Source: https://legaltree.ca/node/879
Timestamp: 2019-04-25 06:53:10+00:00

Document:
When will insurers be estopped from denying coverage on excluded claims?
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.
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.
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.
Note that prejudice to the insured is not an element of waiver.
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).
person authorized for that purpose by the insurer.
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.
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".
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.
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 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.
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.
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.
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.
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.
(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.

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