(Every Tuesday, we will discuss elements of insurance through the lens of Terms & Conditions. In this article, we go into Bill Wilson’s book, When Words Collide to look at the deeper and more profound elements of policy wording and implications for coverage and claims disputes)
Waiver and Estoppel
Waiver is the voluntary relinquishment of a known right that can be based on a written or oral agreement or implied from conduct. It is based on consent (and sometimes on an agent’s “scope of authority”) and, thus, closely tied with contract law. Waiver usually requires that the insured prove the insurer’s voluntary relinquishment of a policy right.
Estoppel, in the context of this discussion, is the prohibition on an insurer to impose exclusionary contract provisions due to waivers or misrepresentations. It is based on an imposed liability (and sometimes on an agent’s “scope of employment”) and, thus, is more closely founded in tort law. Although more useful than waiver against insurers, estoppel normally requires that the insured demonstrate detrimental reliance (see below) upon some waiver or representation, express or implied, in the policy language or in the conduct of the parties.
For example, an insurance policy requires that the insured file a proof of loss within 60 days of the loss. However, the loss (e.g., a hurricane) is so widespread that the insured cannot even access the insured property for a month or longer. In that case, an insurer may extend the reporting period (or an extension may be ordered by a regulator) by waiving the 60-day requirement. It would then be estopped from reasserting it.
To invoke the doctrine of estoppel against the insurer, the insured must prove by “clear and convincing evidence” that he or she was misled by the acts or statements of the insurer or its agent and that he or she reasonably relied on, and was induced to act on, those representations to his or her detriment.
According to industry consultant and expert witness Craig Stanovich, CPCU, CIC, CRM, AU, “If the insurer is relying on an exclusion, the doctrine of estoppel does not usually apply. Estoppel normally applies to a policy condition, not an exclusion.” This appears to continue to be the majority view, but some legal experts opine that, while the general rule of law is that equitable estoppel cannot be used to squeeze coverage out of an insurance contract where such coverage is clearly excluded, a growing minority rule is that an agent’s misrepresentation of coverage may estop the insurer from asserting a policy right.
In addition, when coupled with detrimental reliance, an insurer may be estopped from enforcing an exclusion when an insured relies on directions provided by, for example, a claims adjuster. According to one court has said [emphasis added]:
“The doctrines of waiver and estoppel should be available to protect the insured’s interest, even though they have the effect of broadening the coverage of the policy. It does not matter whether the insurer places limitations on coverage in insuring or exclusionary clauses of its own contract; reasonable reliance to the detriment of the insured has precisely the same result. Regardless of which language is selected by the insurer, the insured has a valid right to expect coverage as promised by the insurer’s agent. Reasonable reliance of the insured is legally sufficient substitute for necessary consideration.” — Bill Brown Construction Co. v. Glens Falls Ins. Co., 818 S.W.2d 1 (Tenn. 1991)
In one claim, an independent adjuster retained by the insurer advised that a major fire loss was covered, established the value of the damage, and authorized the clearing of the property by the insured. A week or more later, an adjuster of the insurer visited the site and reached the conclusion that the damage was overestimated by $700,000, though the amount could not be definitively ascertained because of the demolition and razing underway. After negotiations between the parties, the insurer conceded that the independent adjuster at least had the apparent authority to settle on behalf of the insurer.
In another claim, a herd of goats were able to gain entry into a farmhouse through an open back door and caused extensive damage to the interior when stampeded out the door by the residents. The homeowners policy excluded damage caused by “birds, vermin, rodents, insects, and domestic animals.” When the insured called his agent, he was advised that he had coverage because a goat is not a “domestic animal,” that being dogs, cats, etc. So, the insured initiated repairs. However, when the insurer’s adjuster arrived days later, he advised that the insurer’s interpretation of “domestic” was that this term referred to “domesticated” animals, including goats, cattle, sheep, etc.
Depending on the jurisdiction, the insurer might be estopped from asserting the “domestic animal” exclusion, but probably not. And, from a practical standpoint, the claim is going to be (and was) covered by the agency’s E&O policy, either via direct claim from the insured based on detrimental reliance (see below) or indirectly from the agency’s own insurer if compelled to pay the claim.