451 F.Supp.3d 837
M.D. Tenn.2020Background
- FSH (franchisee) contracted with Medex (franchisor) in 2015, paying initial franchise and ADA fees; Medex agreed to provide operational support but failed to do so.
- FSH notified Medex of breaches; Medex terminated the franchise and ADA; FSH demanded arbitration and prevailed.
- Arbitrator awarded damages separately for breach of the franchise agreement ($120,461), breach of the ADA ($452,065), and for fraud/TCPA ($613,702, non-cumulative), plus attorneys’ fees and arbitration costs; state court confirmed the award.
- Westchester issued a Miscellaneous Professional Liability Policy (with a Franchisors Endorsement) to Medex covering wrongful acts but excluding claims based on fraudulent/dishonest acts and claims seeking refunds of franchise fees/royalties, among other exclusions.
- Westchester defended under reservation of rights but denied indemnity for the arbitration award, citing the fraud exclusion, retroactive-date issues, and the refund/fees exclusion; FSH does not contest that fraud-related award portions are uncovered but seeks coverage for the breach-of-contract awards, attorneys’ fees, and arbitration costs.
- The district court denied Westchester’s motion for summary judgment, finding the fraud and other asserted exclusions do not bar coverage for the breach-of-contract awards, attorneys’ fees, or arbitration costs.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the policy’s fraud/dishonesty exclusion bars coverage for the breach-of-contract awards | Breach damages stem from non‑fraudulent failures to perform (lack of operational support) and thus are covered; concurrent‑cause doctrine applies if fraud partly contributed | Arbitrator found fraud and intentional conduct tied to plaintiff’s recovery, so exclusion bars all awards | Court: Exclusion does not bar breach awards — arbitrator found separate, non‑fraudulent breaches that substantially caused those damages (concurrent‑cause doctrine applies) |
| Whether breach damages are excluded as refunds of franchise fees/royalties | Breach damages are contract damages limited by the agreement, not a refund of fees; plain contract limit does not convert claim into an excluded refund | Awarded breach damages are effectively reimbursement of fees/royalties and thus excluded | Court: Damages are contract damages (subject to contractual limitation) and are not excluded as refunds of fees/royalties |
| Whether franchisor‑endorsement exclusions (guarantee of earnings / unfair business practices) bar ADA breach award | ADA breach award arose from wrongful termination/noncompliance — covered by policy endorsement | Exclusions for promises of earnings or unfair practices defeat coverage for ADA‑related damages | Court: Exclusions not shown to apply; Westchester failed to explain how those exclusions fit the ADA breach award, and the award is based on covered failure to comply/ wrongful termination |
| Whether attorneys’ fees and arbitration costs are excluded because tied to fraudulent conduct | Fees/costs flow from claims adjudicated on fraud and thus excluded | Fees/costs relate to contract/AAA entitlement and arbitration apportionment; should be covered if underlying breach awards are covered | Court: Fees and arbitration costs are not excluded for the same reasons as the breach awards (AAA agreement and contract authorize fees; apportionment not tied to merits of fraud exclusion) |
Key Cases Cited
- Clark v. Sputniks, 368 S.W.3d 431 (Tenn. 2012) (insurance‑coverage interpretation is a question of law; contractual terms given their plain meaning)
- Allstate Ins. Co. v. Watts, 811 S.W.2d 883 (Tenn. 1991) (adopts concurrent‑cause doctrine: coverage exists when a nonexcluded cause is a substantial factor even if excluded cause contributed)
- Morgan v. Utica Mut. Ins. Co., 229 F.3d 1153 (6th Cir. 2000) (applying Tennessee law: nonexcluded cause must be a substantial factor to preserve coverage)
- Rice v. Liberty Surplus Ins. Corp., [citation="113 F. App'x 116"] (6th Cir. 2004) (fraud exclusion applies where the underlying conduct itself was unlawful/fraudulent and formed basis of damages)
- Anderson v. Liberty Lobby, 477 U.S. 242 (1986) (summary judgment standard on weighing factual disputes)