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


     APPEAL FROM THE CHANCERY COURT OF GRUNDY COUNTY
                        TENNESSEE

         THE HONORABLE JEFFREY F. STEWART PRESIDING



ERNEST D. BENNETT, III
TAYLOR, PHILBIN, PIGUE, MARCHETTI
& BENNETT, PLLC
2908 Poston Avenue
Nashville, Tennessee 37203

Attorney for the Defendant/Appellant

ROBERT S. PETERS
100 First Avenue S.W.
Winchester, Tennessee 37398

Attorney for Plaintiff/Appellee



                     AFFIRMED AND REMANDED


                                                PATRICIA COTTRELL, J.

CONCURS:
BEN CANTRELL, P. J., M.S.

DISSENTS IN SEPARATE OPINION:
WILLIAM C. KOCH, JR., J.
                                  OPINION

      This is an action to recover upon an insurance policy insuring an

automobile against loss. The named insured, Mr. Nance, the owner of the

automobile, is not a party to the action. Instead, the suit was brought by Ed

Reeves, doing business as Ed’s Imports, in his capacity as the loss payee named

in the insurance policy. This appeal involves the rights of the loss payee under

the loss payable provision of the insurance contract where, after the loss, the

insurance company canceled the policy retroactively due to a discovered

misrepresentation in the application by the insured. The trial court ruled in favor

of the appellee, Ed’s Imports. We affirm.

      Ed Reeves, doing business as Ed’s Imports, sold a 1992 Nissan Maxima

to Mr. Nance and financed this purchase. Mr. Nance gave Mr. Reeves a

promissory note, and agreed to maintain insurance coverage on the car. Mr.

Nance purchased that insurance from Granite State Insurance Company, the

appellant. Granite State issued the policy, which designated Ed’s Imports as the

loss payee. Also included in the policy was a provision establishing a

“deductible” for the loss payee. Ed’s Imports received notice of the insurance

and its loss payee status from the insurer.

      Mr. Nance’s car was stolen on June 8, 1996, and a claim was filed. In the

course of its investigation, Granite State discovered that Mr. Nance had been

convicted of felonious possession of marijuana before he applied for insurance

coverage. In his application for insurance, he had answered “no” to the question,

“has anyone in household been arrested for any offense other than traffic

offenses?” Based upon this misrepresentation by the insured, Granite State

denied the claim and canceled the insurance policy retroactively, declaring it

void ab initio.

                                        2
      Ed’s Imports, the loss payee, does not dispute the insurance company’s

right to cancel the policy retroactively with regard to the insured. Therefore, we

need not consider the validity of the insurance company’s retroactive

cancellation of the policy as to the insured.

      Ed’s Imports, the loss payee, attempted to recover from the insurance

company, and Granite State denied that claim. Ed’s Imports filed suit in the

Chancery Court of Grundy County, and the matter was tried by Stipulation of

Facts submitted by the parties. The trial court found that, under the terms of the

policy, the loss payee was entitled to recover. The court found that the policy

should be construed to require notice to the loss payee before cancellation would

be effective as to the loss payee, that any ambiguity in this regard should be

resolved in favor of the loss payee, and that the loss occurred prior to the notice

of cancellation of the policy. The trial court awarded Ed’s Imports the stipulated

amount, $12,008. Granite State appeals that decision.

      Counsel for both parties have clearly and accurately defined the issue for

this Court and for the trial court:

      Whether Granite State’s ab initio cancellation of the policy,
      subsequent to the loss, prevents recovery by the loss payee, based
      upon the terms and conditions of the policy and applicable law.


      Since the questions raised herein are purely questions of law and not of

fact, our review is de novo on the record with no presumption of correctness of

the trial court’s conclusions of law. See Chrysler Credit Corp. v. Noles, 813

S.W.2d 437, 438 (Tenn. App. 1990); Adams v. Dean Roofing Co., 715 S.W.2d

341, 343 (Tenn. App. 1986).

                                        I.

      Both parties rely upon the following provision, which they refer to as the



                                        3
loss payable clause, and the outcome of this case largely turns on the

interpretation of this language:

             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
             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.

      Under Tennessee law, where an insurance contract includes an “open” or

“simple” loss payable clause, a loss payee has no greater right than the insured.

See Hocking v. Virginia Fire & Marine Ins. Co., 99 Tenn. 729, 42 S.W. 451

(1897); Central Nat’l Ins. Co. v. Manufacturers Acceptance Corp., 544 S.W.2d

362 (Tenn. 1967). Open or simple clauses designate the loss payee, and declare

that the loss, if any, is payable to the mortgagee as its interest may appear. The

rights of the mortgagee under a simple loss payee clause are wholly derivative

and cannot exceed those of the insured. In Hocking, the court held that the act of

the insured in burning down the covered property extinguished her right to

recover under the insurance contract as well as the rights of the mortgagee or loss

payee. Hocking, 42 S.W. at 451. In Central National Insurance, the chattel

mortgagee/loss payee was denied recovery because of the acts of the insured who

breached material conditions of the policy. Central Nat’l Ins., 544 S.W.2d at

364. In that case, however, the court noted that the contract in question

contained no language “protecting the interest of the mortgagee from acts or

omissions of the insured-mortgagor.” Id.

       A clear majority of jurisdictions recognize the existence of a second type


                                        4
of mortgagee or loss payee clause, the “standard” or “union” clause, which is the

type referred to in Central National Insurance as missing from that contract.

Standard or union clauses designate the mortgagee, and then go a step further.

The signature characteristic of a standard clause is that it contains language

insuring that the interest of the mortgagee will not be invalidated by certain acts

of the insured. See, e.g., Nationwide Mut. Ins. v. Dempsey, 495 S.E.2d 914 (N.C.

App. 1998); see generally 4 Lee R. Russ, Couch on Insurance 3d § 65.32 et seq.

A standard or union clause appears in a policy obtained by the mortgagor for

the benefit of both the mortgagor and the mortgagee. Where an insurance policy

contains a standard or union mortgage clause, the mortgagee has an independent

contract with the insurer, the rights of a mortgagee can be greater than those of

the insured, and the mortgagee’s rights are determined by its separate contract

with the insurer. Id. at § 65.32.

      Tennessee courts have long recognized the existence of the two types of

mortgagee or loss payee clauses and the difference in the effect of their inclusion

in an insurance contract. See Laurenzi v. Atlas Ins. Co., 131 Tenn. 644, 176 S.W.

1022 (1915).

             That view is that the contract evidenced by the rider is
             a separate and distinct one with the mortgagee,
             designed for his protection, and in operation from the
             date of its execution; that, in so far as the policy or
             contract with the mortgagor is in harmony therewith,
             it is to be referred to, to supplement and complete the
             terms of the mortgagee’s contract, and, in so far as the
             policy is out of harmony with the rider, such adverse
             provisions are to be disregarded; and, further, that
             under such a contract the security of the mortgagee
             cannot be invalidated, either in whole or in part, by
             any act or neglect of the mortgagor, either prior or
             subsequent to the execution of such contract with the
             mortgagee.

Laurenzi, 176 S.W. at 1024.



                                        5
       Our courts have consistently held that where the insurance policy contains

a standard or union mortgage clause, the mortgagee has an independent contract

with the insurer. See Third Nat’l Co. v. Thompson, 28 Tenn. App. 436, 191

S.W.2d 190 (1945); Phoenix Mut. Life Ins. Co. v. Aetna Ins. Co, 59 S.W.2d 517

(Tenn. 1933); Phoenix Mut. Life Ins. Co. v. Greene County Farmers’ Mut. Fire

Ins. Co., 54 S.W.2d 971 (Tenn. 1932). Although these cases deal with policies

insuring real property,1 Tennessee courts have also recognized that a standard

mortgage clause contained in an insurance policy for personal property has the

same effect. See Union Planters Nat’l Bank v. American Home Assurance Co.,

865 S.W.2d 907 (Tenn. App. 1993) (bank which lent money for purchase of an

aircraft sued insurer under standard mortgage clause); Noles, 813 S.W.2d at 439

(“The primary importance of the distinction is that the standard clause provides

a separate and distinct contract between the insurer and the lienholder,”

regarding an automobile liability policy); Central Nat’l Ins. Co., 544 S.W.2d at

364 (while interpreting a simple or open clause contained in a motorcycle

insurance policy, the court in dicta noted the existence of standard or union

clauses).

       In a recent case involving the applicability of the doctrine of res judicata

to subrogation claims against the insured by an insurer who had paid the loss

payee, this Court noted:

               We begin our analysis with the observation that
               plaintiff [the insurer] was charged with the knowledge
               that its separate contractual obligation with First

       1
           A statute passed after Laurenzi, now codified at Tenn. Code Ann. § 56-7-804,
protects the interest of a mortgagee from invalidation of a fire insurance policy on realty
because of any act or neglect of the insured. The standard mortgage clauses in that type of
policy could not provide less protection to the mortgagee than the statute. Thus, the language
in the cases involving fire insurance on real property may indicate that the insurer cannot limit
the loss payee’s interest by specifying which acts of the insured may result in invalidation. The
standard mortgage clause language required by Tenn. Code Ann. § 56-7-804 is not required in
other types of insurance.

                                               6
                Tennessee [the loss payee] would not generally be
                invalidated by the acts of the insured or others . . .

Penn-America Ins. Co. v. Crittenden, 984 S.W.2d 231, 232 (Tenn. App. 1998).

        Our Supreme Court has stated that the essential nature and purpose of a

standard or union clause is “to furnish to the mortgagee a reliable security in a

definite sum free from any interference on the part of the mortgagor which

would, to any extent, invalidate or make less adequate that security.” Laurenzi,

176 S.W. at 1026.

        The loss payable clause at issue herein clearly includes the language

necessary to classify it as a standard or union clause: “This insurance with

respect to the interest of the loss payee, shall not become invalid because of

your [the insured’s] fraudulent acts or omissions unless the loss results from

your conversion, secretion or embezzlement of ‘your covered auto.’ ”2 Thus,


        2
          Nationwide Mutual Insurance Co. v. Dempsey involved a clause almost identical to
the one in this case. That provision read:

                Loss or damage under this policy shall be paid as interest may
                appear to you and the loss payee shown in the Declarations.
                This insurance covering the interest of the loss payee shall
                become invalid only because of your conversion or secretion 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 loss payee 10 days notice of cancellation.

Dempsey, 495 S.E.2d at 915.

        The court discussed the two types of mortgagee (or loss payee) clauses. “The first,
typically referred to as a ‘standard or union mortgage clause,’ stipulates that ‘the interest of the
mortgagee in the proceeds of the policy shall not be invalidated by any act or neglect of the
mortgagor.’ This type of clause acts as a distinct and independent contract between the
insurance company and the mortgagee and ‘confer[s] greater coverage to the lienholder than
the insured has in the underlying policy.’” Id. The court found that the language, “insurance
covering the interest of the loss payee shall become invalid only because of your conversion
or secretion of your covered auto,” clearly extends to the loss payee greater coverage than that
extended to the insured as it sets only two instances in which the loss payee’s insurance
coverage will become invalid. Id. at 916.

       In Pittsburgh National Bank v. Motorists Mutual Insurance Co., 87 Ohio App.3d 82,
84, 621 N.E.2d 875, 876 (1993), the Ohio Court of Appeals held that the following language,
which echoes the language of the policy at issue, constituted a standard loss payable clause:


                                                 7
Granite State has provided greater protection to Ed’s Imports than to the

insured and has created a separate contract with Ed’s Imports. In its brief,

Granite State acknowledges that the loss payable clause in its policy is a

standard mortgage clause, but asserts that it provides only a “modicum” of

protection greater than that of the insured.

                                           II.

      The issue, therefore, is whether the separate contract between the

insurer and the loss payee allows the insurer to retroactively cancel it.

In interpreting an insurance contract, standard principles of contract law

apply. See Hurley v. Tennessee Farmers Mut. Ins. Co., 922 S.W.2d 887, 892

(Tenn. App. 1995); Union Planters, 865 S.W.2d at 912. In construing

contracts, the words expressing the parties’ intentions should be given their

usual, natural, and ordinary meaning. See Taylor v. White Stores, Inc., 707

S.W.2d 514 (Tenn. App. 1985). All provisions of a contract should be

construed as in harmony with each other, if such construction can be

reasonably made, so as to avoid repugnancy between the several provisions of

a single contract. See Bank of Commerce & Trust Co. v. Northwestern Nat’l

Life Ins. Co., 160 Tenn. 551, 26 S.W.2d 135 (1930).

      Additionally, where by reason of ambiguity in the language employed

in a contract of insurance, if there is doubt or uncertainty as to its meaning,

and it is fairly susceptible of two interpretations, one favorable to the insured

and the other favorable to the company, the former will be adopted. See



             Loss or damage under this policy shall be paid, as interest may
             appear, to you and the loss payee shown in the Declarations.
             This insurance covering 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 ...

                                            8
Elsner v. Walker, 879 S.W.2d 852, 855 (Tenn. App. 1994); See also Palmer

v. State Farm Mut. Auto Ins. Co. , 614 S.W.2d 788, 789 (Tenn. 1981);

Travelers Ins. Co. v. Aetna Cas. and Sur. Co., 491 S.W.2d 363, 365 (Tenn.

1973) (exclusions will be strongly construed against the insurer).

       While a standard mortgage clause creates a separate contract of

insurance for the mortgagee’s separate benefit, that separate contract is

engrafted upon the main policy and can be understood by reference to the

policy. See Union Planters, 865 S.W.2d at 912. However, the standard

mortgage clause will prevail, as to the loss payee’s interest, over contrary

provisions in the policy. See Third Nat’l Co., 191 S.W.2d at 193. As stated

in Laurenzi, the insurance policy is to be referred to and will be used to

supplement or complete the terms of the mortgagee’s contract only “in so far

as the policy with the mortgagor is in harmony therewith.” Laurenzi, 176

S.W. at 1024.

       The provisions of the separate contract between the loss payee and the

insurer, created by the standard mortgage clause, determine the loss payee’s

rights. “Obviously, any claim ... must arise from a contract and the contract

between the parties in this instance is the breach of warranty endorsement

[standard mortgage clause], which provisions must control.” Union Planters,

865 S.W.2d at 912. Thus, the language of the standard mortgage clause, or

loss payable clause, is the primary source of the loss payee’s rights. See

Phoenix v. Greene County Farmers’ Mut., 54 S.W.2d at 972; Phoenix v.

Aetna Ins. Co., 59 S.W.2d at 518. The independent or separate contract “is

measured by the terms of the mortgage clause itself.” Noles, 813 S.W.2d at

439.



                                        9
      Both parties rely on the same paragraph in the insurance contract (the

loss payable clause), but differ in their interpretation of that paragraph by

stressing different provisions within it. The insurer relies on the language of

the loss payable provision which states: “We reserve the right to cancel the

policy as permitted by policy terms3 and cancellation shall terminate this

agreement as to the loss payee’s interest.” (emphasis added). The insurer

argues that it retroactively canceled the policy as to the insured, and that such

cancellation also terminated the loss payee’s interest.

      On the other hand, the loss payee relies upon the provision which

states, “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.” (emphasis added).

      3
          The terms of the policy governing cancellation provide:

      TERMINATION

      A.       Cancellation. This policy may be canceled during the policy period as follows:
                                           ***
               2.    We may cancel by mailing to the named insured shown in the
                     Declarations at the address shown in this policy:

                      a. at least 10 days notice:
                               (1)     if cancellation is for nonpayment of premium; or

                              (2)    if notice is mailed during the first 60 days this policy is
                                     in effect and this policy is not a renewal or continuation
                                     policy; or

                     b. at least 20 days notice in all other cases
                                            ***
               3.    After this policy is in effect for 60 days, or if this is a renewal or
                     continuation policy, we will cancel only:
                                            ***
                     c. If the policy was obtained through material misrepresentation.
                                            ***
      D.       Other Termination Provisions.
                                            ***
               3.    The effective date of cancellation stated in the notice shall become the
                     end of the policy period.


                                            10
       The loss payable paragraph can be read to give effect to all of its

component provisions, and can be read in harmony with the policy as a whole,

if the words “invalid” and “cancel” are given their plain and distinct

meanings. By the language it used, Granite State has promised the loss payee

that the insurance will not become invalid as to the loss payee’s interest due to

fraudulent acts or omissions of the insured except those specific acts named in

the loss payable clause. A cancellation which is retroactive to the date of

issuance of the policy is, in effect, an attempt to render the policy invalid from

its inception. The insurer cannot avoid its commitment not to invalidate the

loss payee’s interest by calling its action a cancellation which became

effective on the date of policy issuance. In view of the insurer’s commitment

to the loss payee, the terms “cancel” and “cancellation”, must be interpreted

as providing a prospective remedy only, unavailable to invalidate the loss

payee’s interest after a loss,4 absent one of the circumstances enumerated by

the insurer in its contract with the loss payee.5

       The insurer would have us interpret its commitment to the loss payee to

be limited to the situation where the insured’s misrepresentation relates to the

loss, asserting: “Where the insurer would seek to avoid payment of a loss

after its occurrence because of some fraudulent conduct of the insured in

reference to the loss, the loss payee would be protected by the provision of the

loss payable clause in regard to fraud of the insured. Where, however, the

insured lawfully cancels the policy pursuant to its cancellation provision, and



       4
         Generally, the rights of a loss payable mortgagee are determined at the time of the
loss. See Benton Banking Co. v. Tennessee Farmers Mut. Ins. Co., 906 S.W.2d 436, 438
(Tenn. 1995).
       5
          It is undisputed that the insured did not commit any of the acts so enumerated, and
the insurer itself characterizes the insured’s misrepresentations as fraudulent.

                                            11
the reasons have nothing to do with fraud of the insured in connection with

the loss, instead having to do with fraud in the inception by the insured

wrongfully procuring the policy, the cancellation is as effective against the

loss payee as against the insured.”

       We disagree with the insurer’s interpretation of the loss payee’s

separate contract. The loss payable provision simply does not contain the

words the insurer would have us insert. We interpret the provision as

prohibiting invalidation by the insurer of the loss payee’s interest due to any

fraudulent acts or omissions of the insured except those enumerated in the

provision itself.6

                                              III.

       The insurer also argues that the insured’s misrepresentation in the

application renders the policy voidable from its inception, at the option of the

insurer, on the basis of provisions of the policy and on the basis of Tenn.

Code Ann. § 56-7-103.

           The insurer relies upon the policy’s termination provisions and the

following two provisions, the first of which is part of the loss payable clause,

and the second of which is referred to as the fraud provision:

                However, we reserve the right to cancel the policy as
                permitted by policy terms and 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.

                                              ...


       6
         In Noles, 813 S.W.2d at 439, this Court held that the loss payee was protected even
though the insured had let the policy lapse by failing to pay premiums. The loss payable clause
in that contract required the insurer to give ten days notice prior to cancellation of the
lienholder’s protection and also stated that the loss payee’s interest would “not be invalidated
by any act or neglect of the . . . mortgagor.” Id.

                                              12
             We do not provide coverage for any ‘insured’ who
             has made fraudulent statements or engaged in
             fraudulent conduct in connection with any accident
             or loss for which coverage is sought under this
             policy.

      It is the insurer’s position that the fraud provision allows it to cancel the

policy due to the insured’s misrepresentation, that the termination provision

allows the cancellation to become effective on the date the insurer chooses to

state in the notice of cancellation, that the cancellation notice herein dated

November 25, 1996, stated that the cancellation was to take effect at

12:01a.m. on February 28,1996, that the loss payee was only entitled to the

same notice as the insured, and that the retroactive cancellation was valid as

to both the insured and the loss payee under the language of the loss payable

clause.

      We respectfully do not agree with the insurer’s interpretation of the

policy provisions as they apply to the separate contract with the loss payee.

First, although the loss payee’s interest can be terminated by cancellation, that

cancellation must comply with the policy terms, under the language the

insurer relies on and under well-settled law. When an insurance company

seeks to cancel a policy, strict compliance with policy cancellation provisions

is required in order to effectuate cancellation. See Jefferson Ins. Co. v. Curle,

771 S.W.2d 424 (Tenn. App. 1989); State Automobile Mut. Ins. Co. v. Lloyd,

54 Tenn. App. 587, 393 S.W.2d 17 (1965).

      The termination provisions of the policy contain no language

authorizing retroactive cancellation and, in fact, require advance notice of

cancellation. The insurer has promised to give the loss payee the same

advance notice as is given to the insured. Second, even if the fraud clause



                                       13
provides a basis for the insurer to deny coverage ab initio7 to the insured,

there is a distinction between canceling a policy and denying coverage after a

loss or attempting to avoid the policy. While we agree that such a distinction

may not have practical meaning with regard to the insured in this situation, it

has significance to the interest of the loss payee by virtue of the language used

by the insurer in its policy. Lastly, the fraud clause, by its terms, applies only

to coverage of the insured. It does not affect the loss payee’s separate

contract.

        We find that the policy provisions do not authorize the insurer to

retroactively cancel the policy so as to invalidate the loss payee’s interest on

the basis of the insured’s misrepresentation in his application.

                                                  IV.

        The insurer also relies on Tenn. Code Ann. § 56-7-103 as authorizing it

to void the policy, thereby invalidating the loss payee’s interest. That statute

provides:

                         No written or oral misrepresentation or
                  warranty therein made in the negotiations of a
                  contract or 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 or warranty is made with actual
                  intent to deceive, or unless the matter represented
                  increases the risk of loss.

        As stated by the insurer, Tenn. Code Ann. § 56-7-103 provides an

insurer with a defense which may render a contract voidable.8 See National


        7
            The validity of the cancellation ab initio as to the insured is not at issue in this appeal.
        8
           A voidable contract is one where one or more parties have the power to avoid the
legal relations created by the contract, or by ratification of the contract to extinguish the power
of avoidance. Accordingly, a voidable contract is valid and binding until it is avoided by the
party entitled to avoid it. See Newton v. Cox, 878 S.W.2d 105, 108 (Tenn 1994).


                                                   14
Union Fire Ins. Co. v. F.D.I.C., 837 S.W.2d 373, 381 (Tenn. 1992). The

statute prohibits an insurer from invalidating an insurance contract except in

the specified circumstances. Where those circumstances are present, an

insurer is allowed, but not required, to avoid a contract. An insurer retains

the option to waive invalidation and continue a contract of insurance after

discovery of misrepresentation. An insurer also retains the right to limit its

ability to void a policy by an express agreement to do so. Similarly, we see

no reason why an insurer cannot, by contract, agree to waive its right to

invalidate a policy as to the loss payee to whatever extent it wants.

       With regard to the effect of Tenn. Code Ann. § 56-7-103 on the

separate and independent contract between Granite State and Ed’s Imports,

even if Granite State can avoid its contract with the insured in reliance on the

statute and its policy provisions, the voiding of that contract does not

automatically render the separate contract with the loss payee void.9

       In Jackson v. American Eagle Fire Insurance Co., 92 S.W.2d 874

(Tenn. 1936), our Supreme Court held that both the insured and the loss payee

were cut off from their right to recover where, at the time of the purchase of

the policy, the loss payee was aware that the insured did not have

unconditional ownership of the covered property, as was required by the

policy. The court relied in part upon the statute and upon the standard

mortgage clause in that policy which required the mortgagee to give notice of



       9
          Oklahoma courts have held that a standard or union clause is effective to protect the
interest of the mortgagee even though the policy itself was void ab initio as to the mortgagor.
Great American Ins. Co. v. Southwestern Finance Co., 297 P.2d 403 (Okla. 1956); Oklahoma
State Union of Farmers’ Educational & Cooperative Union v. Folsom, 325 P.2d 1053 (Okla.
1958). Similarly, in Pittsburgh National Bank v. Motorists Mutual Ins. Co., 87 Ohio App.3d
82, 621 N.E.2d 875 (1993), the court held that where the actions of the insured would render
the loss beyond the scope of the policy coverage, the mortgagee is not precluded from coverage,
absent such a limitation in the loss payable clause.

                                             15
any increase in hazard, finding that ownership as tenant by the entirety while

insuring the property as sole owner was an increased hazard. Id. at 875.

      However, in Third National Co., this Court found that a

misrepresentation as to the nature of the use of the insured premises and a

breach of a stipulation against an increase in hazard did not render the policies

void, where the policy included the statement that the entire policy, unless

otherwise agreed, would be void if the hazard was increased by any means

within the control or knowledge of the insured. Id., 191 S.W.2d at 192.

Holding that the policies were “merely voidable if the insurers chose to avoid

them,” the Court further stated:

             The policies, however, were voidable only as to the
             insured, not as to the mortgagee. Such is the effect
             of the mortgage clause. This misrepresentation, or
             increase of the hazard, was an act of the insured, not
             participated in or known by the mortgagee. That
             clause stipulates, among other things, that the
             insurance as to the interest of the mortgagee ‘shall
             not be invalidated by any act or neglect’ of the
             mortgagor or owner of the property insured, nor by
             the ‘occupation of the premises for purposes more
             hazardous than are permitted’ by the policy.

Id., 191 S.W.2d at 193.

      In General Electric Credit Corporation v. Kelly & Dearing Aviation,

765 S.W.2d 750 (Tenn. App. 1988) this court denied recovery to the

lienholder/loss payee because it found that the loss was due to conversion, a

situation expressly excluded from the protection afforded the loss payee in the

policy. The relevant provision of the policy stated, “should you do anything

which makes your coverage invalid, we will still make a payment to that

lienholder or lessor . . . . We won’t cover your conversion, embezzlement or

secretion of the aircraft.” The insurer also had argued that the insured had



                                       16
made material misrepresentations on its application, thereby rendering the

policy void ab initio, and that the policy should be considered as if it never

existed. Id. at 753. This court found no evidence of misrepresentation in the

application, but stated:

             Furthermore, in Tennessee clauses such as this,
             lienholder’s endorsement have long been held to
             create “a separate and independent contract between
             the insurer and the mortgagee that the latter’s rights
             cannot be invalidated by any act or neglect of the
             mortgagor or insured . . .” Third National Company
             v. Thompson, 191 S.W.2d 190, 193 (Tenn. App.
             1945). See also, Couch on Insurance 2d, § 74: 347.

Id.

             The court further held:

             The language used in the lienholder’s endorsement
             provides that, regardless of whether the insured does
             anything which would cause his coverage to be
             invalidated, the insurer will pay the lienholder.

                                       ...

             [U]nless conversion, embezzlement or secretion by
             [insured] can be shown, [lienholder] is entitled to
             payment under the lienholder’s endorsement.

Id.

      Similarly, in First Tennessee Bank National Ass’n v. U.S. Fidelity and

Guaranty Co., 829 S.W.2d 144, (Tenn. App. 1991), this court found, partially

on the basis of Tenn. Code Ann. § 57-6-103, that a mortgagee bank’s failure

to disclose material information (the co-insured former spouse had threatened

to burn his dwelling to the insurer made the separate contract between the

mortgagee and the insurer voidable. The court based its reasoning on the fact

that the mortgagee, as a party to the independent contract created by the

mortgage clause, was under the duty to disclose conditions affecting the risk.



                                       17
Id.

      In the case now before us, there is neither proof nor allegation that Ed’s

Imports, the loss payee, had any knowledge of the insured’s misrepresentation

on his application. Such knowledge and failure to disclose, if under a duty to

do so, appear to be the determining factors in denying recovery to a loss payee

due to an insured’s misrepresentation. This interpretation is consistent with

the premise that the loss payee has a separate contract and with the law

regarding the ability of an insurer to avoid liability under its contract with the

insured on the basis of misrepresentation by the insured. To avoid coverage

on the basis of the statute, the insurer must first prove a misrepresentation.

See Gatlin v. World Serv. Life Ins. Co., 616 S.W.2d 606, 608 (Tenn. 1981);

Womack v. Blue Cross & Blue Shield, 593 S.W.2d 294, 295 (Tenn. 1980).

Since Ed’s Imports committed no misrepresentation, the statute cannot be

used by the insurer to void its separate contract with the loss payee.

      In essence, the statute provides to an insurer a defense of

misrepresentation to a claim by the insured under an insurance contract, when

properly pled and under the appropriate circumstances. See, e.g., National

Union Fire Ins. v. F.D.I.C., 837 S.W.2d 373 (Tenn. 1992); Bland v. Allstate

Ins. Co., 944 S.W.2d 372 (Tenn. App. 1996). We interpret the loss payable

clause at issue as an assurance that the insurer will not assert the defense of

the insured’s misrepresentation provided by Tenn. Code Ann. § 56-7-103

against the loss payee, unless the loss resulted from the insured’s conversion,

secretion or embezzlement of the covered auto. It is undisputed that Mr.

Nance did not convert, secrete or embezzle the insured automobile, therefore,

under the terms of the loss payable clause, his conduct does not give the



                                        18
insurance company the right to assert the defense of misrepresentation against

the loss payee.

                                       IV.

      Granite State, through the language of its policy provisions, provided

greater protections to the loss payee than it provided to the insured, and in so

doing created a separate and independent contract between itself and Ed’s

Imports. Based on the foregoing we interpret the language of the loss payable

clause in the instant case to prohibit the insurance company from retroactively

canceling the contract or rendering it invalid or void ab initio with respect to

the loss payee.

The case is remanded to the trial court for whatever further proceedings may

be necessary. The costs of this appeal are hereby taxed to the appellant.



                                       _____________________________
                                       PATRICIA J. COTTRELL, JUDGE

CONCURS:


___________________________
BEN H. CANTRELL, P. J., M.S.



DISSENTS IN SEPARATE OPINION:

WILLIAM C. KOCH, JR., J.




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