Bank in

Sioux City v. Watts, 462 N.W.2d 922 (Iowa 1990); Reece v. Massachusetts Fire & Marine

Ins. Co., 107 Ga. App. 581, 130 S.E.2d 782 (1963); Waynesville Security Bank v.

Stuyvesant Ins. Co., 499 S.W.2d 218 (Mo. Ct. App. 1973). These cases make the same

distinction between the meaning of the words “cancellation” and “expiration” as does the

Gibson case.


       2
        All of the provisions in the loss payable clause were not stated in the
Noles opinion, and it does not otherwise state why the insurance company
gave notice of the termination of the policy. The holding in Noles was that
the insurance company “acted properly” by paying the lienholder.

                                               6
      The root of much confusion in this case is caused by the use of the terms

“cancellation” and “expiration” as being synonymous. The policy was not canceled by

anyone prior to the accident; it terminated by its own provisions on August 20, 1997. The

following statements by the Supreme Court of Iowa in the Watts case is applicable here:

             The difference between the two terms is succinctly stated in
             Waynesville where the court rejected similar reasoning:

             “Cancellation,” as used in insurance law, means termination of
             a policy prior to the expiration of the policy period by act of one
             or all of the parties; “termination” refers to the expiration of the
             policy by lapse of the policy period. In this case, the policy
             “terminated” or “expired” by lapse of the policy period. [The
             lienholder’s] argument that it did not receive notice of
             cancellation is therefore wholly without merit.

      Waynesville, 499 S.W.2d at 220; see also Travelers Indem. Co. v. Fields,
      317 N.W.2d 176, 185 (Iowa 1982) (cancellation and nonrenewal are not
      synonymous).

      Here the policy terminated or expired by lapse of the policy period. The ten-
      day notice provision for cancellation in the loss payable clause simply did not
      apply.

Watts, 462 N.W.2d at 926-27.

      Also, the following statement from Watts is applicable in the case under

consideration:


      One such argument centers around the nature of the loss payable clause.
      The district court here correctly noted that the loss payable clause is a union
      or standard mortgage clause. Such a clause expressly provides that the
      right of the mortgagee to recover is not invalidated by any act or neglect of
      the owner. See Critchlow v. Reliance Mut. Ins. Ass’n, 198 Iowa 1086, 1091,
      197 N.W. 318, 321 (1924). The court also properly noted that a loss payable
      clause operates as a separate contract between the mortgagee and the
      insurer.

      But we think the court erred when it determined that Watts’ failure to pay the
      renewal premium did not invalidate the policy as to the bank. The court
      incorrectly concluded that Watts’ failure was an “act or neglect of the owner”
      under the loss payable clause. The language “act or neglect of the owner”
      in a loss payable clause refers to breach of policy conditions by the owner.
      Waynesville, 499 S.W.2d at 221; General Motors Accept. Corp. v. Western
      Fire Ins. Co., 457 S.W.2d 234, 236 (Mo. App. 1970). The loss payable
      clause operates as in independent contract between the insurer and the loss
      payee lienholder. So the owner cannot defeat the loss payee’s interest by
      breaching a condition of the policy. General Motors Accept. Corp., 457
      S.W.2d at 236.

      But there is no condition or provision in the policy that required Watts to
      renew it. See Waynesville, 499 S.W.2d at 221. So Watts breached no
      condition or provision of the policy when he failed to pay the renewal
      premium.



                                              7
Watts, 462 N.W.2d at 926.

       For the same reasons given in the above cited authorities, we hold that the

Insurance Company was not required to give the Bank lienholder notice of the expiration

or lapse of the policy under the cancellation.3 The policy was not canceled but expired

under its own terms. The Bank was plainly told in the additional interest notice that the

policy period was continuous from 7/29/1997 to 8/20/1997. The insurance contract

required no further notice of the dates of the policy period.

       The Bank argues that the statement in the first additional interest notice that the

policy period is continuous, in effect, makes this a perpetual policy as to the lienholder and

entitles it to notice of cancellation after lapse of the policy. The meaning of this language

is plain; it simply means that the coverage is continuous during the stated “Policy Period.”

The first issue is sustained.

       In the second issue, the Insurance Company attacks the holding of the trial judge

that the Insurance Company waived the lapse of coverage when it reinstated the policy of

insurance effective one day after the loss.

       As previously stated, the accident occurred on September 11, 1997, after the policy

had lapsed. On the next day, September 12, 1997, the Insured went to the insurance

agent to pay a renewal premium and told the agent that the insured vehicle had been

wrecked. The agent informed the Insured that the policy had lapsed and accepted the

payment of a renewal premium on the policy, but the agent informed the Insured that the

renewal would not cover the accident and that the renewal would not be effective until

midnight September 12, 1997. The agent issued an additional interest notice to the Bank

that covered the period from September 13, 1997, to September 13, 1998.

       The trial judge held in part:

              The court finds that by accepting payment for the vehicle
              knowing it was a total loss before the renewal payment is
              inconsistent with providing coverage with a lapse; therefore,
              the insurance company waived the lapse in coverage and
              provided continuous coverage.

       The trial judge based its holding on the unreported decision of this court styled


       3
        The policy is not in the record. The documents before us that were
delivered to the Bank did not contain provisions requiring the Insured to
renew it. Further, there was no provision for a grace period.

                                              8
Tennessee Farmers Mutual Insurance Co. v. Davis, 1993 W.L. 312688, (Tenn. Ct. App.

1993). perm. app. not applied for. In that case, the insured sent a check to the insurance

company on March 2, 1990, to renew a policy that expired on March 7, 1990. The check

was dishonored for insufficient funds, and the insurance company notified the insurer of

this fact by letter dated March 21, 1990, and told him that if he wished to reinstate the

policy, he should contact the insurance company immediately. Afterwards, the following

transpired:

              On March 22, 1990, defendant went to the local farm bureau
              office in Bolivar and paid $168.00 in cash which the
              Tennessee Farmers’ agent duly sent to the company. In the
              meantime, on March 18, 1990, Davis’ truck was involved in a
              collision which resulted in a total loss of the truck. Tennessee
              Farmers was notified of this loss on March 19, 1990, and a
              Tennessee Farmers’ claims adjuster met with Davis on March
              19th to obtain the details of the loss.

1993 W.L. 312688, at *1.

       On these facts, the court held:

       In the case at bar,

              Tennessee Farmers knew that the vehicle insured had been
              deemed a total loss. Acceptance of a premium payment for
              property that has been totally destroyed is absolutely
              inconsistent with providing coverage from and after the date of
              payment of the premium. To the contrary, Tennessee
              Farmers’ acceptance of the premium is consistent with
              providing continuous coverage on the F-150 truck, since to
              consider otherwise would indicate Tennessee Farmers’
              intention to insure a total loss vehicle. If we are to say that the
              premium was paid for the period subsequent to March 22,
              1990, we would be saying that a premium was paid on
              property which was virtually nonexistent. This cannot be.
              Accordingly, we hold that Tennessee Farmer waived the lapse
              in coverage and provided continuous coverage under the
              insurance policy. (Emphasis added).

Id. at *4.

       The Davis case is factually distinguished from the case at bar. In this case, the trial

judge’s finding that the Insurance Company accepted payment of the premium after the

accident knowing that the vehicle was a total loss is not supported by any evidence. There

was evidence that the insurance agent was informed that the vehicle had been in an

accident or had been wrecked, but the extent and nature of the damage, if any, was not

mentioned, according to the record.        Moreover, there is no evidence in the record

whatsoever to establish that the insured vehicle was, in fact, a total loss. There was

                                              9
evidence as to the value of the vehicle before the accident, but no evidence as to its value

after the accident. There is no reference or description of any damage to the vehicle.

Therefore, the decision in the Davis case does not apply. We find that the trial court erred

in holding that the Insurance Company waived the lapse in coverage.

       The judgment of the trial court is reversed, and the case is dismissed. The plaintiff,

Munford Union Bank, will pay the costs.




                                            F. LLOYD TATUM, SENIOR JUDGE




CONCUR:




ALAN E. HIGHERS, JUDGE




DAVID R. FARMER, JUDGE




                                             10
