Incomplete Claim Investigations May Create Coverage Where No Coverage Exists

As a general proposition, the doctrine of estoppel cannot be used to expand or create insurance coverage where no coverage exists. See e.g., Continental Casualty Co. v. Advance Terrazzo & Tile Co. Inc., 462 F.3d 1002 (8th Cir. 2006) (interpreting Minnesota law); Nova Casualty Co. v. Waserstein, 424 F.Supp.2d 1325 (S.D. Fla. 2006).

An insured generally cannot rely upon the doctrine of equitable estoppel to create or expand coverage beyond the terms contracted for in the policy when no coverage exists as a matter of law. See, e.g., Hanson v. Republic Ins. Co., 5 S.W.3d 324 (Tex. App. Houston 1st Dist. 1999).

To assert equitable estoppel in the insurance context an insured must prove: (1) unreasonable conduct by the insurer that misleads the insured concerning the scope of coverage; and (2) justifiable reliance by the insured upon the conduct of the insurer. See, e.g., County Forest Products Inc. v. Green Mountain Agency Inc., 2000 Me. 161, 758 A.2d 59 (Me. 2000), General Accident Ins. Co of America v. American Nat’l Fire Proofing, Inc., 716 A.2d 751 (R.I. 1998).

Can an inadequate claim investigation prior to any lawsuit being filed create coverage through estoppel?

At least one court has found that it can.

In Florida Municipal Ins. Trust v. Village of Golf, 850 So.2d 544 (Fla. Ct. App. 4th Dist. 2003), a claim was brought against the insured municipality arising from a chlorine gas leak from its water treatment plant. A claimant alleged that the leak caused damage to the claimant’s pepper crop. The claimant was a neighboring farmer to the treatment plant. The Florida Municipal Insurance Trust was notified of the leak within a few days after it had occurred. Shortly thereafter, the Trust settled several small claims brought by other claimants which totaled approximately $20,000. One of the claimants notified the Trust that he had sustained crop damage which he attributed to the chlorine leak three months after the leak had occurred. The Trust hired an adjuster who was not experienced in evaluating crop damage to investigate. The adjuster visited the farm and took photographs. Ten months later that claimant made a demand for $1.6 million for the crop damage. Shortly thereafter the claimant filed a lawsuit. The Trust denied coverage based upon the policy’s pollution exclusion. Because the Trust did not defend its insured, the insured municipality retained its own counsel who then settled the crop damage claim. The municipality then sued the Trust.

On appeal the question was whether the trial court should have allowed the estoppel claim to be submitted to a jury. At the conclusion of the trial the jury found that there was no coverage because of the policy’s pollution exclusion for the crop damage claim but the jury did find coverage on the basis of estoppel.

On appeal, the Court found that estoppel was appropriate for two reasons. First, there was sufficient evidence for a jury to conclude that the insurance company’s investigation was inadequate. The municipality presented expert testimony that the insurer’s investigation was negligent in failing to determine if the crops were damaged by the chlorine leak. Then, 13 months later, when the Trust first denied coverage, it was too late for the insured to do a proper investigation which could have put the municipality in a stronger position to demonstrate that there was no causal relationship.

The Court observed that a claim investigation which negligently failed to preserve critical evidence could be damaging to the ability of the insured to defend a claim than any type of misconduct that occurs after suit is filed.

A second basis for permitting the estoppel claim to be presented to the jury centered upon the Trust’s settlement of several small claims arising from the chlorine gas leak without first issuing a reservation of rights letter. The municipality presented expert testimony at trial that without a reservation of rights letter being issued the insured received a false sense of security: the insured inferred that coverage existed, that someone was settling its claims, and that it had protection.

On the other hand, a reservation of rights letter would have informed the insured of a potential disclaimer of coverage, affording the insured the opportunity to investigate the case on its own, hire its own lawyers and obtain its own experts.

The expert retained by the municipality also testified that the claim adjuster should not have merely relied upon the various claimants’ representations of what occurred but should have instead investigated, taken recorded statements and called in experts, if needed, particularly where the adjuster was uncertain of damage causation. Because the adjuster lacked experience with the type of claim at issue (crop damage) the adjuster should have retained an expert to analyze the crops.

The majority ruling of the Court in Florida Municipal Ins. Trust v. Village of Golf, was challenged by a pointed dissent from Judge Farmer.

First, Judge Farmer pointed out that the municipality was a sophisticated insured who had experience in toxic exposures and who would have or should have known that the policy’s pollution exclusion would likely be asserted to any litigation.

Second, Judge Farmer pointed out that the insurer had acted above its policy obligation when, long before any suits were filed, the insurer attempted to assist the municipality by adjusting perspective claims after the escape of the chlorine gas from the city’s water treatment plant. Even though coverage was clearly and unequivocally excluded, the insurer forswore “reserving its rights” and proceeded to assist the municipality in dealing with its residents and citizens whose property or persons had been exposed to the emission.

In explaining why the insurer would pay to settle a number of small claims, adding up to approximately $20,000, Judge Farmer noted that the insurer’s settlements were not the charity of a beatific insurance company. More likely than not, the insurer wished its long relationship with the city to continue and thought by assisting in the adjustment of small claims arising from the exposure, it could generate even longer lasting good will and further prolong what had been a profitable relationship. Judge Farmer also observed that the city knew exactly what the carrier was doing and was not misled into believing that the policy was being effectually rewritten by the carrier’s solicitude.

Turning to the insurer’s initial handling of the prospective claim that ultimately led to the lawsuit, Judge Farmer noted the following relevant facts: six days after the gas leak, the claimant, a grower of peppers, notified the insured of a potential claim for damages to its crops as a result of the chlorine exposure. In a conversation with the adjuster, the claimant was not sure yet whether any crops had actually been damaged from the exposure. No amount of dollar loss was stated or discussed in this initial exchange. The insurer was not led to understand that the value of lost peppers was any greater than the other small claims the insurer had agreed to pay.

In fact, it was some 10 months after the emission before the pepper growers specified for the first time that it would claim damages of $1.6 million. When the grower finally filed suit, the insurer promptly disclaimed coverage and its defense. Judge Farmer then made the following relevant observation:

It needs to be said that the precise aspect of the carrier’s conduct said to result in the estoppel is both benign and understandable. For in its attempted adjustment of these small claims, the carrier is accused of not incurring the expense of hiring professionals familiar with this kind of toxic emission, and of not acquiring and assembling the full extent of evidence that would reveal or refute any damage caused by the emission. That is to say, a carrier who had not agreed to cover a claim, is accused of failing to act like a carrier who had agreed to cover the claim.

Notice what is not said. No one has accused the carrier of agreeing to preserve evidence which it then lost or destroyed. The carrier is not charged with spoliation of evidence. On the contrary, a carrier who has been a good citizen with its insured, by gratuitously paying several small claims that were clearly not covered by the policy, is accused of not making the substantial expenditures for the kind of investigation that would have been expected if there were coverage and there was a likelihood of litigation asserting some large claims. This is a curious basis on which to create insurance coverage by estoppel. 850 So.2d at 550.

The Florida Municipal Ins. Trust v. Village of Golf case, is an example of the adage that no good deed should go unpunished. The case is a warning to all claims professionals.

A preliminary reservation of rights letter should always be issued indicating that by performing a “preliminary” investigation of the claims, the insurer is not agreeing that coverage exists. Where the liability event has produced numerous small claims, the reservation of rights letter should spell out that the insurer may, in its own discretion, settle some of the small claims as an accommodation but not as an admission of coverage. The claim representative should get a more detailed reservation of rights letter out regarding the claim which specifies the policy provisions which are in question and which may exclude coverage, because once the insured receives notification of the policy basis for a potential of no coverage, the insured must then make its own decision of whether it should investigate the claims independent of the insurer with a focus of preserving relevant and significant evidence.

Plitt is a national legal expert on insurance law.