This article considers when an insurer will be estopped from denying coverage in circumstances where the insured has not entered into a non-waiver agreement and the insurer has not sent the insured a reservation of rights letter.
When a claim is filed by an insured, the insurer must decide whether the claim is covered by the policy, or is excluded by one of the policy exclusions. If it is clear that the claim is excluded, the insurer will notify the insured of that fact and deny coverage.
If the insurer is uncertain as to whether the claim is covered by the policy, it will generally do one of two things. First, it may attempt to have the insured sign a non-waiver agreement. Such agreements state that the insurer will investigate the claim, but that it reserves the right to deny coverage later on if it decides that in fact the claim is not covered by the policy. If the insured refuses to enter into a non-waiver agreement, the insurer will normally resort to its second option, which is to send the insured a reservation of rights letter. That letter is designed to have the same effect as the non-waiver agreement; but rather than having the insured agree that the insurer’s rights to deny coverage are reserved, the letter simply tells the insured that the insurer reserves the right to deny coverage if it decides that the claim is not covered by the policy.
But what if the insured does not enter into a non-waiver agreement, and the insurer does not send the insured a reservation of rights letter? Does that mean that the insurer is obligated to provide coverage even if there is an exclusion that appears to exclude coverage? Will failure to assert its rights at the outset estop the insurer from asserting those rights and denying coverage based on an exclusion later on? This article considers those questions.
The distinction between waiver and estoppel
Insurers may lose the right to rely on a coverage exclusion in two ways:
1. By waiving the right to rely on the exclusion
2. By conducting themselves in a way that estops them from invoking the exclusion.
Although this article focuses on estoppel, it is useful to understand waiver in order to appreciate the difference between waiver and estoppel.
In Mitchell & Jewell Ltd. v. Canadian Pacific Express Company (1974), 44 D.L.R. (3d) 603 at 614 (Alta. C.A.) waiver was defined as follows:
Waiver arises where one party to a contract, with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with the condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to so have elected, and thereby waived that right, must be viewed objectively and must be unequivocal.
In other words, waiver requires the following:
1. Full knowledge of the contractual right being waived
2. An act which evinces a clear intention to abandon the right being waived
Note that prejudice to the insured is not an element of waiver.
Provincial insurance legislation generally requires waiver of rights under insurance contracts to be in writing. For example, the British Columbia statute provides as follows:
Waiver of term or condition
11 (1) A term or condition of a contract is not deemed to be waived by the insurer in whole or in part unless the waiver is stated in writing and signed by a person authorized for that purpose by the insurer.
(2) Neither the insurer nor the insured are deemed to have waived any term or condition of a contract by any act relating to the appraisal of the amount of loss or to the delivery and completion of proofs or to the investigation or adjustment of any claim under the contract.
(Insurance Act, R.S.B.C. 1996, c. 226).
The Saskatchewan statute provides as follows:
Waiver of term or condition
111(1) No term or condition of a contract shall be deemed to be waived by the
insurer in whole or in part unless the waiver is stated in writing and signed by a
person authorized for that purpose by the insurer.
Appraisal acts not waiver
(2) Neither the insurer nor the insured shall be deemed to have waived any term
or condition of a contract by any act relating to the appraisal of the amount of loss or to the delivery and completion of proofs or to the investigation or adjustment of any claim under the contract.
(Saskatchewan Insurance Act, R.S.S. 1979, c. S-26).
Obiter comments in MacKenzie v. Jevco Ins. Management Inc. (1986), 28 C.C.L.I. 358 at para. 19 (B.C.S.C.) aff’d (1988), 32 C.C.L.I. 78 (B.C.C.A.) indicate that the British Columbia statutory provision does not apply to the doctrine of estoppel.
The elements of estoppel
There are many different types of estoppel. In Saskatoon Credit Union Limited v. Central Park Enterprises Ltd., (1988), 22 B.C.L.R. (2d) 89 at 93 (S.C.), McEachern C.J.S.C. said the following :
Lord Denning M.R. in McIlkenny v. Chief Constable of the West Midlands; Walker v. Chief Constable for the West Midlands; Power v. Chief Constable of the Lancashire Police Force  Q.B. 283,  2 W.L.R. 689 at 700,  2 All E.R. 227 (C.A.), explains that estoppel comes from the Norman-French language and means simply that someone is stopped from saying something. Lord Denning M.R. went on to say that from these simple beginnings estoppel has become "a big house with many rooms". In Coke's time there were only three rooms, estoppel by record, by writing or in pais (conduct). But now we have so many rooms we are likely to become confused. Lord Denning refers to estoppel per rem judicatam, issue estoppel, or estoppel by deed, representation, conduct, acquiescence, election, waiver and negligence, as well as promissory estoppel, proprietary estoppel, and "goodness knows what else".
Estoppel by representation is the type of estoppel that may apply to prevent an insurer denying coverage after initially failing to give prompt notice that coverage may be excluded. In Maclaine v. Gatty,  1 A.C. 376 at 386 (H.C.) Lord Birkenhead described estoppel by representation as follows:
Where A has by his words or conduct justified B in believing that a certain state of facts existed, and B has acted upon such belief to his prejudice, A is not permitted to affirm against B that a different state of facts existed at the same time.
Two cases which considered estoppel by representation in the context of an insurer failing to promptly deny coverage are Snair v. Halifax Insurance (1995), 145 N.S.R. (2d) 132 (N.S.S.C.) [Snair ] and Rosenblood Estate v. Law Society of Upper Canada (1989), 37 C.C.L.I. 142 (Ont. H.C.J.) [Rosenblood], aff’d (1992), 16 C.C.L.I. (2d) 226 (Ont.C.A.). These are considered below.
Snair: insurer estopped from denying coverage where coverage denied after 5 years
In Snair, the insured injured his girlfriend in a boating accident and then called on the insured to indemnity him under his tenants’ insurance policy. The insurer defended the action through production, discovery and settlement negotiations, but then, before trial, denied coverage on the basis of an exclusion for bodily injury suffered by persons who resided in the insured’s household.
Cacchione J. found as fact that the insured and his girlfriend were not residing in the same household at the material time, but went on to consider whether the insurer was estopped from denying coverage.
The court summarized the key facts relating to the estoppel as follows:
The totality of the evidence dealing with the issue of coverage clearly establishes that the defendant, through its actions of defending the claim, attending discoveries, discussing the possibility of settlement with the plaintiffs personal counsel, and through its omissions by not sending a reservation of rights letter or asking that the plaintiff sign a non-waiver agreement, held out to the plaintiff that coverage was in place. It was only after Mr. Nolan's [memo] of June 30, 1993, that the defendant charted a course aimed at denying coverage. The information on which this denial was based had been available to the defendant since 1988. No new information came to light which would justify the defendant's denial of coverage.
Cacchione J. summarized the law of estoppel as follows:
In order for estoppel to apply: 1) there must be knowledge on the part of the insurer of the facts which indicate a lack of coverage; 2) there must be a course of conduct by the insurer upon which the insured relied; and 3) the insured must have been prejudiced as a result of his reliance on the insurer's course of conduct.
The court found that the insurer knew of the relevant facts in 1988, but did not raise coverage concerns until 1993. Defending the action against the insured through discoveries was a course of conduct which the insured relied on. Actual prejudice was found because counsel for the insured, believing that coverage would be provided, played a less active role in defending the action against the insured than he would have had it been known that the insurer would deny coverage. Thus, Cacchione J. found that the insurer was estopped from denying coverage.
Cacchione J. made the following observations regarding the insurer’s claims manual and the steps insurers are expected to take when coverage issues arise:
The defendant's claims manual … requires that the Claim Manager submit all coverage problems promptly to the General Office Claims Department for a decision. The manual imposes an obligation on the defendant's employees to issue to its insured a reservation of rights letter where coverage is being investigated. According to the claims manual, the defendant, by issuing such a letter, undertakes the affirmative duty to advise its insured of its decision to disclaim coverage, accept coverage or continue under reservation within a reasonable time. The manual notes that the important thing is that the insured not be left languishing without a decision which, in fact, is exactly what occurred here.
[I]f [the insurer] had any concerns about coverage, [it] should have followed the instructions contained in its claims manual and issued a reservation of rights letter or asked that the plaintiff sign a non-waiver agreement. The defendant chose to do neither. The reservation of rights letter and the non-waiver agreement are both vehicles by which the insurer advises its insured that it has concerns about coverage. These documents are issued so that an insured does not infer from the defence of an action, the hiring of experts, and the continuing investigation of the claim that coverage is in place.
Rosenblood: prejudice to the insured may be inferred from the circumstances.
In Rosenblood, a solicitor for a credit union was dishonest and this caused the credit union to suffer losses on mortgage transactions. The credit union sued the solicitor, who was insured by the Law Society. The Law Society, as administrator of the insurance, retained a lawyer to defend the claim against the solicitor. Two years later the law society advised the estate that it was denying coverage.
The insurer denied liability on the grounds that the loss was caused by dishonesty, which was excluded from coverage, and on the grounds that the insured solicitor was in breach of the policy by failing to give timely notice of possible claims. The estate argued that the insurer, by taking on the defence, was estopped from denying liability.
The court held that the defence and settlement negotiations could have been conducted differently if the estate had known that the insurer was going to deny coverage. Although it was not established that the defence of the action would actually have been conducted differently, and so actual prejudice was not established, the court was prepared to infer prejudice:
It is not possible to point to actual prejudice but in the circumstances of this case where the insurer persisted in the defence through production and discovery into settlement negotiations prejudice must be presumed.
When a claim is presented to an insurer the facts giving rise to the claim should be investigated. If there is no coverage then the insured should be told at once and the insurer should have nothing further to do with the claim if it wishes to maintain its off-coverage position. If coverage is questionable the insurer should advise the insured at once and in the absence of a non-waiver agreement or of an adequate reservation of rights letter defends the claim at its risk. …
Thus the insurer in Rosenblood was estopped from denying coverage.
Insurer conduct which may establish an estoppel.
The following are examples of the type of conduct that may result in an insurer being estopped from denying coverage.
(a) continued investigation of the claim after it becomes known that coverage is questionable
(b) silence or inaction on the part of the insurer in response to a request by the insured to confirm that coverage in fact is in place
(c) defending the action against the insured
(d) making payments to third parties on behalf of the insured
(e) conducting settlement negotiations with the claimant or his solicitor
(f) an express or implied representation by an insurer, its adjuster, agent or counsel that coverage will afforded
(g) attending at mediations, discovery, arbitration and trial
(h) invoking policy provisions – for example, appraisal, exercising the right to repair.
Insurers who suspect that a claim is excluded should promptly notify the insured of that view. To reserve their rights to deny coverage while investigating the claim, insurers should have the insured enter into a non-waiver agreement, or, failing that, send the insured a reservation of rights letter. If this is not done, and the insured embarks on a course of conduct which suggests that it intends to provide coverage, it will be estopped from denying coverage if doing so would prejudice the insured. However, estoppel is an equitable doctrine and each case will turn on its own facts.