Waiver and Estoppel
Prof. Bill Long 1/26/05
You should look at the four subject areas we have studied in the last three classes (contra proferentem, reasonable expectations, the authority of the agent, and estoppel/waiver) as arguments which the insurer's attorney can use to try to "stretch" coverage for the insured. Likewise, the insurer will try to minimize the effect of these "arguments"--by claiming for example, that the contract is unambiguous, that the notice provisions were conspicuous, that the agent was not really speaking for the insurer, etc. Law and litigation is a game of sorts, a wrestling match where people try to use the arguments available to "get the upper hand" on the opponent. That is how you should see these topics.
The Roseth case treats the issue of estoppel in a helpful but not very complete way. Basically, the holding of the SD court was that estoppel was not available to the plaintiff (that is, the argument that the insurer ought to be estopped at trial from denying coverage because its agent, previously, had possibly represented that there would be coverage) because the possible change in position (of the agent) was not done at the beginning of the contract. I had a hard time figuring out why this time was such a big deal, and after studying the issue for a while, I still have a hard time. But this essay is designed to put the issue into a larger perspective.
Generally, the rule of law with respect to insurance contracts is that waiver or estoppel cannot create a contract of insurance or "expand" a policy to include coverage which by the terms of the policy is expressly excepted or otherwise excluded. That is, the general rule of law is that if an agent represents that you have coverage in your policy and you don't actually have coverage, you cannot estop the agent (or insurer) from changing positions at trial by introducing the actual insurance contract to show that you don't have coverage. This seems strange to me, but it comes from the approach where the written policy controls. You may have an action against the agent for negligent misrepresentation, but you don't have an action against the insurer for coverage under an estoppel theory. You may, however, be able to argue "reasonable expectations" or "contra proferentem." You just generally cannot estop the insurer from introducing the policy.
Yet the minority rule, which Jerry says is growing quite rapidly, is quoted by the New Jersey Supreme Court in Roseth and provides that if the agent misrepresents coverage, even innocently, before or at the inception of the contract, and the insured reasonably relies on it, then the insurer is estopped to deny coverage after a loss on a risk actually not covered (but represented to be covered) by the terms of the policy.
The case that got the ball rollling from this perspective, Harr v. Allstate Insurance Co., was a 1969 decision in which the insured owned a homeowners and policy which excepted coverage of business merchandise. Plaintiff understood this. Plaintiff moved some business property home and called his agent to get additional coverage for the business merchandise. According to the insured's testimony at trial, the agent said, "We can cover you for $7,500 (in loss) and you are fully covered." Well, you know what happened. There was a loss by water that wiped out his business merchandise at home but the agent had bought a fire insurance policy and didn't go through the provisions with the insured.
The insured sued on the theory that, even though the policies didn't cover the loss, the insurer ought to be estopped from denying coverage under the new policy. The insurer won at trial but on appeal the NJ Supreme Court reversed and held that the doctrine of equitable estoppel was available under proper circumstances to broaden the coverage of an insurance policy. The "proper circumstances" that it enumerated were misrepresentations "before or at the inception of the contract." In this case, the fire policy (the second one secured) was recently secured; the agent represented falsely that Mr. Harr was covered; and that representation later proved incorrect. Thus, the NJ Supreme Court wrote a rule narrowly tailored to the facts of the case--that the misrepresentation had to be at the beginning of the contract period for estoppel to be invoked.
Now you should be in a position to understand Roseth more clearly. Even though SD is a minority jurisdiction (following NJ), the court held that the Harr rule (if I can call it that) was inapplicable here because the potential misrepresentation was made well after the policy was issued. But this doesn't ultimately seem to make sense to me. Why should it matter when the misrepresentation is made? Perhaps one can argue that if it is made a few years after the policy issued then the insured ought to know the contents completely, but this isn't an obvious winner for me. It might just be that the SD court didn't want to expand on the Harr rule because the facts of the case didn't clearly show a misrepresentation by the agent. Possibly if the facts were more egregious we might have seen a different rule of law.
Jerry concludes his treatment of the subject by saying, "The rule that estoppel cannot be used to expand the coverage of insurance policies is still the majority rule, but the minority rule seems destined to displace the majority rule someday (pp. 420-21)." I don't know if that is true, but that is where things are today.
Copyright © 2004-2007 William R. Long