Estoppel of the Right to Demand Proof of Loss

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In the last issue of IDC Quarterly, we examined circumstances which causes the waiver of an insurer's right to demand from its insured a Sworn Statement in Proof of Loss. In this article we examine the loss of such rights from the standpoint of estoppel.

As discussed previously, courts have held that the requirement for an insured to file a sworn statement in proof of loss is a formal condition which is inserted in a policy for the insurer's benefit and, therefore, that requirement can be waived by express or implied conduct which is inconsistent with the insurer's intention to enforce it, or such rights may be lost by operation of estoppel. Downing v. Wolverine Ins. Co., 62 Ill. App. 2d 305, 210 N.E.2d 603 (2nd Dist. 1965).

The doctrines of "waiver" and "estoppel" are not identical in their application, nor are they technically synonymous terms. Waiver is the insurer's voluntary and intentional relinquishment of a known right. Whereas, to establish estoppel the insured must show that she was, in some manner, misled by the acts or statements of the insurer, or its agents, show that she relied on this conduct or representation, and further show that she was prejudiced thereby. Schoonover v. American Family Ins. Co., 214 Ill. App. 3d 33, 572 N.E.2d 1258 (4th Dist. 1991), appeal after remand, 230 Ill. App. 3d 65, 595 N.E.2d 230 (4th Dist. 1992).

As in the previous article, the reader will glean from the authority cited throughout, that there are relatively few recent Illinois court decisions involving disputes on this subject. Accordingly, a litigant may, as did this author, find it necessary to rely on longstanding and/or on out-of-state court holdings in an effort to anticipate the outcome of similar actions in Illinois.

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Waiver is essentially unilateral and is a legal consequence of the insurer's conduct, i.e., no act of the insured is necessary to complete a finding of waiver by the insurer. Western Cas. & Surety Co. v. Brochu, 105 Ill. 2d 486, 475 N.E.2d 872 (1985). Strong proof is not required of waiver. It is founded in the subtle operation of mind and speech, i.e., it may arise by expression, but more often by implication. Downing, 62 Ill. App. 2d at 305, 210 N.E.2d at 603.

It is important to note, however, that the factual circumstances must indicate that the relinquishment was intended by the insurer, and there must be sufficient evidence to establish that the insurer had full knowledge of all facts at the time of the alleged waiver. Id.

Theoretically, it is possible for an insurer to waive any provision in an insurance policy inserted for its benefit, or which do not modify the conditions which are to be performed after a loss or injury. Concordia Fire Ins. Co. v. Hardman, 63 Ga. App. 320, 11 S.E.2d 79 (1940). In fact, even a nonwaiver provision, i.e., one which states that no waiver can occur without the waiver being in writing can be waived! Gipps Brewing v. Central Mfgs Mut. Ins. Co., 147 F.2d 6 (7th Cir. 1945). ESTOPPEL DEFINED

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Estoppel is broader than that of waiver, and may even embrace it within its scope in some cases, since an insurer, after waiving certain rights, would be estopped thereafter to insist upon them. The converse, however, is not true, as an estoppel need not be founded upon a waiver.

Moreover, the doctrine of estoppel rests on the ground of public policy, fair dealing, good faith and justice, and its purpose is to forbid one from speaking against his or her own acts or representations or commitments to the detriment of one whom such conduct or statements were directed and who reasonably relied on them. Caledonia Sand & Gravel Co. v. Campbell, 128 Vt. 182, 260 A.2d 221, 39 A.L.R.3d 121 (1969).

Under the common law of Illinois, the doctrine of equitable estoppel may be invoked only in cases where the words or conduct by the party against whom the estoppel is asserted amounts to a misrepresentation or concealment of a material fact, where the truth respecting those representations is unknown to the party claiming the benefit of the estoppel, and where the party claiming the benefit of the estoppel actually relies on those representations. Whaley v. American Nat'l Ins. Co., 30 Ill. App. 3d 32, 331 N.E.2d 571 (4th Dist. 1975).

From an insurance standpoint, estoppel is based on the alleged ignorance of the insured that invokes the estoppel, charges of misleading representations or conduct on the part of the insurer, and an innocent and deleterious change of position by the insured in reliance on the insurer's conduct or statements, i.e., it may arise where there is no intent by the insurer to mislead. Ames v. Crown Life Ins. Co. of Toronto, 85 Ill. App. 3d 203, 406 N.E.2d 222 (3rd Dist. 1980).

In short, it is the effect upon the insured that gives vitality to a charge of estoppel by an insurer and against the insurer's effort to charge the insured with breach of contract. Hartford Accident. & Indem. Co. v. D.F. Bast, Inc., 56 Ill. App. 3d 960, 372 N.E.2d 829 (1st. Dist. 1977).

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Unanticipated forfeitures of insureds' policy rights are not looked upon with favor by most courts. Accordingly, most courts will first examine whether an insurer has waived its right or whether it should be estopped to assert a forfeiture in an effort to prevent the insurer from avoiding payment because of the insured's failure to comply with some requirement of the policy. Bank of Lyons v. Schultz, 109 Ill. App. 2d 453, 248 N.E.2d 812 (1st. Dist. 1969).

While no affirmative act by an insurer is necessary in order for a forfeiture to occur, when the insurer does gain the right to assert a forfeiture, it will not be permitted to do an act entirely inconsistent with that right and, at the same time, claim the forfeiture. Adam v. Columbian Natl. Life Ins. Co., 218 Ill. App. 54 (1st. Dist. 1921). Thus, an insurer will not be permitted to lull an insured into a false state of security, and into a position that the insured would not have taken, but for, the insurer's misleading conduct. Lee v. Ohio Casualty Ins. Co., 58 Ill. App. 3d 1, 373 N.E.2d 1027 (4th Dist. 1978).

Moreover, in order to establish that an insurer is estopped from raising a coverage defense, because it lulled the insured into a false sense of security, uncontroverted proof of the insurer's waiver is not required; rather, the insured need only establish those facts which would render enforcement of the coverage defense unjust, inequitable, or unconscionable. Id. at 1031.

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Estoppel, unlike waiver, requires a prejudicial change of position by the insured in justifiably relying on the acts, words, or conduct of the insurer to their detriment. However, an insured cannot be found to have justifiably relied on words or conduct of which he is unaware. Burr v. Lane, 517 P.2d 988, 10 Wash. App. 412 (Wash. Ct. App. 1974). Thus, no estoppel operates where the person claiming the benefit of an estoppel had no knowledge of acts done and which are claimed to result in estoppel since no reliance is possible in such a situation. Reynolds v. Guarantee Reserve Life Ins. Co., 44 Ill. App. 3d 764, 358 N.E.2d 940 (5th Dist. 1976).

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An insured who claims an estoppel must show that he has exercised due diligence to know the truth, and show that he not only did not know the true state of things, but also lacked any reasonable available means of acquiring the requisite knowledge. Novella v. Hartford Acc. & Indem. Co., 163 Conn. 552, 316 A.2d 394 (1979). Thus, a party may not invoke the doctrine of equitable estoppel except after having exercised such diligence as would reasonably be expected under the prevailing circumstances to avoid any mistake or misunderstanding. Muhleisen v Allstate Ins. Co, 203 So.2d 847 (La. Ct. App. 4th Cir. 1967).

An insured may be under a duty to read and know the contents of his policy. Carstensenv. Standard Acc. Ins. Co., 8 Wash.2d 72, 111 P.2d 565 (1941). As one court has aptly pointed out, however, if the requirement that the insured must have had no knowledge of the essential facts were applied without regard to context, there could never be estoppel where the insured could have referred to a policy. Saunders v. Lloyd's of London, 113 Wash.2d 330, 779 P.2d 249 (1989).

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As a general rule, there must be some affirmative conduct or representation on the part of the insurer that would, if the insurer were not estopped, operate as a fraud on the insured who has taken or neglected to take some action to his or her own detriment in reliance on the insurer' actions. However, an insurer's inaction in the form of silence may cause a similar effect.

Thus, an insurer may be estopped by its silence where it had the duty and opportunity to speak, and where it can be shown that the insurer intentionally or negligently disregarded such duty. Resolute Ins. Co. v. Mississippi, 290 So.2d 599 (1974). For example, silence on the part of the insurer for any length of time after receipt of a Sworn Statement in Proof of Loss may constitute a waiver of the necessity for any further proof to be furnished by the insured. Czerwinski v. Natl. Ben Franklin Fire Ins. Co., Pa.Com.Pl, 14 Northumb.L.J. 10, affirmed 10 A.2d 40 (1938). Silence, however, may estop the denial of coverage only if the silence is misleading. National Ins. Underwriters, Inc. v. Bequette, 280 F.Supp. 842 (D. Ala. 1968), affirmed, 429 F.2d 896 (9th Cir. 1970).

It is important to note that good faith on the part of the insurer requires that it point out the details in which a notice or proof of loss is insufficient under the contract and, thereupon, give the insured an opportunity to correct these defects. Thus, good faith does not permit an insurer to be silent and evasive under such circumstances. Johnson v. Scottish Union, 160 Tenn. 152, 22 S.W.2d 362 (1929).

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It has been held that a misrepresentation of law generally raises no equitable estoppel. American Bank & Trust Co. v. Trinity Universal Ins. Co., 251 La. 445, 205 So.2d 35 (1967). Moreover, only under exceptional circumstances, such as the existence of a confidential relationship between the parties or where there is greatly superior knowledge of the subject matter on the part of the representor, is a party justified in relying upon a representation of law. Id.

An Illinois court has been held, however, that an insurer's claim that it made a mistake of law did not preclude the trial court from finding that the insurer was estopped from denying coverage. Anderson v. Safeway Ins. Co., 10 Ill. App. 3d 597, 295 N.E.2d 117 (1st. Dist. 1973).

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Estoppel is available, in most cases, only to innocent parties who have proceeded in good faith and with "clean hands."

31 C.J.S. Estoppel, at 453-54.

For example, in Mutual of Enumclaw Ins. Co. v. Cox, 110 Wash.2d 643, 757 P.2d 499 (1988), the insured allegedly included fraudulent information on a personal property inventory form and sought recovery. The court held that the homeowner's insurer was not estopped from voiding the policy notwithstanding the fact that the insurer made partial payments to the insured after becoming aware of the false statements.

It has also been held, however, that an insured can assert an estoppel against an insurer, even without clean hands, as long as the estoppel would promote effective enforcement of public policy and where the insured's conduct is no more egregious than the conduct of the insurer. Ellis v. William Penn Life Assur. Co. of Amer., 124 Wash.2d 1, 873 P.2d 1185 (1994).

It should be noted at this point that a lack of good faith on the part of an insured does not prevent consideration of the issue of whether the insurer has waived an insured's forfeiture. Thus, the lack of a good-faith defense is generally applicable to the doctrine of estoppel, and not to the doctrine of waiver, which involves only the act or conduct of one of the parties to a contract. Fireman's Fund Ins. Co. v. Knutsen, 132 Vt. 383, 324 A.2d 223 (1974).

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Estoppel cannot be invoked to expand the scope of coverage absent a showing of detrimental good faith reliance upon statements or conduct of the party against whom estoppel is invoked which reasonably led an insured to believe coverage was present. Design Data Corp. v. Maryland Cas. Co., 243 Neb. 945, 503 N.W.2d 552 (1993). In other words, estoppel (nor waiver), as a general rule, can enlarge risks covered by the policy and, therefore, those doctrines should not be used to create a new and different contract with respect to the risk covered and insurance extended. Minnesota Mutual Life Ins. Co. v. Morse, 16 Tex. 83, 487 S.W.2d 317 (1972).

Or, as stated in State Farm Fire & Casualty Co. v. Kleckner, 194 Ill. App. 3d 371, 551 N.E.2d 224 (2nd Dist. 1990), "insurance coverage cannot be 'waived' into existence." Nor may a contract, under the guise of waiver, be reformed to create a liability for a condition specifically excluded by the specific terms of the policy. Frank Gardner Hardware & Marine Ins. Co., 245 Miss. 320, 148 So.2d 190 (1963).

However, the longstanding majority rule denying the enlargement of coverage by way of waiver, has been rejected by some courts. For example, in Tate v. Charles Agullard Ins. & Real Estate Inc., 508 So.2d 1371 (La. 1987), the court held that waiver may apply to any provision of the insurance contract even to the extent that the effect may bring within coverage risks originally excluded or not covered.

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As noted in the previous issue of IDC Quarterly, an insured is typically required to submit a proof of loss in order for the insurance company to determine the extent, if any, of its liability for the claim. Zak v. Fidelity-Phoenix Ins. Co., 34 Ill. 2d 438, 216 N.E.2d 113 (1966).

The proof of loss requirement is not a mere technical requirement but rather a valid prerequisite for coverage. American States Ins. Co. v. National Cycle Inc., 260 Ill. App. 3d 299, 631 N.E.2d 1292 (1st. Dist. 1994). Further, the insurer does not have to establish actual prejudice by the insured's failure to comply. Davila v. Arlasky, 857 F. Supp. 1258 (N.D.IL. 1994), dismissed 47 F.3d 1182 (Fed. Cir. 1995)

The terms of most property policies provide, inter alia, that in the event of loss, the insured must see that the following duties are performed:

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Most property polices state that the insured must submit a Sworn Statement in Proof of Loss within 60 days after the loss. The purpose of the provision in an insurance contract which requires the insured to give prompt notice is to allow the insurer to make a timely investigation in order to evaluate claims and to defend against fraudulent, invalid or excessive claims. Rooney v. State Farm Mutual Auto Ins. Co., 110 Ill. App. 3d 112, 456 N.E.2d 160 (1st. Dist. 1983).

It is important to note, however, that where the conduct of the insurer induces the insured to believe that there is no need to file a formal proof of loss, that settlement of the loss will be consummated and that the insured could govern his actions accordingly, the insurer is estopped from enforcing the policy provisions requiring that proof of claim be made within 60 days. Downing, 62 Ill. App. 2d at 305, 210 N.E.2d at 603.

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When an insured has attempted to file a proof of loss, albeit in a defective or insufficient manner, the burden is upon the insurer to make proper objections or it may be deemed to have waived the defect or insufficiency. Federal Land Bank v. Rocky Mountain Fire Ins. Co., 85 Mont. 405, 279 P. 239 (1929). Moreover, it has been held that an insurer which accepts proofs under a reservation of rights, but without objection to the proof's sufficiency, has waived its right to later reject the proofs due to an insufficiency or incompleteness. A&S Corp. v. Centennial Ins. Co., 242 F.Supp. 584 (N.D.IL. 1965).

In that regard, it is interesting to note the court's holding in Bennett v. Allstate Ins. Co., 950 F.2d 1102 (5th Cir. 1992), that even if the insured relied upon the false representations made by the insurer that a Sworn Statement in Proof of Loss was not required, there was no reasonable reliance on those representations sufficient to induce the insured to submit a fraudulent proof of loss.

The court in Mutual of Enumclaw Ins. Co. v. Cox, 110 Wash.2d 643, 757 P.2d 499 (1988), examined a separate aspect of "inducement" and held that an insurer's failure to assist the insured in filing out a personal property inventory list did not induce the insured to commit fraud by exaggerating the extent of their claim. Moreover, applying the "clean hands" doctrine, the court in Enumclaw held that the insured was precluded from recovering bad faith damages from the insurer because the insured submitted a false claim. Id. at 500.

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It is common for an insurer to request from the insured an execution of a "non-waiver agreement," i.e., a mutual agreement acknowledging that no rights of either party are being waived; or requesting in lieu thereof, a reservation of rights letter, when there is a danger that the insurer's conduct in investigating a claim may be misinterpreted or cause the insured to believe that coverage is being afforded.

Where, however, the parties have previously agreed that the insurer may proceed with an investigation of a loss without an estoppel or waiver of rights, the insurer should be allowed to later protest the insufficiency of the proof of loss required for filing a claim. Capital Fixture & Supply Co. v. Natl. Fire Ins. Co. of Hartford, 131 Colo. 64, 279 P.2d 435 (1955).

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An insurer is entitled, albeit obligated in most cases, to gain as much knowledge as may aid in its investigation, or as may otherwise be significant in determining its liability under the policy and in protecting itself against fraudulent claims. Waste Management v. Intern. Surplus Lines, 144 Ill. 2d 178, 579 N.E.2d 322 (1991).

Therefore, because an insurer often rests its coverage decisions under the policy, in part, on information contained in the proof of loss, it is apparent that the insurer must exercise extreme care in the manner that representations are made to the insured during the claims investigation process. Thus, valuable evidence or information necessary to establish a valid coverage defense may be inadvertently lost due to the unwanted applications of waiver and/or estoppel.