Waiver and Estoppel

Notice to the Insured Declaring Policy Void

Waiver and Estoppel

Although the concepts of “waiver” and “estoppel” are usually lumped together, they are totally different concepts that, when applied. They may result in similar conclusions by a trier of fact but they are different.

Waiver is a “voluntary relinquishment or abandonment—express or implied—of a legal right or advantage.”^[1] The person who is found to have waived a right must do it knowingly, with knowledge of the existing right and the intention of forgoing the right.

Estoppel, on the other hand, requires that a court create a bar that “prevents one from asserting a claim or right that contradicts what one has said or done before or what has been legally established as true.”

To establish estoppel, the insured or insurer must produce evidence that:

1. there must be a false representation;

2. it must be made with knowledge of the facts;

3. the other party must have been ignorant of the truth;

4. it must have been made with the intention that it should be acted upon by the other party; and

5. the other party must have been induced to act upon it.”[2]

The theory behind the rule of estoppel, when applied to an insurer, is that the insurer is estopped to declare a policy void when the insurer has been fully compensated.^[3]

When void is considered absolutely void the insurer need only take such action as will avoid waiver and estoppel.^[4]

The doctrine of waiver works against an insurer only when the insurer has knowledge of facts constituting a forfeiture. The equitable doctrines of waiver or estoppel may act to bar an insurer’s effort to void a policy where the insurer, with knowledge of facts that support a forfeiture, remains silent and fails to object or declare the forfeiture, cancel the policy, or rescind the insurance within a reasonable time.

The rationale behind this rule is that it is a breach of the covenant of good faith and fair dealing for an insurer, with knowledge of the right to declare a forfeiture, to remain silent. Retaining the unearned premium and failing to give notice can lead the insured to believe the contract is still regarded as valid.^[5]

The Restatement 2nd of Contracts recognizes the same rule in section 381, providing for a loss of the power of avoidance if, after knowledge of a misrepresentation, the injured party (the insurer) fails to manifest an intent to avoid within a reasonable time. “Reasonable time” is determined by four factors:

1. the extent to which the delay enabled or might have enabled the party with the power of avoidance to speculate at the other party’s risk with the court considering whether it is more fair, because of the delay, to prevent the insurer from voiding a policy where, if it did give notice promptly, the insured could have protected itself from future losses with new insurance;

2. the extent to which the delay resulted or might have resulted in justifiable reliance by the other party;

3. the extent to which the ground for avoidance was the result of any fault by either party; and

4. the extent to which the other party’s conduct contributed to the delay.

In Bank of Anderson v. Home Insurance Co., 14 Cal. App. 208, 111 P. 507 (1910), the court held that an insurer must at least object when it has facts that support a forfeiture or the forfeiture defense is waived. In this case the plaintiff bank loaned the insureds money to start their business, naming itself as beneficiary or additional insured on the policy.

A second policy was purchased on the same property, with the defendant’s knowledge. Fire destroyed the premises and the plaintiff sought recovery on both policies. The defendant denied liability, relying on a clause voiding the policy if additional coverage on the same property were purchased. The court ruled the defendant’s failure to at least object to the purchase of the second policy by claiming the plaintiff’s forfeiture under the policy waived the defense. The court held the insurer must at least express its dissent in some way, suggesting “[i]t could be done by objecting or by canceling the policy and returning the premium.”

In 1876, the Mississippi Supreme Court held that “Nothing is better settled, both in regard to insurance contracts and contracts of all sorts, than that an untrue statement by either party, as to a matter vital to the agreement, will avoid it, though there be no intentional fraud in the misrepresentation.” Coop. Life Ass’n of Miss., 53 Miss. at 12.

Insurers often, by the wording of the policy, voluntarily waive a right usually available to insurers, the right to use the equitable right of subrogation where, after a loss is paid the insured may step into the shoes of the insured and seek damages from the person responsible for the loss. The insurance contract will often allow the insured, before a loss, to waive the right of its insurer to subrogate against a certain class of person such as landlords, general contractors, property owners or lessees.