                 IN THE COURT OF APPEALS OF TENNESSEE
                              AT JACKSON
                                   October 17, 2000 Session

    LARRY J. RAY v. TENNESSEE FARMERS MUTUAL INSURANCE
                          COMPANY

                Direct Appeal from the Circuit Court for Lauderdale County
                           No. 4143    Joseph H. Walker, Judge



                   No. W1999-00698-COA-R3-CV - Filed February 1, 2001


Appellant had a fire insurance policy with Appellee which covered Appellant’s dwelling and the
contents therein. After a fire completely destroyed Appellant’s home and all of the contents therein,
Appellee refused to pay Appellant for his losses. Appellee declared the policy to be void ab initio
due to material misrepresentations contained in the application for insurance. Jury returned a verdict
in favor of Appellant, finding that Appellant did not make the misrepresentations with the intent to
deceive the Appellee. The trial court directed a verdict for Appellee, holding that the
misrepresentations were material and increased the Appellee’s risk of loss. We reverse the directed
verdict and remand.

  Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Reversed in part;
                            Affirmed in part; and Remanded

DAVID R. FARMER , J., delivered the opinion of the court, in which ALAN E. HIGHERS and HOLLY K.
LILLARD, J.J., joined.

Thomas H. Strawn, Dyersburg, Tennessee for the appellant, Larry J. Ray.

Jere B. Albright, Humboldt, Tennessee for the Appellee, Tennessee Farmers Mutual Insurance
Company.

                                             OPINION

        Larry Ray (Mr. Ray) had an insurance policy with Tennessee Farmers Mutual Insurance
Company (Tennessee Farmers), effective August 17, 1989, covering his residence and the contents
therein from loss due to fire. The policy was in effect on January 17, 1991, when Mr. Ray’s home
was completely destroyed by fire. The policy provided insurance coverage in the amount of $35,000
on the dwelling and $20,500 on the contents therein. Despite Mr. Ray’s complying with all of the
provisions in the policy, including submitting a sworn proof of loss statement and making a demand
for payment of loss under the policy, Tennessee Farmers refused to pay Mr. Ray for his losses.
Tennessee Farmers did, however, pay $25,000 to the loss-payee mortgagee, the Bank of Halls, under
the policy. In July of 1991, Tennessee Farmers cancelled Mr. Ray’s policy, declared it void, and
refunded all premiums paid from August 1989 forward.

       Tennessee Farmers contends that it refused to pay Mr. Ray for his losses because the policy
is void ab initio. In support of its contention, Tennessee Farmers asserts that Mr. Ray made
misrepresentations on his application for insurance by not disclosing a previous fire which, in turn,
increased the insurance company’s risk of loss. Mr. Ray alleges that when a Tennessee Farmers’
insurance agent asked him whether he had ever had a fire before, he told the agent he had a fire in
1979 and that the agent then told him that any fire occurring over ten years ago did not matter, and
the agent did not note the 1979 fire on the application.

        Mr. Ray filed suit in circuit court for $49,999.99 in damages associated with the fire loss and
for attorney’s fees. Tennessee Farmers counterclaimed for $25,000 which was the amount it paid
to the Bank of Halls under the policy. At the close of all proof, Tennessee Farmers moved the court
for a directed verdict, and the trial court took the motion under advisement. The jury returned a
verdict for Mr. Ray for $49,999.99, finding that he did not make a material misrepresentation on the
application for insurance with the intent to deceive.

         After the jury returned its verdict, the court considered the motion for directed verdict. The
court opined that, although the issue of whether the answers Mr. Ray gave to the insurance agent’s
questions were false and given with the intent to deceive was a question for the jury, the issue of
whether those false answers materially increased the risk of loss to the insurance company was a
question for the court. The court found that the answers represented in the application increased the
risk of loss to Tennessee Farmers, and it accordingly granted Tennessee Farmers’ motion for directed
verdict which, essentially, rendered the policy void for misrepresentation. Mr. Ray appeals, claiming
error in the trial court’s grant of a directed verdict. Additionally, on appeal, Tennessee Farmers
raises the issue, as we perceive it, of whether the trial court erred in refusing to grant a judgment on
its counterclaim against Mr. Ray for the $25,000 it paid to the loss payee-mortgagee under the
insurance policy. For the reasons discussed below, we affirm the trial court’s judgment as to
Tennessee Farmer’s counterclaim, but we reverse the trial court’s judgment as to Mr. Ray.

       Statutory language concerning a material misrepresentation in an insurance policy application
can be found in section 56-7-103 of the Tennessee Code which provides,

        No written or oral misrepresentation . . . made in the negotiations of a . . . policy of
        insurance, or in the application therefor, by the insured or in the insured’s behalf,
        shall be deemed material or defeat or void the policy or prevent its attaching, unless
        such misrepresentation . . . is made with actual intent to deceive, or unless the matter
        represented increases the risk of loss.

Tenn. Code Ann. § 56-7-103 (2000). Risk of loss is increased if the representation relates to a matter
of sufficient importance to naturally and reasonably influence the judgment of the insurer in issuing


                                                  -2-
the policy. See Howell v. Colonial Penn Ins. Co., 842 F.2d 821 (6th Cir. 1987); Renner v.
Firemen’s Ins. Co., 136 F. Supp. 114 (E.D. Tenn. 1955); Lane v. Travelers Indem. Co., 499 S.W.2d
643 (Tenn. Ct. App. 1973). Accordingly, then, in order to void an application for insurance, the
representation made by the insured must be false in the sense that it was made with the intent to
deceive and that it concealed matters which increased the risk of loss to the insurance company. See
Volunteer State Life Ins. Co. v. Richardson, 244 S.W. 44 (Tenn. 1922).

        Mr. Ray submitted an application for fire insurance which contained the following question
and answer: “Ever had any fire, theft, or liability loss? No.” Regarding his answer, Mr. Ray
testified as follows:

        Q.:     When the property was insured in August of 1989, did you sit down with Mr.
                Norman and fill out that application?

        A.:     I sat down with him, and he filled it out, and I signed it.

        Q.:     Did he ask you questions?

        A.:     Yes, sir, he did.

        Q.:     Did he ask you had you ever had a fire before?

        A.:     Yes, sir, he did.

        Q.:     And what was the result of that? What was said?

        A.:     I told him I had a fire in 1979, and he told me anything over ten years, it didn’t
                matter, and he didn’t put it down.

        Q.:     Well, did you tell him what kind of fire it was, or what happened?

        A.:     He wasn’t interested in finding out nothing about it.

Mr. Norman, the insurance agent, denied that the above conversation took place. Based upon Mr.
Ray’s testimony, however, the jury in the instant case found that Mr. Ray did not intend to deceive
the insurance company.

          Where this court is asked to review a grant of a directed verdict on motion of a defendant,
it is not our duty to weigh the evidence. Rather, we must take the strongest legitimate view of the
evidence in favor of the plaintiff, indulging in all reasonable inferences in his favor, and disregarding
any evidence to the contrary. The trial court’s action may be sustained only where the evidence is
uncontradicted and a reasonable mind could draw only one conclusion. See Alexander v.
Armingtrout, 24 S.W.3d 267, 271 (Tenn. 2000); Keller v. East Tennessee Prod. Credit Ass’n, 501


                                                  -3-
S.W.2d 810 (Tenn. Ct. App. 1973). Based upon this standard, this court must accept as true the
testimony of Mr. Ray wherein he stated that he told the agent for Tennessee Farmers that he had a
previous fire in 1979 and that the agent responded that any fire over ten years ago did not matter.

        Generally, the knowledge of an agent is imputed to his principal. See Griffith Motors, Inc.
v. Parker, 633 S.W.2d 319, 322 (Tenn. Ct. App. 1982). Additionally, when an agent acts within the
scope of his apparent authority, although exceeding his actual authority, he binds his principal. See
Industrial Life & Health Ins. Co. v. Trinkle, 205 S.W.2d 414, 415 (Tenn. 1947). Further, where
the insurer, at the time of issuance of a policy, has knowledge of existing facts which, if insisted
upon, would invalidate the policy from its inception, such knowledge constitutes a waiver of
conditions in the policy inconsistent with the known facts and the insurer is estopped thereafter from
asserting a breach of such conditions. There are exceptions to the imputed knowledge rule. The
knowledge of the agent is not imputed to his principal when a third party, such as an applicant for
insurance, is acquainted with circumstances indicating that the agent will not advise his principal of
disclosed facts; where the third party colludes with the agent in acting adversely to the principal;
where the third party uses the agent to further his own fraud upon the principal; where the agent’s
knowledge is such that the agent is certain to conceal the information from his principal; or where
the agent’s interest would be defeated by disclosure. See De Ford v. National Life & Accident Ins.
Co., 185 S.W.2d 617, 620 (Tenn. 1945). This court opined in Bland v. Allstate Insurance Co., 944
S.W.2d 372, 376 (Tenn. Ct. App. 1996), that this exception does not apply in instances where the
agent is acting as the sole representative of the principal, citing as authority Griffith Motors, Inc.
v. Parker, 633 S.W.2d 319, 322 (Tenn. Ct. App. 1982) and State v. Candler, 728 S.W.2d 756, 759
(Tenn. Crim. App. 1986). We believe the principal stated in Griffith Motors is misplaced here.
Regarding the imputed knowledge rule, the court in Griffith Motors stated,

       There is an exception to [the imputed knowledge] rule, however, where the agent is
       dealing with the principal in his own interests or where his interests are adverse to
       that of the principal so that it is to his own advantage not to impart his knowledge to
       the principal. There is also a limitation to this exception, sometimes referred to as
       the “sole actor” or the “sole representative” doctrine. This doctrine holds that the
       adverse interest exception does not apply when the transaction on behalf of the
       principal to which notice is sought to be imputed is entrusted solely to the officer or
       agent having the knowledge.

Griffith Motors, 633 S.W.2d at 322 (citations omitted). The important language here is “entrusted
solely.” We are of the opinion that the sole representative rule applies in situations where the agent
conducts and approves the entire transaction, thus binding his principal. For example, a bank’s loan
officer would be the sole representative of the bank in a transaction where the officer takes a loan
application, investigates it, and approves it himself on behalf of the bank. Such a transaction is
typical in the banking industry, but is atypical in the insurance agency. To have the sole
representative rule apply in an insurance transaction, the agent would have to take the application
for insurance, investigate it, and approve it himself on behalf of the insurance company without
sending it to the home office for review. Such a hypothetical situation is not what we had in the case


                                                 -4-
at hand. Here, Mr. Ray met with Mr. Norman to fill out an application for insurance. Mr. Norman
asked Mr. Ray a series of questions and then filled out the application, which Mr. Ray signed. Once
completed, the application was submitted to Tennessee Farmers for approval. Based upon these
facts, it cannot be said that Mr. Norman was acting as the sole representative of Tennessee Farmers
in this insurance transaction. It would seem to follow then that in the instant action, the imputed
knowledge rule would not apply. However, when faced with facts similar to the facts at hand, this
court, in Stubblefield v. Mutual Benefit Health & Accident Ass’n, 11 Tenn. App. 411 (1930), held
that where an applicant relied on an agent’s assurances of relevancy, the assurances were imputed
to the insurance company, and the insurance company was estopped from voiding the contract.

         In that case, Mr. Stubblefield applied for a policy of insurance against injuries from accident
and disability from disease. The agent for the insurance company asked Mr. Stubblefield whether
he had received medical treatment or whether he had any local or constitutional disease within the
last five years. Id. at 413. Mr. Stubblefield told the agent that he had a spell with his liver two years
prior and that he visited a doctor three or four times for this condition. Id. The agent told Mr.
Stubblefield that his bouts with his liver were irrelevant for purposes of the application because
anyone was liable to such attacks. Id. Mr. Stubblefield signed the application with full knowledge
of the negative answer to the question, confident that a negative answer was acceptable based upon
what the agent told him. Id. Mr. Stubblefield sued to recover benefits under the policy after
becoming ill with cancer. The insurance company notified Mr. Stubblefield that it considered the
policy void on the ground that Mr. Stubblefield knowingly made a false representation material to
the risk in his written application for insurance. As a result, it tendered to Mr. Stubblefield all of the
premiums he had paid from the date of issuance of the policy. Id. at 412. The trial court ruled in
favor of Mr. Stubblefield, and the insurance company appealed. On review of the case, this Court
stated,

        The argument that no estoppel could arise in view of the knowledge of the applicant
        that the agent had written an untrue answer is not sustainable because the applicant
        accepted in good faith the agent’s assurance that the question did not relate to such
        facts as the applicant had disclosed; and to allow the Association, under such
        circumstances, to avoid its contract, on account of the assurance which it, through its
        agent, gave to the applicant, would be to allow it to take advantage of its own wrong.
        The applicant could thus rely on the agent’s determination of the materiality of the
        question and answer and the necessity of disclosure called for by the question.

Stubblefield, 11 Tenn. App. at 415 (citing Planters’ Inc. Co. v. Sorrels, 1 Baxt. 352; Hale v.
Sovereign Camp, 226 S.W. 1045 (Tenn. 1921)); see also Robbins v. New York Life Ins. Co., 72
S.W.2d 788, 792 (Tenn. Ct. App. 1934) (holding that knowledge and action on the part of the
insurance agent was imputable to the insurance company and therefore the company was estopped
from taking advantage of the misrepresentation).

      In the case before this court, Mr. Ray told Mr. Norman that Mr. Ray had a fire in 1979, and
Mr. Norman told Mr. Ray that a fire occurring over ten years ago was irrelevant to the application.


                                                   -5-
This knowledge must be imputed to Tennessee Farmers, and Tennessee Farmers is estopped from
asserting that, had it known the true facts, it would not have issued the policy to Mr. Ray.
Additionally, Tennessee Farmers cannot argue that the imputed knowledge rule does not apply here
because Mr. Ray knew that the agent had written an untrue answer. Mr. Norman assured Mr. Ray
that he need not disclose a fire occurring over ten years ago. Mr. Ray signed the application for
insurance knowing that it contained a false answer; however, Mr. Ray relied on Mr. Norman’s
assurances concerning the necessity of disclosure, and he is justified in so doing.

        There are numerous cases in Tennessee in which our courts have refused to enforce an
insurance application based upon misrepresentations therein. For example, in the cases of Beasley
v. Metropolitan Life Insurance Co., 229 S.W.2d 146 (Tenn. 1950); Giles v. Allstate Insurance Co.,
871 S.W.2d 154 (Tenn. Ct. App. 1993); Montgomery v. Reserve Life Insurance Co., 585 S.W.2d
620 (Tenn. Ct. App. 1979); and Hardin v. Combined Insurance Company of America, 528 S.W.2d
31 (Tenn. Ct. App. 1975), the applicant told the truth to the agent; the agent filled out the application
with false answers; and the applicant signed the application without reading it. In Tegethoff v.
Metropolitan Life Insurance Co., 424 S.W.2d 565 (Tenn. Ct. App. 1966) and National Life &
Accident Insurance Co. v. Atwood, 194 S.W.2d 350 (Tenn. Ct. App. 1946), the misrepresentation
originated with the insurance agent, but the applicant failed to correct the information and failed to
inform the insurance company after becoming aware of the error. Other cases dealt with situations
where the applicant had reason to know that the agent was not disclosing full information to the
insurance company, and thereby acquiesced in the fraud; where the applicant gave false answers to
the agent; or where the applicant withheld information from the agent. See Broyles v. Ford Life Ins.
Co., 594 S.W.2d 691 (Tenn. 1980); De Ford v. National Life & Accident Ins. Co., 185 S.W.2d 617
(Tenn. 1945); Milligan v. MFA Mut. Ins. Co., 497 S.W.2d 736 (Tenn. Ct. App. 1973). These cases
are factually distinguishable from the case at hand. Here, Mr. Ray told the truth to the agent, and
the agent filled out the application with false answers. Being assured by the Tennessee Farmers’
agent that he did not need to disclose his previous fire loss, Mr. Ray signed the application. Because
these cases are easily distinguishable from the case at hand, and because the facts of the instant case
are analogous to those in Stubblefield, we conclude that Stubblefield is controlling. As a result, the
assurances Mr. Norman gave to Mr. Ray are imputed to Tennessee Farmers, and Tennessee Farmers
is estopped from asserting that, had it known of the previous fire, it would not have issued the policy
to Mr. Ray. Because we find that Mr. Ray’s policy was not void, we find that the trial court did not
err in not awarding Tennessee Farmers a judgment of $25,000 for the funds it paid to the Bank of
Halls.

        Based upon the foregoing facts and case law, we reverse the trial court’s grant of a directed
verdict for Tennessee Farmers. We find that the knowledge Mr. Norman had regarding Mr. Ray’s
1979 fire was imputed to Tennessee Farmers and that Mr. Ray was justified in relying on the
assurances given him concerning the necessity of disclosure called for by the question in his
application. To direct a verdict in favor of Tennessee Farmers, finding that the misrepresentation
contained in Mr. Ray’s application for insurance increased Tennessee Farmers’ risk of loss, allows
Tennessee Farmers to take advantage of its own wrong. In view of his good faith, we hold that Mr.
Ray should not be deprived of his benefits. Accordingly, we affirm the holding of the trial court as


                                                  -6-
it pertains to Tennessee Farmers. Additionally, as it pertains to Mr. Ray, we reverse and remand the
holding of the trial court for reinstatement of the jury’s verdict. The costs of this appeal are taxed
to appellee, Tennessee Farmers Mutual Insurance Company, and its surety, for which execution may
issue if necessary.


                                                       ___________________________________
                                                       DAVID R. FARMER, JUDGE




                                                 -7-
