Skip to Content

October 24, 2000

This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 14, #12, p. 24 (October 24, 2000). © Copyright Butler 2000.

In representing insurers in bad faith litigation, from time to time one will find a coverage issue that was not raised in the underlying litigation. The question to be addressed in this article is whether the coverage issue may be raised for the first time as a defense to the bad faith litigation.

Plaintiff’s counsel will normally attempt to allege waiver or estoppel to bar forfeiture of coverage. What happens if the insurer simply overlooked or disregarded a potential coverage issue? When is it too late to raise a coverage issue which may have thwarted coverage and done away with the underlying claim when that claim reaches the level of bad faith litigation? Will providing a defense to an insured in the underlying claim or paying an insured benefits under the subject policy bar an insurer from raising a coverage defense in a bad faith action?

I.  The ‘Missed’ Coverage Defense

Several reasons may exist as to why a coverage defense was missed. It could be as a result of a “late” found misrepresentation in the application for insurance. Alternatively, an insurer may not have known, at the time, that the insured was making misstatements during the course of the investigation of the claim. Similarly, facts giving rise to an exclusion may not have been disclosed. The reasons for missing a coverage defense are numerous.

The initial question to be analyzed by counsel for the insurer is whether the potential coverage defense would constitute a complete bar to recovery under the policy. If such a defense exists, the next question is what actions were taken by the insurer once it received actual or constructive notice of the facts which would support the potential coverage defense, which actions might ultimately result in an estoppel or waiver.

II.  The Doctrines Of Waiver And Estoppel – Tools To Defeat A Coverage Defense

A split of authority among jurisdictions exists as to whether an insurer has the right to contest coverage after it acts in a manner which would normally indicate the existence of coverage. Some jurisdictions indicate “the application of waiver and estoppel is limited, and usually, the doctrines will not be applied to broaden the coverage of a policy to protect the insured against risks that were not included in the policy or that were expressly excluded from the policy.” Kirschner v. Process Design Assoc. Inc., 592 N.W.2d 707 (Mich. 1999); Doe v. Allstate Insur. Co., 653 So. 2d 371 (Fla. 1995); Broderick v. Detroit Life Ins. Co., 177 N.W. 242 (Mich. 1920). This is based upon the reasoning that an insurance company should not be required to pay for a loss for which it has not charged a premium. Applying the doctrine of waiver and estoppel to broaden the coverage of a policy would force an insurer to cover a loss never covered by the policy’s terms.

Some jurisdictions generally hold that the doctrine of waiver may not be applied to extend insurance coverage beyond that contracted by the parties; however, under the appropriate circumstances, the doctrine of estoppel may be so applied. Potesta v. United States Fidelity & Guarantee Co., 504 S.E.2d 135 (W.V. 1998). Other jurisdictions find that an exception to the general rule exists, (1) when the insurer provides a defense to the insured without reserving its rights under the policy for such a period of time as to prejudice the insured, or (2) when the insurer or its agents misrepresent the extent of coverage the insured is purchasing. See, Turner Liquidating Co. v. St. Paul’s Surplus Alliance Insur. Co., 638 N.E.2d 174 (Ohio Ct. App. 1994); Britton v. Smythe, Cramer Co. et al., 2000 Ohio App. Lexis 4288 (Sept. 21, 2000).

Estoppel and waiver are two distinct doctrines. State Farm’s Lloyds, Inc. v. Williams, 960 S.W.2d 781 (Tex. Ct. App. 1997). Waiver requires the voluntary surrender of a known right. Basco v. McNeil Insur. Agency, 2000 Tex. App. Lexis 4788 (Tex. July 20, 2000). The most frequent and generally accepted definition of the term “waiver” is the intentional relinquishment of a known right, the voluntary relinquishment of a known right, or conduct which warrants an inference of the relinquishment of a known right. 92 C.J.S. Waiver, Page 1041. When a waiver is implied from conduct, the acts, conduct, or circumstances relied upon to show waiver must make out a clear case. Gilman v. Butzloff, 22 So. 2d 263 (Fla. 1945); Fireman’s Fund Insur. Co. v. Vogel, 195 So. 2d 20 (Fla. 2d DCA 1967). There can be no waiver unless the party against whom the waiver is evoked was in possession of all the material facts. 92 C.J.S. Waiver, Page 1059. See, Fireman’s Fund Insur. Co. v. Vogel, supra.

As a general rule, the estoppel doctrine will not create insurance coverage where none exists under the terms of the policy. Texas Farmers Insur. Co. v. McGuire, 744 S.W.2d 601, 602—03 (Tex. 1988); Minnesota Mutual Life Insur. Co. v. Morse, 487 S.W.2d 317, 320 (Tex. 1972); Doe v. Allstate, supra. Furthermore, unlike waiver, estoppel requires a showing that the insured was prejudiced by the insurer’s conduct. See, Employers Casualty Co. v. Tilley, 496 S.W.2d 552, 560 (Tex. 1973).

The burden of proving estoppel rests with the party evoking it, and every fact essential to an estoppel in pias must be clearly and satisfactorily proved. Ennis v. Warm Mineral Springs Inc., 203 So. 2d 514 (Fla. 2d DCA 1967). As stated in 31 C.J.S. Estoppel Section 87, beginning on Page 485:

Mere silence of itself, will not raise an estoppel. To make the silence of a party operate as an estoppel the circumstances must have been such to render it his duty to speak, and there has been an opportunity to speak. It is essential that one claimed to be estopped should have the knowledge of the facts, and that the adverse party should have been ignorant of the truth, and have been mislead into doing that which he would not have done but for such silence. Silence will not support an estoppel unless the party claiming an estoppel justifiably relied on the silence to its prejudice, and such conduct and reliance must be intended or reasonably anticipated by the one who remained silent. One cannot claim an estoppel based on silence where he had actual knowledge of the facts or the means of acquiring knowledge. One may not fail to avail himself of readily accessible sources of information and rely on the silence of another who has been guilty of no act calculated to induce the party claiming ignorance to refrain from investigating.

In some jurisdictions, estoppel based upon the conduct of the insurer does not operate to bring within the coverage of a policy risks not covered by its terms or risks expressly excluded therefrom, 43 Am. Jur. 2d Insurance Section 465; 31 Fla. Jur. 2d Insurance Section 670. Further, estoppel may not be used to affirmatively create or extend insurance coverage beyond that set forth in the policy. Criterian Leasing Group v. Gulf Coast Plastering & Drywall, 582 So. 2d 799, 800 (Fla. 1st DCA 1991).

Payment under the policy, by itself, is not fatal to assertion of a coverage defense in all jurisdictions. In the case of Trade Winds Construction v. Aetna Life & Casualty Co., 606 So. 2d 708 (Fla. 1st DCA 1992), a Florida Court of Appeals reversed a determination that the carrier was estopped from denying coverage in a workers’ compensation case because it had been paying the claim for over two years without raising a coverage defense. The court held the claimant was not prejudiced thereby.

Many states hold that defenses are waived if a carrier defends without notifying the insured of a reservation of rights. Britton v. Smyth Kramer Co., supra. The Washington Supreme Court has previously held that in third-party cases, a bad faith action could be maintained under a theory of presumptive prejudice even when coverage was ultimately found to be non-existent. Coventry Assoc. v. American States Insur. Co., 961 P.2d 933 (Wash. 1998). In Coventry, the Washington Supreme Court reversed its Court of Appeals and held that a bad faith action is permissible against an insurer in either a first-party or third-party case, regardless of whether the insurer was ultimately correct in determining the absence of coverage. Still, the court declined to apply the doctrine of presumptive prejudice to first-party cases, restricting its use to third-party cases. See, Id. at 938—939. In the absence of presumptive prejudice, the court also declined to apply the doctrine of coverage by estoppel. Id. at 940.

Similarly, the assumption of the defense of its insured or a continuation of the defense of an insured by an insurer after gaining knowledge of facts indicating non-coverage, without issuing a reservation of rights, may cause a waiver or the insurer may be estopped from raising the coverage defense. Basco v. McNeill Insur. Agency, 2000 Tex. App. Lexis 4788 (Tex. Ct. App. July 20, 2000). See also, Farmers Tex County Mutual Insur. Co. v. Wilkinson, 601 S.W.2d 520 (Tex. Ct. App. 1980).

In Michigan, while the law requires an insurer to notify its insured of its potential coverage defenses and defend such a case under a reservation of rights, no additional duty exists which requires an insurer that is not a party to the lawsuit to notify a plaintiff about a potential lack of coverage. Kirschner v. Process Design Assoc. Inc., supra. A simple assignment of the insured to the plaintiff of the insured’s rights against an insurer for potential bad faith only allows the Plaintiff to step into the shoes of the insured. If the insured cannot apply the doctrine of waiver or estoppel to extend coverage beyond the terms of the policy, neither can the insured’s assignee. Kirschner, supra. As stated by the court in Kirschner, in describing why the assignee’s claim failed, “plaintiffs did not simply want to stand in Process Design’s shoes, but rather wanted new shoes.”

In Heritage Mutual Insur. Co. v. Wisconsin Plating Works, 570 N.W.2d 252 (Wis. Ct. App. 1997), the court held that when a coverage dispute exists, the failure to immediately seek a determination of coverage did not, in and of itself, waive the right to contest coverage. The court held that an insurer may reject the tender of defense and permit the insured to pursue its own defense outside the insurer’s control. While this course of action was the most risky of available options, in the end the insurer “is not liable to the insured unless there is, in fact, coverage under the policy or coverage is determined to be fairly debatable.” Production Stamping Corp. v. Maryland Casualty Co., 544 N.W.2d 584, 586 (Wis. Ct. App. 1996).

III.  Raising The Coverage Defense In The Bad Faith Claim

When a misrepresentation in the application or a misrepresentation during the claims investigation by the insured is not discovered until after the bad faith claim is filed, in some jurisdictions it may be possible to raise the coverage defense for the first time in the bad faith litigation. The threshold question at this juncture, in an effort to get the coverage defense before the court, would be when did the insurer find and fully discover all the facts comprising the coverage defense. Secondly, one must then determine what, if anything, the insurer did which may constitute waiver or estoppel.

In Florida, several interesting cases exist which, through their interplay, provide a possibility to raise a later discovered coverage defense. The case of Johnson v. Life Insur. Co. of Georgia, 52 So. 2d (Fla. 1951), held that an insurer who had constructive knowledge of a potential coverage defense prior to the event of the loss resulted in a waiver of the coverage defense. Similarly, in Wimberg v. Chandler, 986 F.Supp. 1447 (M.D. Fla. 1997), it was determined that enough information existed to place the insurer on notice of the applicability of a complete coverage defense. In Wimberg, as in Johnson, the insurer’s agent discovered information concerning a potential exclusion prior to the loss. Despite the insurer not learning of the information until after the loss, the constructive knowledge of its agent prior to the loss was imputed to the insurer.

Conversely, in the case of United Services Automobile Association v. Clarke, 957 So. 2d 554 (Fla. 4th DCA 2000), USAA discovered after a loss that its insured had materially misrepresented his military status which was a requirement to be considered for coverage. The trial court agreed that Clarke was guilty of making material misrepresentations on his application but relied on Johnson, supra, and held that USAA waived its right to rescind the policy because USAA had constructive knowledge of the misrepresentation. The trial court further found that USAA failed to follow its own internal procedures in verifying Clarke’s military status and failed to cancel the policy when such verification was not received. In Clarke, the insurer did not assert misrepresentation as a defense until after it allowed Clarke to accept the tortfeasor’s policy limits in exchange for a full release. In this uninsured motorist case, this terminated any further recovery by its insured but for the uninsured motorist coverage availability. In overturning the trial court, the appellate court stated:

Unlike in Johnson, however, in this case no insurance agent had actual knowledge of the false information furnished by the insured and there were no circumstances which sufficiently put USAA on notice of the true facts such that it could be charged with knowledge of those facts. Here there was no deliberate disregard of information sufficient to excite attention and call for inquiry as to the existence of facts by reason of which a forfeiture should be declared.

Id. at 815. (Emphasis added.) As such, the court held that an age discrepancy which could have revealed the misrepresentation was not readily apparent and did not call attention to any situation requiring further inquiry. USAA did not discover the misrepresentation until it was conducting discovery in a civil suit initiated by Clarke years later.

Johnson, supra, is the seminal case in Florida regarding waiver of a coverage defense by “pre-loss” actual or constructive knowledge by the insurer. There, Florida’s Supreme Court held that when an insurer has knowledge of the existence of facts which would justify a forfeiture of the policy, any unequivocal act which recognizes the continued existence of the policy or which is wholly inconsistent with a forfeiture, will constitute a waiver. In Johnson, instead of making further inquiry based upon the agent’s knowledge of a misrepresentation in the application, the insurer continued to bill the insured for its policy premiums and then, after the loss, raised a coverage defense. The court in Clarke held the Johnson decision to be inapposite.

Similarly, in the case of Leonardo v. State Farm Fire & Casualty Co., 675 So. 2d 176 (Fla. 4th DCA 1996), the court stated:

Of even greater significance to this appeal is whether State Farm waived its right to avoid Leonardo’s policy by continuing to bill him and accept payments of premium for a considerable period of time after denying his claim and after notifying him of its intent to void the policy. The elements of waiver are (1) the existence at the time of the waiver of a right, privilege, advantage, or benefit which may be waived; (2) the actual or constructive knowledge of the rights; and, (3) the intention to relinquish the right.

The court found that although a right, privilege, advantage, or benefit which could be waived existed as well as actual or constructive knowledge of the right, disputed material issues of fact existed regarding whether State Farm intended through its continued billing and acceptance of premiums to waive its recission of Leonardo’s policy.

The court in Vega v. Independent Fire Insur. Co., 651 So. 2d 743 (Fla. 5th DCA 1995), also interpreted the Johnson case as requiring a deliberate disregard of suspicious information which was the legal equivalent of knowledge. The court in Independent Fire Insur. Co. v. Arvidson, 604 So. 2d 854 (Fla. 4th DCA 1992), held that because the accident (which would have given rise to coverage) occurred prior to the events that appellees contended demonstrated waiver, what took place after the accident was irrelevant to the issue of waiver.

Florida is not the only jurisdiction that has case law which can be used to assist in asserting a missed coverage defense. In Goldberg v. Commercial Union Insurance Co., 188 A.2d 188 (N.J. App. Div. 1963), the court rejected the insured’s contention that the insurer had waived the policy provision limiting theft coverage to property of persons living in the same household as the named insured. The court stated, “On this aspect of the case, the predominant view is that a loss which is not within the coverage of a policy cannot be brought within such coverage by invoking the principles of waiver or estoppel.”

In Reserve Life Ins. Co. v. Howell, 357 P.2d 400 (Or. 1960), a waiver was not implied where the insurer’s employee with no knowledge of the decision to rescind, through some clerical error, sent notice of and collected premiums for a period of ten months. The court held that waiver required a voluntarily intentional relinquishment of a known right and that the requisite intent could not be established where payment of premiums was accepted through negligence or mistake and thereafter returned when the mistake was discovered.

A similar result was also reached in the case of Ryder v. State Farm Mutual Automobile Insurance Company, 187 N.W.2d 176 (Wisc.1971), where the court held that the decision of an underwriting agent in regard to renewal of the insurance contract without knowledge of the facts giving rise to a right to rescind the policy on the ground of misrepresentation, did not constitute a waiver of the right to rescind.

In the case of Nations Title Insurance Co. v. Rosen, 56 Cal. App. 4th 1489 (Cal. Ct. App. 1997), the insurer was sued for bad faith refusal to defend plaintiffs. The court stated, “it is axiomatic that if Nations had no duty to defend, there was no breach of contract. The bad faith claim is also dependent on the existence of a duty to defend. Absent such a contractual duty, the cause of action cannot stand.” (Emphasis added.) The Nations court in essence held that if there was no coverage for the claimed contractual breach, there could not be bad faith. As such, estoppel or waiver would not and could not affect a lack of coverage.

In the case of Florida International Indemnity Company v. Osgood, 503 S.E.2d 371 (Ga. App. 1998), an insurer denied coverage due to a material misrepresentation in an application for insurance. The court held that although, with regard to liability under the policy, FIIC waived its defense the policy was void, it did not waive its defense against the bad faith claim that the reason it did not pay was Osgood’s fraud. These were held to be two separate defenses to two separate claims. The court stated that a waiver of the right to deny a breach of contract does not automatically preclude the showing of reasonable grounds for the breach so as to avoid a finding of bad faith. The Osgood court held the trial court:

. . . .did not err in allowing FIIC to present evidence on this point. Osgood’s argument, that the court’s order disallowing this evidence to defend against the policy claim collaterally disallowed evidence to defend against the bad faith claim, fails for two reasons. It is illogical and “[a] final judgment is required before any possibility of application of the doctrines of res judicata or collateral estoppel may arise.” There was no final judgment when the court permitted the evidence.

Finally, in the case of Home Insurance Co. v. Campbell Motor Co., 150 So. 486, 489 (Ala. 1933), the court held that if the loss was not within the coverage of the policy contract, it cannot be brought within that coverage by invoking the principle of waiver or estoppel. The Campbell Motor Company court appropriately stated:

Waiver or estoppel can only have a field of operation when the subject-matter is within the terms of the contract. No one, we assume, would argue that a policy of insurance, which protected one against loss by fire, could be extended or broadened, by the application of the principle of waiver or estoppel, to cover loss by cyclone. The effect, in such a case, would be to create a new contract, without a new consideration.

(Emphasis added.)


Many jurisdictions have cases which may permit an insurer to assert a previously “over looked” coverage defense. The use of these arguments to overcome waiver and estoppel arguments could potentially save insurers from losing a coverage defense and from ultimately being defrauded. Waiver and estoppel are available to plaintiffs in coverage disputes both in the underlying cases and in bad faith claims to avoid coverage defenses. However, in some instances, there are situations when waiver and estoppel simply do not apply. Both sides, given the right factual scenario, have compelling arguments to make as to why a coverage defense should or should not be applicable. It may be, under the right circumstances and in the right jurisdiction, an insurer will not lose the right to assert, in a bad faith case, a coverage defense overlooked in the underlying case. However, it is best to analyze the claim carefully, before the bad faith claim is made to determine whether any coverage defenses are applicable. Most critically, the argument which should prevail is that the insured should not benefit in a bad faith action, when he or she should not have had coverage in the first place.