By RICK HAMMOND, J.D., CLU
Absent special circumstances, few insurers would elect to have any of its policy rights waived, particularly, the right to demand from an insured a sworn statement in proof of loss. However, an insurer's inadvertent conduct, or a misinterpreted representation often causes such an effect. In other words, an insurer's right to demand compliance with the terms of its policy is a privilege which may inadvertently be lost.
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, such a requirement can be waived by express or implied conduct which is inconsistent with the insurer's intention to enforce such a requirement. Downing v. Wolverine Ins. Co., 62 Ill. App. 2d 305, 210 N.E.2d 603 (2nd Dist. 1965).
This article will examine insurer conduct which causes the waiver of the right to demand a proof of loss. As the reader will glean from the authority cited throughout, 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 situations in Illinois.
Conduct amounting to a waiver is often confused with "estoppel." However, estoppel generally requires a finding that the insured reasonably relied to their detriment on the insurer's act or conduct. Hartford Accident. & Indem. Co. v. D.F. Bast, Inc., 56 Ill. App. 3d 960, 372 N.E.2d 829 (1st Dist. 1977).
Thus, unlike estoppel, 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).
Waiver is not peculiar to insurance contracts. Under the common law, to constitute a technical waiver, there only needs to be an intention to waive one's rights by either expressed or implied conduct. However, as a matter of definition, waiver is defined as the voluntary, intentional relinquishment of a known right, or intentional conduct inconsistent with claiming the right. National Discount Shoes, Inc. v. Royal Globe Ins. Co., 99 Ill. App. 3d 54, 424 N.E.2d 1166 (1st Dist. 1981).
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 v. Wolverine Ins. Co., 62 Ill. App. 2d 305, 210 N.E.2d 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, 11 S.E.2d 79, 63 Ga. App. 320 (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).
Intent - The Necessary Element
An insurer's express waiver of its right to demand that an insured file a sworn statement in proof of loss is usually not difficult to establish. It has been argued that such a waiver should occur when an adjuster or company representative inspects the site of a loss and informs the insured that "no further proof is necessary," or, that "the only proof necessary is a list of the property destroyed." Harrison v. German-Amer. Fire Ins. Co., 67 F. 577 (S.D. Iowa 1895) (dismissed, 100 F. 1001).
Most disputes regarding whether an insurer has waived its rights are based upon an allegation of implied waiver. In such cases, policy rights may be lost when an insurer induces its insured to believe that there is no need to comply with certain policy provisions, or that such provisions will not be enforced. Downing, 62 Ill.App.2d at 308, 210 N.E.2d 606.
Thus, if the requisite "intent" is not shown by an insurer's express declarations, but by implied conduct, the conduct must be so clear, unequivocal, decisive, and so consistent with the intention to waive that no other reasonable explanation is possible. Bartleman v. Humphrey, 441 S.W. 2d 335 (Mo. 1969). In other words, the insured must reasonably presume that the company did not intend to insist upon a compliance with the condition. Continental Ins. Co. v. Coons, 14 Ky.Law Rep., abstract, 110.
Thus, if an insurer, having knowledge of a loss and, by some act or representation, throws its insured off-guard as to the necessity of fulfilling some policy requirement, the insurer should not be permitted to take advantage of the insured's failure to act. Fedas v. Ins. Co. of State of Penn., 151 A. 285, 300 Pa. 555 (Pa. 1930). Or, as the court held in Maddox v. German Ins. Co., 39 Mo. App. 198, the requirement for the submission of proofs of loss may be waived by the "shuffling, tricky, or evasive course of conduct on the part of the insurer, amounting neither to an absolute denial nor to a distinct recognition of its liability, yet such as to lead a reasonably prudent man to believe that proofs of loss are not to be required."
Waiver Operates to Avoid a Forfeiture
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 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 its 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 that waives a forfeiture is bound to treat the contract as though no forfeiture had occurred. Moreover, a court's finding that a clause has been waived by the insurer effectively eliminates that clause from the policy. S.E. Hanna & Co. v. Orient Ins. Co., 109 Mo. App. 152, 82 S.W. 1115.
It should be noted that when there is sufficient evidence to find that an insured has committed fraud, an insurer can be found to have waived its rights respecting the insured's forfeiture if, after becoming aware of the fraud, the insurer's conduct amounts to an affirmation of the contract, or a preemption of the investigation and defense of claim against the insured for an unreasonable time. Bonnet v. Stewart, 68 N.J. Super 287, 344 A.2d 321 (1975) (appeal after remand, 155 N.J. Super. 326, 382 A.2d 930 (App. Div. 1978).
However, it should also be noted that an insurer's waiver of one forfeiture based upon one aspect of fraud, does not constitute waiver of another where the insurer has no reason to believe that a second act of fraud has occurred. Housour v. Prudential Life Ins. Co. Of America, 1 Mich. App. 455, 136 N.W.2d 689 (1965). See also: San Francisco Lathing Co. v. Penn Mut. Life Ins. Co., 144 Cal. App. 2d 181, 300 P.2d 715 (1st Dist. 1956).
Thus, an insurer's knowledge of an insured's breach of a policy condition cannot be imputed from knowledge of a different breach. Philadelphia Underwriter's Ins. Co. v. Bigelow, 48 Fla. 105, 37 So. 210 (Fla. 1904). Moreover, because of the sheer volume of files an insurer is required to process, an insurer is entitled to rely on the representations of its insured without checking all of its files to determine if the insured is guilty of fraud. Modisette v. Foundation Reserve Ins. Co., 77 N.M. 661, 427 P.2d 21 (N.M. 1967).
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 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).
Insurance Coverage Should Not Be Waived into Existence
Neither waiver nor estoppel, 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.
Waiver of the Right to Demand Proof of Loss
Typically, an insured is required to submit a proof of loss in order for the insurance company to determine the extent, if any, of their liability for the claim. Zak v. Fidelity-Phoenix Ins. Co., 34 Ill. 2d 438, 216 N.E.2d 113 (1966).
In that regard, 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:
- prepare an inventory of damaged or stolen personal property. Show in detail the quantity, description, actual cash value and amount of loss. Attach to the inventory all bills, receipts and related documents that substantiate the figures in the inventory;
- submit to [the insurer], within 60 days after the loss, a signed, sworn proof of loss which sets forth, to the best of your knowledge and belief:
- specifications of any damaged building and detailed estimates for repair of the damage;
- an inventory of damaged or stolen personal property
It is important to note that if the insurer, before demanding a proof of loss, is fully aware of facts which allows for a coverage defense and does not then insist on noncoverage but recognizes the continued validity of the policy by requiring the insured to go to the trouble and expense, if any, of preparing proofs of loss and related matter, an implied intention to waive the respective policy defense may follow. Kenilworth Ins. Co. v. McDougal, 20 Ill. App. 3d 615, 313 N.E.2d 673 (2nd Dist. 1974).
However, one court has held that, in order to establish that an insurer has waived its right to demand a proof of loss, the alleged conduct amounting to the waiver must have occurred during the time fixed by the policy for filing the proof of loss, or prior to the time of the insured's forfeiture for failure to comply with that policy condition. Conley v. Fidelity-Phoenix Fire Ins. Co. of New York, 102 F.Supp. 474 (D. Ark. 1952).
It should also be noted that at least one other court has concluded that an insured cannot be charged with "waiving a waiver" after one has occurred. For example, in Warshawky v. Anchor Mut. Fire Ins. Co., 98 Iowa 221, 67 N.W. 237 (1896), the court held that an insured may charge an insurer with waiver of its right to demand a proof of loss, notwithstanding the fact that the insured later submitted the proof out of caution.
Time Limitation for Filing and Rejecting Proofs
As noted previously, most property polices state that the insured must submit a sworn statement in proof of loss within 60 days after the loss. An insurer's own failure to furnish proof of loss forms in a timely manner to its insured after receiving written notice of the loss could constitute a waiver of the strict compliance with that requirement. Canal Ins. Co. v. Savannah Bank & Trust Co., 181 Ga. App. 520, 352 S.E.2d 835 (Ga. Ct. App. 1987). However, at least one court has held that, in the absence of a contractual or statutory duty of an insurer to furnish to its insureds blank copies of the proof of loss, a failure to do so has been held not to constitute a waiver. Standard Life & Acc. Ins. Co. v. Strong, 13 Ind. App. 315, 41 N.E. 604 (1895).
In Dellar v. Frankenmuth Mut. Ins. Co., 173 Mich. App. 138, 433 N.W.2d 380 (Mich. Ct. App. 1988), the court held that the insured did not receive a copy of the policy from the insurer, despite repeated requests, until after expiration of the sixty-day period for the filing of the proof of loss. Moreover, the insured claims that she never received a blank proof of loss during the period before commencement of legal action. Id.
The court held that the failure of the insurer to provide such documents until after the expiration of the sixty-day period prevented the insured's compliance. The court also concluded that because there had been a full investigation, a pending criminal charge, and an examination under oath of the insured, a sworn proof of loss would add nothing and that its functional equivalent was already provided. Id.
It is interesting to note that the court in Dellar stated in dicta that:
[i]t would be better policy that, in order for an insurance company to argue in favor of a forfeiture of benefits based exclusively on the failure to file a sworn proof of loss within sixty days, the company be required to give notice of such potential forfeiture and either its own form for proof of loss or a specification in writing of what constitutes a satisfactory proof of loss.
A reasonable consequence of a waiver of the time limitation for filing a proof of loss is a finding by at least one court that states that an insurance company, upon rejecting a proof of loss and arranges with the insured for the filing of a new proof of loss, is obligated to notify the insured of its rejection in ample time to allow the insured to comply with the policy provision which sets a time limit for filing suit. Downing, 62 Ill. App. 2d at 308, 210 N.E.2d at 606.
However, an insurer does not waive the provisions regarding the time limitation for the submission of a proof of loss where it has no knowledge of the facts of the claim. Thus, an insurer is entitled to know that a demand is being made upon it under a policy issued by it, before its acts may be treated as a waiver. Nelson v. Travelers Ins., 113 Vt. 86, 30 A.2d 75 (1943).
Retention of Proofs Without Objection
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. Karelsen v. Sun Fire Office of London, 45 Hun 144, 9 N.Y.St.Rep. 831.
Similarly, silence on the part of the insurer for any length of time after receipt of the 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 10A.2d 40 (1938).
Denial of Liability
It is common for an insurer to assert a coverage defense to a claim for reasons other than the insured's failure to timely file a proof of loss, notwithstanding, their failure to do so. An interesting dichotomy may exist in such cases.
For example, in McMahon v. Coronet Ins. Co., 6 Ill. App. 3d 704, 286 N.E.2d 631 (1st. Dist. 1972), the court held that where an insurer's denial of liability is based upon grounds other than the insured's failure to file a proof of loss, the insurer has waived, or rendered unnecessary, compliance with the proof of loss requirement in the policy.
Yet, in Tibbs v. Great Central Ins. Co., 57 Ill. App. 3d 866, 373 N.E.2d 492 (1978), the court concluded that an insurer's letter, written to an insured after the expiration of time for filing a proof of loss and refusing payment for reason other than failure to timely file a proof, did not operate as waiver of the insurer's right to assert such failure as a defense to recovery.
Good Faith Investigations
An insurer is entitled, irrespective of whether its duty is to defend or to indemnify, 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).
Accordingly, an insurer is allowed a reasonable time to investigate the validity of a claim, and forbearance for a reasonable time should not cause a wavier of rights. Thus, when an insurer acts in good faith, it should not be held to a danger of being charged with a waiver. Agerton v. National Council Junior Order United American Mechanics, 188 S.E. 185. However, it is important to note that in Hornback v. Hornback, 667 S.W.2d 399 (Ky. Ct. App. 1824), the court held that if an investigation reveals to the insurance company all or substantially all of the information that would be included on a proof of loss, then the need for a proof of loss is obviated. (See also Aetna Insurance Co. v. Solomon, 511 S.W.2d 205 (Ky. 1974) and Western Automobile Casualty Co. v. Lee, 246 Ky. 364, 55 S.W.2d 1).
Nevertheless, where 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 may 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 (Co. 1955).
Examinations Under Oath
Demand for an insured's examination under oath, with knowledge that proofs have not been tendered by the insured may constitute a waiver of that requirement. Enos v. St. Paul Fire & Marine Ins. Co., 57 N.W. 919, 4 S. D. 639. Similarly, the insistence of an insurer in examining the insured after receiving proofs of loss may waive any objection the insurer may have regarding the insured's delay in submitting proofs. Carpenter v. German-American Ins. Co., 135 N.Y. 298, 31 N.E. 1015. It is important to note, however, that demanding an examination under oath of the insured has been held not to waive a forfeiture caused by an insured's false swearing in a proof of loss. Kavooras v. Royal Ins. Co., 167 Ill.App. 230 (1912).
It is interesting to note that at least one court has held that, notwithstanding the fact that an insurer may have conducted an examination under oath of its insured and retained an independent investigator for the purpose of examining the insured's claim, an insurer is still entitled to a sworn statement in proof of loss, and no waiver occurs when the insurer continues the demand for such. Bennett v. Allstate Ins. Co., 950 F.2d 1102 (5th Cir. 1992).
Nonwaiver Agreements and Reservation of Rights Letters
It is common for an insurer to request the insured's execution of a "non-waiver agreement,", i.e., a mutual agreement acknowledging that no rights of either party are being waived; or 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 when there is concern that such conduct may cause the insured to believe that coverage is being afforded. However, a nonwaiver agreement or a reservation of rights letter does not insulate an insurer from any and all possibilities of waiver, particularly, where the insurer has been found to have investigated the loss, put the insured to considerable trouble, or found to have accepted defective proofs prepared by the insured. Hanover Fire Ins. Co. v. Slaughter, 111 S.W.2d 362.
For example, an adjuster's actions which go far beyond the scope of a mere investigation of a loss have been held not to be protected under a nonwaiver agreement which allows the insurer to investigate the cause and amount of loss without waiving policy conditions. Conn. Fire Ins. Co. v. Fox, 361 F.2d 1 (10th Cir. 1966). Moreover, a nonwaiver agreement that is executed by an insured does not operate with respect to facts occurring prior to the time that the agreement was made. Home Indem. Co. v. Williamson, 183 F.2d 572 (5th Cir. 1950). Thus, a nonwaiver agreement has no effect on a waiver already accomplished. Home Ins. Co. v. Currie, 54 F.2d 203 (5th. Cir. 1931).
Most insurers go to great lengths to avoid an inadvertent waiver of its policy rights. Although this article focused, in large part, on the doctrine of waiver, it is advisable for the insurer to also be mindful of the type of conduct or representation which may cause an allegation of estoppel.