INSURER SILENCE MAY CONCEDE FULL COVERAGE

Introduction

In Miller v. Elite, California adopted a rule that an "insurer's unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert such grounds."1 This well established rule is based on the equitable principles of estoppel and waiver, not forfeiture.2 However, many reported opinions have permitted insurers to reserve their rights to deny coverage as late as two years after to agreeing to defend without reserving rights.3

The Rule: A Failure to Reserve Rights Implies Acceptance of Full Coverage

If a liability insurer agrees to defend its policyholder without any warning that it may later deny coverage, it usually loses contractual defenses and will be required to indemnify. "The general rule supported by the great weight of authority is that if a liability insurer, with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage. In other words, the insurer's unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert such grounds."4

The Rationale for the Rule

The rationale for this rule is that an insurer that intends to challenge coverage must warn the policyholder. "Waiver is the voluntary and intentional relinquishment of a known right. Waiver may be express or implied from conduct. An insurer can waive policy provisions which would otherwise defeat coverage. Where an insurer reserves its right to claim noncoverage under the policy, notice of the reservation must be given to the insured or the reservation is deemed waived. '.... [I]f a liability insurer with knowledge of a ground of forfeiture or noncoverage under the policy, assumes and conducts the defense of an action brought against the insured, without disclaiming liability and giving notice of its reservation of rights, it is thereafter precluded in an action upon the policy from setting up such ground of forfeiture or noncoverage. In other words, the insurer's unconditional defense of an action brought against its insured constitutes a waiver of the terms of the policy and an estoppel of the insurer to assert such grounds.'"5

Silence Implies a Waiver of Coverage Challenges

The Miller case based its holding both on waiver and estoppel. On waiver, the court stated: "It appears from the record below that [the insurer] was uncertain about [its] duty to defend. It may be that by its conduct alone [the insurer] waived the right to reserve a denial of coverage, but coupled with its failure to notify [the policyholder] of the contemplated reservation, waiver of the right was established."6

Silence Invites Estoppel by The Policyholder's Detrimental Reliance

On estoppel, the court stated: "[The policyholder] relied to his detriment on [the insurer]'s defense under the policy as evidenced by his failure to retain an attorney, his failure to negotiate with either [the insurer] or [the claimant], and his failure to deal directly with the [claimants] or their attorney. Further, [the policyholder] was denied the possibility of choosing to settle the claim by compromise because he was not informed of [the claimant]'s first offer and [the insurer]'s subsequent refusal. [The policyholder], when informed by [the claimant] of their second offer of compromise for $5,000, assumed that there was no problem because that amount was within his policy limit. It would appear that all of the criteria of estoppel are met and that there is sufficient evidence to show that [the policyholder] justifiably relied on [the insurer]'s posture as diligent insurer protecting the interests of the insured. [The insurer] is estopped from asserting its coverage defenses."7

There Is No Deadline To Reserve Rights to Later Deny Coverage

Insurance statute and regulations require an insurer to analyze a policyholder's coverage and fully explain any coverage denial immediately. However, judicial enforcement of this body of law is spotty, at best. Accordingly, judicial opinions published since Miller have allowed insurers to reserve rights as much as two years after assuming their policyholder's defense without any coverage warning.8

Practice Pointer

If an insurer notifies its policyholder that it is providing a defense but does not expressly reserve any rights, the policyholder may seek clarification that coverage is assured by sending a simple letter.9