Equitable Estoppel And Insurance Premium Payments

EQUITABLE ESTOPPEL

AND INSURANCE PREMIUM PAYMENTS

by Christopher Kenney

Like the rest of us, insurers can't have it both ways. This generalization is particularly true with regard to an insurer's acceptance of late premiums to backdate coverage on renewal. An insurer's practice of accepting late premium and backdating coverage must be consistent and uniform: That is, an insurer can't accept late premiums when it knows no loss occurred during the lapse in coverage, and then later refuse to accept late premium and deny coverage for a loss that occurs during a subsequent lapse in coverage. Courts simply won't permit the insurer to enforce policy provisions selectively with regard to lapsed coverage to enrich itself during a period when no loss occurred and then deny coverage for a loss that it knows occurred during a later lapse.

Insurance policies typically provide that premiums not paid prior to the renewal date will result in a lapse of coverage. However, an insurer that routinely accepts late premium payments and backdates coverage will be precluded from later denying coverage for a loss that occurred during the period between the expiration and the premium payment. The reason for this is simple: Insurers that accept late payments must treat all late payments the same. It's unfair if an insurer applies premiums to the period prior to the late payment when it knows no casualty occurred, but denies coverage to the same period when it learns a loss did occur. See Keeton & Widiss, Insurance Law § 6.8©(3) (1988).

Because an insurer would receive 'an unconscionable advantage if it were allowed to choose, case by case, the course which would be most advantageous in each instance,' courts have held that when '[t]he insured has reasonably relied on the insurer's representation of coverage [through a practice of accepting late renewal premiums], the insurer should be liable for resulting harm to the insured.' Id. at § 6.2(b); Jet Line Services, Inc. v. American Employers Insurance Co., 404 Mass. 706, 716 (1989).

An insured who has been denied coverage by an insurer may claim coverage under the legal doctrine of equitable estoppel. See Lunt v. Aetna Life Ins. Co. of Hartford, 261 Mass. 469 (1928); Rose v. Regan, 344 Mass. 223 (1962); Merrimac Mutual Fire Ins. Co. v. Nonaka, 414 Mass. 187 (1993).

The Massachusetts Supreme Judicial Court has explained that 'to work an estoppel, it must appear that [the insured] has been induced by the conduct of [the insurer] to do something different from what otherwise would have been done, which has resulted to his harm, and that the [insurer] knew or had reasonable cause to know that such consequence might follow.' O'Blenes v. Zoning Board of Appeals of Lynn, 397 Mass. 555, 558 (1986), quoting Boston & Albany R.R. v. Reardon, 226 Mass. 286, 291 (1917). The insured will meet its burden of proving 'detrimental reliance (that is, that the insurer's conduct caused a loss to the insured) simply by demonstrating that the loss occurred.' Jet Line Services, Inc., 404 Mass. at 715.

In addition, the courts have required that the insured's reliance on the insurer's practice be reasonable. See O'Blenes, 397 Mass. at 558; Franklin County Realty Trust v. Assessors of Greenfield, 391 Mass. 1018, 1018-19 (1984); Ford v. Rogovin, 289 Mass. 549, 552 (1935).

In Saunders v. Lloyds of London, 779 P.2d 249 (Wash. 1989), an insurer was estopped from denying coverage because of its practice of accepting late payments for renewals and backdating coverage. Plaintiff Saunders obtained an insurance policy from Lloyds of London covering a triplex rental that was effective from June 11, 1983 to June 11, 1984. After receiving late orders for renewal in 1984 and 1985, Lloyds issued and backdated each renewal to June 11. Lloyds did not notify Saunders that there had been a lapse in coverage for the period between expiration and payment, nor did it refund any portion of the premium for the period of noncoverage.

In 1986, Saunders again failed to pay the premium by the renewal date of June 11. On June 28, 1986, a tree fell on Saunders' triplex, causing severe damage to the property. Saunders attempted to recover the insurance proceeds from Lloyds, but Lloyds denied coverage because the insurance policy had lapsed. Saunders filed suit, claiming that Lloyds was equitably estopped from denying coverage because of its policy of accepting late payments and backdating the renewals. The Court held that Lloyds' policy of accepting late payments and backdating coverage, without providing notice to Saunders that there was a gap in the coverage or refunding part of the premium, induced Saunders to believe he had continuous coverage. Such reliance was reasonable, given the fact that Lloyds had accepted and backdated Saunders' late renewals for the preceding two years. The Court held that 'reasonable minds could conclude that the insured justifiably relied to his detriment on the insurers' practices of backdating to believe that prompt payment was not necessary for continuous coverage.' Id. at 256.

As a result of the decision in Saunders and other cases, agents and brokers should be aware of the application of the doctrine of equitable estoppel to prohibit insurers, who have previously accepted late payments and backdated coverage, from denying coverage based on late payment of renewal premium.