       IN THE COURT OF APPEALS OF TENNESSEE
                   AT NASHVILLE                                   FILED
                                                                September 17, 1999
ED REEVES, d/b/a                         )
ED’S IMPORTS,                            )                      Cecil Crowson, Jr.
                                         )                     Appellate Court Clerk
      Plaintiff/Appellee,                )     Grundy Chancery
                                         )     No. 4708
VS.                                      )
                                         )     Appeal No.
GRANITE STATE INSURANCE                  )     01A01-9807-CH-00379
COMPANY,                                 )
                                         )
      Defendant/Appellant.               )


                         DISSENTING OPINION

      This appeal calls into question a loss payee’s right to receive the proceeds of
an insurance policy even though the insurer cancelled the policy after discovering that
the insured made material misrepresentations in obtaining the policy. The court has
determined that the cancellation of the policy, while effective with regard to the
insured, does not affect the loss payee’s claim. I disagree. The policy expressly
reserves the insurer’s right to cancel the policy and also provides that the cancellation
will defeat the loss payee’s interest in the policy.


      The policy provision at the heart of this dispute states:
             Loss or damage under this policy shall be paid, as interest
             may appear, to you and the loss payee shown in the
             Declarations or in this endorsement. This insurance with
             respect to the interest of the loss payee, shall not become
             invalid because of your fraudulent acts or omissions unless
             the loss results from your conversion, secretion or
             embezzlement of “your covered auto.” However, we
             reserve the right to cancel the policy as permitted by policy
             terms and the cancellation shall terminate this agreement
             as to the loss payee’s interest. We will give the same
             advance notice of cancellation to the loss payee as we give
             to the named insured shown in the Declarations.

There can be little dispute that this provision is a “standard” or “union” clause and,
therefore, that it creates an independent contract between Granite State Insurance
Company (“Granite State”) and Ed Reeves, the loss payee. See Union Planters Nat’l
Bank v. American Home Assurance Co., 865 S.W.2d 907, 911 (Tenn. Ct. App. 1993).
However, the “independent contract” principle should not be applied so literally that
it excludes the other provisions of the insurance policy. A loss payee claiming under
a standard clause asserts its rights subject to all the terms and conditions of the
insurance contract except those expressly waived by the insurer in the standard clause
itself. See 4 Lee R. Russ & Thomas F. Segella, Couch on Insurance § 65:46 (3d ed.
1995).


      The court has apparently concluded that Granite State may cancel the insurance
contract with regard to Mr. Nance, the insured, because he obtained the policy by
misrepresenting that he had not been convicted of any offense other than traffic
violations when, in fact, he had been convicted of the felonious possession of
marijuana. However, the court has decided that Granite State cannot cancel the
separate insurance contract imposed by law for Mr. Reeves’s benefit because it
agreed that the insurance would not become invalid with respect to Mr. Reeves unless
the loss resulted from Mr. Nance’s conversion, secretion, or embezzlement of the
covered vehicle.


      The court’s construction overlooks the next sentence of the standard clause in
which Granite State explicitly reserves the right to cancel the policy in a way that
terminates Mr. Reeves’s interest. It also overlooks Granite State’s right under Tenn.
Code Ann. § 56-7-103 (1994) to declare the policy void ab initio because of Mr.
Nance’s misrepresentations. See Medley v. Cimmaron Ins. Co., 514 S.W.2d 426, 428
(Tenn. 1974); Bland v. Allstate Ins. Co., 944 S.W.2d 372, 375 (Tenn. Ct. App. 1996);
Milligan v. MFA Mut. Ins. Co., 497 S.W.2d 736, 739 (Tenn. Ct. App. 1973). The
right to cancel or rescind the policy, whether derived from the statute or the insurance
contract, exists even when the insurer does not discover the misrepresentation until
after the loss has occurred. See Burton v. Wolverine Mut. Ins. Co., 540 N.W.2d 480,
482 (Mich. Ct. App. 1995) (holding that an insurer may rescind a policy ab initio
upon discovering a material misrepresentation regardless of whether the discovery
occurs before or after the loss).




         Mr. Reeves’s right to the insurance proceeds is governed by all the terms of the
policy except those expressly waived by Granite State. The policy’s termination


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provision authorizes Granite State to rescind or cancel the policy “if the policy was
obtained through material misrepresentation.” Granite State did not expressly waive
its right to cancel the policy; to the contrary, it expressly reserved its right to
terminate Mr. Reeves’s interest. Accordingly, based on the policy’s language and
Tenn. Code Ann. § 56-7-103, I would hold that the cancellation of the policy in
accordance with its terms defeats Mr. Reeves’s claim against Granite State.


                                              _____________________________
                                              WILLIAM C. KOCH, JR., JUDGE




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