From the desk of Jeffrey D. Eberhard: : So I’ll give you the lawyerly answer – it depends. This recent, important case clarifies some older case law (which the court called “misguided”) about when an agent’s statements can bind the insurance company to provide coverage. Read on to find the circumstances under which an agent’s statements will bind the insurer.
Claims Pointer: The legal principle at issue here is called “estoppel.” Estoppel means the insured’s ability to prevent the insurer from denying coverage because of statements made by the agent, particularly when the insured took actions to its disadvantage in reliance on those statements. The Court of Appeals held that estoppel cannot be used to contradict an express exclusion in the policy. However, estoppel may apply if 1) the agent actually reads the policy, and 2) is providing its interpretation to the insured of an ambiguous policy provision.
Deardorff v. Farnsworth, 268 Or App 844 (February 4, 2015)
Deardorff asked his insurance agent, Farnsworth, to obtain insurance for his horse stable business. The agent submitted an application to Oregon Mutual Insurance Company which provided the agent with a quote. The quote did not initially include coverage for property in the care, custody or control (CCC) of Deardorff. Farnsworth communicated with Oregon Mutual about Deardorff’s desire for CCC coverage and ultimately Farnsworth told Deardorff that he had CCC coverage. It turned out that the Oregon Mutual policy excluded liability coverage for CCC. Liability coverage exists to defend (hire lawyers) and indemnify (pay damages on behalf of) the insured when the insured is sued by a third party for property damages. Specifically, the Oregon Mutual policy excluded liability coverage for “‘Property damage’ to * * * [p]ersonal property in the care, custody or control of the ‘insured.’” (Note, that while the Oregon Mutual policy did include CCC property insurance coverage, the property coverage did not apply to the loss involved in the case).
After the policy went into effect, but before the policy was delivered (and before Farnsworth had a chance to read it) Deardorff was transporting horses in a trailer when the trailer caught fire, killing the horses. The horse owners’ insurer paid the horse owners for their losses and then sued Deardorff for those damages. Deardorff successfully defended the lawsuit by the horse owners’ insurer and then filed a lawsuit against Farnsworth and Oregon Mutual to recover the costs of defending himself in the lawsuit. Oregon Mutual ultimately settled with Deardorff and then pursued Farnsworth for miscommunicating to Deardorff that the policy provided CCC liability coverage.
The trial court ruled that Oregon Mutual was estopped from denying liability coverage for the loss of the horses because of its communication to Farnsworth —specifically, because Farnsworth was told that CCC liability was “covered” under the liability form—and because that communication led Farnsworth to tell Deardorff that he had CCC liability insurance.
The Court of Appeals reversed the trial court’s ruling. It held that estoppel is not available to avoid an express exclusion in the policy. In other words, estoppel cannot expand the scope of an insurance contract. However, the Court of Appeals also described the circumstances under which estoppel is potentially available. It commented that an insured may claim coverage by estoppel where the agent provides its interpretation to the insured of an ambiguous policy provision. For example, if the policy provides coverage for the loss, but coverage is conditioned on the acts of the insured (called a “condition of forfeiture”), and if the agent misinterprets those conditions for the insured, or how those conditions apply, an estoppel situation may occur. The Court of Appeals emphasized that for an estoppel situation to occur, the agent must have also actually read the ambiguous policy provision. In this case, Farnsworth neither read nor interpreted the Oregon Mutual policy, and since the policy clearly and unambiguous excluded CCC liability coverage, Deardorff could not establish coverage by estoppel against Oregon Mutual.
Case updates are intended to inform our clients and others about legal matters of current interest. They are not intended as legal advice. Readers should not act upon the information contained in this article without seeking professional counsel.