Tennessee's Supreme Court on Friday sided with BlueCross BlueShield of Tennessee in overturning lower court rulings that used testimony from former BlueCross executives about the insurer's agreements with agents that sell BlueCross policies.
In a case closely watched by Tennessee's business community, the state's high-court held that trial courts cannot use evidence outside of the written agreement-called "extrinsic" evidence-to interpret a contract if that evidence is contrary to the contract's written terms.
The case stems from an agreement BlueCross first made in 1999 with insurance agency Individual HealthCare Specialists, Inc., to allow Individual HealthCare to solicit applications for BlueCross insurance policies. Their business relationship lasted over 10 years, with new contracts each year that spelled out the commission rates for sales of new insurance policies and renewals of existing insurance policies.
For years, BlueCross paid Individual HealthCare commissions on renewal policies at the renewal rate in effect when the policy was first issued. In 2011, however, BlueCross cut the commissions paid on renewal policies based on the rate in effect when the policy was renewed, which was substantially less.
Individual HealthCare objected to the change, claiming that BlueCross could not change those rates without Individual HealthCare's permission. Ultimately, the parties' business relationship ended and Individual HealthCare sued BlueCross in Davidson County Chancery Court for breach of contract. The parties disputed, among other things, whether BlueCross had the authority to unilaterally change commission rates on renewal policies.
The trial court considered the oral testimony of three former BlueCross executives who helped negotiate the agency contract. The former BlueCross managers said that during the pre-contract negotiations neither party intended for BlueCross to have the authority to unilaterally change the commission rate. The trial court ordered BlueCross to pay Individual HealthCare more than $2.1 million in damages and legal fees.
In Friday's ruling, the Supreme Court acknowledged that Tennessee judges have long used extrinsic evidence of the circumstances when parties entered into a contract to interpret what they intended the written words to mean.
But in Friday's 54-page ruling written by Justice Holly Kirby, the court said "the written words are the lodestar of contract interpretation." Tennessee law does not allow the use of extrinsic evidence of pre-contract negotiations to justify an interpretation of the contract that contradicts the contract's written words.
The Supreme Court found that the language in the contract between BlueCross and Individual HealthCare clearly gave BlueCross the right to unilaterally change all of the commission rates, including the renewal rates. The Court concluded that the trial court erred by using evidence of the parties' pre-contract negotiations to contradict the written words in their agreement and overturned the lower court judgment.