                 IN THE COURT OF APPEALS OF TENNESSEE
                                                                               FILED
                                    AT KNOXVILLE                              June 8, 1999

                                                                            Cecil Crowson, Jr.
                                                                            Appellate C ourt
                                                                                Clerk

HOM ER R . (TOB Y) BA RNE S, et al.,
                           ) C/A NO. 03A01-9812-CH-00403
                           )
    Plaintiff-Appellee,    ) SEVIER CHANCERY
                           )
v.                         ) HON . TEL FOR D E. F OGE TY, JR .,
                           ) CHANCELLOR
EMPLOYERS MUTUAL CASUA LTY )
COMPANY,                   ) AFFIRMED
                           ) AND
    Defend ant-App ellant. ) REMANDED




JAMES H. RIPLEY , SHARP & RIPLEY , Sevierville, for Plaintiff-Appellee.

FRANK Q . VETTORI, O’NEIL, PARK ER & WILLIAM SON, Knoxville, for
Defend ant-App ellant.




                                      O P I N IO N


                                                           Franks, J.




              In this Declaratory Judgmen t action, the Trial Judge entered su mmary

judgment against Employers Mutual Casualty Company, in favor of the plaintiffs,

declaring “[t]he defendant owes the plaintiffs a duty of defense of the action pending

in the Circuit Court for Sevier County, Tennessee, captioned Devin Phillips v. Toby

Barnes . . . an d further o wes inde mnity covera ge respectin g such claim , pursuant to

the policies o f insuranc e in question . . .”. The judgm ent was e ntered purs uant to

T.R.C.P . Rule 54.0 2, and the in surance co mpany has appealed that decision to this

Court.

              The action mentioned in the judgment arose due to a Complaint for

malicious prosecution which was filed against plaintiff Barnes and The Christmas
Place, In c., by Phillip s, a form er emp loyee of T he Ch ristmas P lace.

                An employee of The Christmas Place told Barnes that Phillips was

observed taking three 100 dollar bills out of the cash register at the store, and Phillips

told the employee, “You didn’t see this.” A $300 discrepancy in the cash drawer was

discovered on November 30, 1996. Barnes investigated the discrepancy, without

success. On December 5, 1996, Barnes terminated Phillips’ employment with The

Christmas Place. The next day, on D ecembe r 6, 1996, B arnes prese nted the fa cts to

the Deputy Clerk of the Trial Justice Court, and an arrest warrant was issued for

Phillips for misdemeanor theft. On March 11, 1997, Phillips was acquitted of the theft

charge, and on June 19, 1997, Barnes was served with the Complaint for malicious

prosecution. He gave notice of the suit to the insurer of The Christmas Place on June

20, 1997. He explained that prior to the filing, he had no warning or notice of any

kind th at Phillip s intend ed to br ing the a ction.

                Mr. Barnes stated that in initiating the prosecution of Phillips, he was

acting out of his duty as director and manager of The Christmas Place and not out of

any personal concerns. He stated that The Christmas Place did not make a regular

practice of prosecuting its employees or former employees, and that Phillips status as a

former employee was irrelevant to the decision to prosecute because any person taking

mone y from th e cash r egister w ould ha ve bee n prose cuted.

                Summary Judgment is appropriate where there are no genuine issues of

materia l fact an d the m oving p arty is entitle d to jud gmen t as a ma tter of law . Byrd v.

Hall, 847 S.W .2d 208 (T enn. 1993 ). Since only a q uestion of la w is involv ed in this

case,1 the review of the grant of summary judgment is de novo, without a presumption

of corr ectness . Bain v. W ells, 936 S .W.2d 618 (T enn. 19 97).


   1

       The scope of insurance coverage and the insurer’s duty to defend present questions of law.
Standard Fire Ins. Co. V. Chester-O’Donley & Assoc. Inc., 972 S.W.2d 1,5 (Tenn. App. 1998).


                                                 2
               An insurance policy must be construed in a reasonable and logical

mann er to dete rmine th e intent o f the pa rties. Setters v. Permanent General Assur.

Corp., 937 S.W.2d 950, 953 (Tenn. App. 1996). The language of the policy must be

given its plain an d ordin ary mean ing as a layman w ould un derstan d it. Paul v.

Insurance Co. of North America, 675 S .W.2d 481, 48 3-484 (Tenn . App. 1 984).

Where an ambiguity exists in an insurance policy, the ambiguity is to be construed

strongly a gainst th e insure r in favo r of the i nsured , Trave lers Ins. C o. v. Aetn a Cas . &

Sur. Co., 491 S.W .2d 363, 36 6 (Tenn. 1 973); Ryan v. MFA Mut. Ins. Co., 610 S.W.2d

428, 437 (Tenn. A pp. 1980 ), and the Su preme C ourt has said that ambig uities in

“exceptions, exclusions, and limitations in policies of insurance are to be most

strongly construed against the insurer.” Travelers Ins. Co., 491 S.W.2d at 367.

               In the contract of insurance before us, under the title “WHO IS AN

INSURED,” the contract provides coverage for the named insured, The Christmas

Place, Inc. Coverage also extends to the corporation’s executive officers and

directors, but only with respect to their duties as officers or directors. Coverage also

extends to employees other than officers and directors, but only for acts within the

scope of their employment. Excluded from coverage of an employee acting within the

scope of employment is personal injury to a co-employee “while in the course of his or

her employment or while performing duties related to the conduct of your business.”

               Defendant concedes that Barnes was a director, managing officer, and

manage r of The C hristmas Pla ce, Inc., and B arnes, in his af fidavit stated th at at all

times he was ac ting in h is capac ity as direct or and m anage r of the C hristma s Place .

Barnes testimony was not disputed, and under the policy his coverage is that of an

officer and director, and not just as a “co-employee”.

               The policy states that it applies to bodily injury, property damage,

personal injury, and advertising injury. At issue is “personal injury.” The policy


                                                3
applies to personal injury “caused by an offense arising out of your business, . . . .”

“Personal injury” is defined as an “injury other than ‘bodily injury,’ arising out of one

or more o f the follow ing offen ses:”

               a. False arrest, de tention or im prisonme nt;
               b. Malicious prosecution;
               c. . . .
               d. Oral or written publication of material that slanders or libels a
               person or organization o r disparages a person’s o r organization’s
               goods, products or services; or
               e. . . . .

Accordingly, the policy specifically provides coverage to the insured for suits against

the insured for malicious prosecution.

               While the policy specifically provides coverage for malicious

prosecution, it also contains an exclusion which the defendant claims excludes

coverage in this case. In an amendment to the policy, titled “EMPLOYMENT-

RELATE D PRAC TICES EX CLUSION ,” the policy states:

               This insurance does not apply to:

               1. “Bodily injury” or “personal injury” to:

               a. A pers on arisin g out of a ny:
                     (1) Refusal to employ that person;
                     (2) Termination of that person’s employment; or
                     (3) Employment-related practices, policies, acts or
                     omissions such as coercion, demotion, evaluation,
                     reassignm ent, discipline, d efamation , harassme nt,
                     humilia tion or d iscrimin ation dir ected a t that per son; . . .

Using the definition o f persona l injury set forth in th e policy, the def endant see ms to

rewrite this exclusion in their brief to say, “This insurance does not apply to false

arrest or malicious prosecution claims of a person arising out of any refusal to employ

that person; termination of that person’s employment; or employment-related

practices, policies, acts or omissions . . . .” The defendant then argues that if the

individual is insured under the policy due to being either an officer or employee of

The Christmas Place, and that individual fires an employee of the business for alleged


                                               4
theft out of the cash register during his employment, then later has an arrest warrant

issued for the employee and prosecutes that employee for the alleged theft, then the

resultant false arrest and subsequent malicious prosecution must arise out of the

employment-related practices, policies or acts or omissions, which are excluded from

policy co verage .

                “Personal Injury” is defined in the policy as meaning false arrest and

malicious prosecution, among other things. The exclusion does not attempt to alter

the d efin ition of “p erso nal in jury.” It sim ply ex clud es co vera ge fo r “pe rson al inj ury”

arising out of certain employment-related situations. This part of the exclusion is not

ambiguous, but what is ambiguous is one of the limited situations to which the

personal injury exclusion applies. The injury in this case did not arise out of a refusal

to employ a person, nor did it arise out of termination of employment, because Phillips

brought suit against the plaintiff for malicious prosecution due to his arrest and

subsequent prosecution, not his termination of employment. The question thus

becomes whether the alleged malicious prosecution arose out of “employment-related

practices, policies, acts or omissions, such as coercion, demotion, evaluation,

reassignment, discipline, defamation, harassment, humiliation or discrimination

directed at that person.”

                Plaintiffs arg ue that the p rosecution of Phillips w as not an em ployment-

related practic e, policy, act, or om ission. They ass ert that The C hristmas Pla ce wou ld

pros ecut e any p erso n for stea ling, whethe r that person w ere a n em ploye e or m erely a

customer. Barnes asserted that this is the only instance he can remember where a

forme r emplo yee was prosec uted. T hus the prosec ution co uld not be, he c ontend s, a

“practice” or “policy.” Further a criminal prosecution is not related to normal

employment sanctions, like discipline or reassignment. While defendant here does not

explicitly state its position, it indicates that because Phillips was an employee when he


                                                  5
alleged ly took the mone y, his subs equen t prosec ution w as emp loyment- related.

               A reason able interpre tation of this e xclusion is th at the emp loyment-

related practic es, policies, acts, o r omissions are limited to th e types of thing s listed in

the provision. By providing such a list, which includes “coercion, demotion,

evaluation, reassignment, discipline, defamation, harassment, humiliation or

discrimination,” the policy indicates that only these types of employment-related

matters are covered. Situations in which the employment relationship is more tenuous

would not be covered. This analysis is consistent with Allstate Ins. C o. v. Watts, 811

S.W.2d 883, 887-888 (Tenn. 1991), where the Supreme Court said that the broad

phrase “arising out of” should not inclu de any ca usal rela tionship .

               Considering the policy wording in the light of the foregoing, the

prosecution of Phillips would not be considered to be the type of employment-related

practice, policy, act or omission which is included in this provision. Prosecution for

alleged thef t cannot be brought in to the realm o f the provis ion merely be cause it

incidentally causes humiliation, which could be employment-related practice, if the

prosecutio n did not aris e out of the employme nt practice. T he provisio n at issue is

ambiguo us, becaus e the plain an d ordinary m eaning of the langua ge does n ot clearly

indicate whether malicious prosecution of a former employee is excluded.

               Accordingly, prosecution of a former employee for theft does not appear

to be the type of employment-related practice, policy, act or omission to which the

exclusion applies, since the insurance policy explicitly provides coverage for

malicious prosecution. Moreover, any ambiguities, especially those in exclusions,

must be construed strongly against the insurer, and on this basis, we affirm the grant

of su mmary judgm ent d eclaring coverag e under the policy.

               Finally, defendant argues that it does not have the duty to defend and

indemnify because Barnes did not comply with the notice provision in the policy. The


                                               6
contract of insurance provides:

               2. Duties in th e Event o f Occur rence, Of fense, Cla im or Suit

                       a. You must see to it that we are notified as soon as
                       practicable of an “occurrence” or an offense which may
                       result in a claim . To the exte nt possible, n otice should
                       include:

                       1. How, when and where the “occurrence” or offense took
                       place;
                       2. The names and addresses of any injured persons and
                       witnesses, and
                       3. The nature and location of any injury or damage arising out of
                       the “occurrence” or offense.

                       b. If a claim is made or “suit” is brought against any
                       insured, you m ust:

                       1. Immed iately record the sp ecifics of th e claim or “s uit”
                       and the date received; and

                       2. Notify us as soon as practicable.

               “Occurrence” is defined in the policy as “an accident, including

continuous or repeated exposure to substantially the same general harmful

conditio ns,” bu t “offe nse” is n ot defin ed.

               Defendant concedes that provision (b) was complied with, because

Barnes gave notice of the suit immediately after receiving the Complaint for malicious

prosecution, but it claims that provision (a) was not complied with, because Barnes

did not give notice of an “occurrence.” Since the policy defines “occurrence” as an

accident, and this case involves an alleged intentional tort instead of an accident, no

“occurrence” happened in this case for Barnes to report. Thus the issue becomes

whether an offense took place which Barnes should have reported.

               An insure d has a du ty to give notice w hen, “an o rdinarily or reason ably

prudent p erson wo uld have k nown o f the occu rrence of a n event tha t might reaso nably

be expected to produce a claim against the insurance company.” Allstate Ins. Co. v.

Wilson, 856 S.W.2d 706, 709 (Tenn. App. 1992). Admittedly, Barnes knew that he


                                                  7
was prosecuting Phillips for theft, but he stated that he believed that Phillips did steal

the money and that he was justified in prosecuting him. It is reasoned that if the

prosecutio n was justif ied, there w ould be no reason to ex pect such p rosecution would

give rise to a ma licious p rosecu tion claim .

               On these facts, this is not th e type of “of fense” w hich a reaso nably

prudent person would expect to give rise to a claim. Accordingly, we hold that Barnes

did not violate the insurance policy by failing to inform the insurance company that he

was about to prosecute Phillips for theft. His first notice of a claim or a potential

claim wa s when th e Comp laint was file d, and then he gave n otice imme diately

thereaft er, as requ ired under the policy.

               We affirm the judgment of the Trial Court, and remand with the cost of

the appea l assessed to th e appellant.




                                              __________________________
                                              Herschel P. Franks, J.


CONCUR:




___________________________
Houston M. Godd ard, P.J.




___________________________
H. David Cate, Sp.J.




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