Opinion ID: 1829136
Heading Depth: 2
Heading Rank: 3

Heading: The Universal Policy Coverage Exclusion

Text: Because the loss should be prorated among the remaining insurance providers which provide coverage, we must determine now whether Universal provides coverage, such that it must contribute proportionately. If not, the pro rata share must be absorbed by Westfield and Economy. Universal argues that given exclusionary language in the Universal policy, it does not provide any coverage to Bi-State, its insured, under these circumstances. In the adjudication of law points ruling, the district court dismissed the exclusionary language in the policy as contravening the intent of Bi-State to seek insurance for its vehicles used in its business. The court then found that Universal was liable to Bi-State as an excess insurer. On appeal, Westfield argues Universal should be estopped from denying coverage because it failed to deny coverage during the settlement proceedings and discovery.
Westfield argued in its motion to adjudicate law points filed in the district court that Universal was estopped to deny coverage because Universal had defended its insured, Bi-State, without reserving its rights, and Bi-State had admitted in answers to interrogatories that coverage for the accident was provided by Universal. To support its motion, Westfield relied on the doctrine of estoppel by acquiescence and our decision in American Family Mutual Insurance Co. v. Allied Mutual Insurance Co., 562 N.W.2d 159, 165 (Iowa 1997). We have held that while a forfeiture of benefits contracted for may be waived, the doctrine of waiver or estoppel cannot be successfully invoked to create a liability for benefits not contracted for at all. Pierce v. Homesteaders Life Ass'n, 223 Iowa 211, 217, 272 N.W. 543, 546 (1937); accord Richardson v. Iowa State Traveling Men's Ass'n, 228 Iowa 319, 328, 291 N.W. 408, 412 (1940) (holding the doctrine of estoppel cannot create by waiver a contractual liability not contained in the policy itself); see also City of Carter Lake v. Aetna Cas. & Sur. Co., 604 F.2d 1052, 1059 (8th Cir.1979) (Iowa follows the general rule that the doctrine of estoppel may not be used `to bring within the coverage of a policy risks not covered by its terms, or risks expressly excluded therefrom.' (quoting Randolph v. Fireman's Fund Ins. Co., 255 Iowa 943, 950, 124 N.W.2d 528, 532 (1963))). There is, however, a well-recognized exception to this rule: [W]hen an insurance company assumes the defense of an action, with knowledge actual or presumed, of facts which would have permitted it to deny coverage, it may be estopped from subsequently raising the defense of non-coverage. City of Carter Lake, 604 F.2d at 1059 (applying Iowa law). The court in Carter Lake noted that there was some authority for the proposition that prejudice is presumed from undertaking the defense of an action without a reservation of rights or, alternatively stated, that the loss of control of one's own case is itself prejudice. Id. at 1061. Nonetheless, the court did not rely on a presumption of prejudice in concluding that the insurer was estopped. Instead, the court identified specific ways in which the insured was harmed by the insurer's delay in denying coverage. Id. at 1061-62. The doctrine of estoppel by acquiescence upon which Westfield relies does not fall within the exception to the general rule identified in the Carter Lake case. Although this doctrine bears an estoppel label, it is, in reality, a waiver theory. We have held that this doctrine applies `where a person knows or ought to know that he is entitled to enforce his right ... and neglects to do so for such a length of time as would imply that he intended to waive or abandon his right.' Anthony v. Anthony, 204 N.W.2d 829, 834 (Iowa 1973) (emphasis added) (quoting Humboldt Livestock Auction, Inc. v. B & H Cattle Co., 261 Iowa 419, 432, 155 N.W.2d 478, 487 (1967)). Similarly, we have stated: Estoppel by acquiescence is based on an examination of the ... actions [of the individual] who holds the right in order to determine whether the right has been waived. Davidson v. Van Lengen, 266 N.W.2d 436, 439 (Iowa 1978) (emphasis added). Under Iowa law, it is not necessary to prove prejudice to establish estoppel by acquiescence. See id. In contrast, the doctrine of equitable estoppel requires proof that the party alleging an estoppel relied on a false representation or concealment of material fact to his prejudice and injury. Fencl v. City of Harpers Ferry, 620 N.W.2d 808, 815 (Iowa 2000). These cases indicate that the doctrine of estoppel by acquiescence is more akin to waiver than to equitable estoppel due to the absence of the justifiable reliance and prejudice elements. The exception to the general rule that coverage cannot be established by waiver or estoppel is limited to equitable estoppel. Justifiable reliance and prejudice must be shown to estop an insurer from denying coverage. See Bruns v. Hartford Accident & Indem. Co., 407 N.W.2d 576, 580 (Iowa 1987) (noting, in case alleging insurer was estopped to claim insured had forfeited coverage by failing to give notice, that person claiming estoppel ha[d] not explained what elements compose[d] her estoppel cause of action, and then holding that person must demonstrate justifiable reliance). There is, nonetheless, a question as to the effect of our decision in American Family, 562 N.W.2d at 165. In that case, two insurers, American Family and Allied, potentially provided coverage for an alleged tortfeasor. Id. at 161. American Family assumed the defense and settled the tort claim. It then sought to recoup a portion of its payment from Allied. Allied successfully moved for summary judgment on the basis of estoppel by acquiescence. On appeal, our court held that the summary judgment could not be affirmed on the basis of estoppel by acquiescence. We stated that American Family had not neglected its right to seek indemnity or contribution against Allied for such time as would imply an intention to waive or abandon the right. Id. at 165. It is significant to note that the court in American Family did not discuss whether, as a legal matter, the doctrine of estoppel by acquiescence was appropriately applied in this context. Moreover, no discussion of the doctrine of equitable estoppel was made as to its applicability to the claim of one insurer against another for contribution. We believe that in the case at bar the appropriate legal doctrine to apply to Westfield's claim against Universal is equitable estoppel. As such, Westfield must prove the elements of equitable estoppel to successfully prevent Universal from denying coverage under its policy. Therefore, we must examine the record to determine whether Westfield established justifiable reliance on Universal's representations to its prejudice as a matter of law. The estoppel issue was raised in Westfield's motion to adjudicate law points, not its motion for summary judgment. Consequently, there were no affidavits or other testimony submitted in support of Westfield's estoppel theory. In fact, Westfield did not even allege in its pleadings filed in connection with its motion to adjudicate law points or its motion for summary judgment that it justifiably and detrimentally relied on Universal's representations and actions with respect to Universal's coverage for the accident. This state of the record is fatal to Westfield's argument on appeal that judgment should be entered in its favor, whether this contention is considered under the requirements for a motion to adjudicate law points or under the requirements for summary judgment. Westfield has made no showing that the uncontroverted pleadings establish its justifiable and detrimental reliance. In the absence of a showing that there is no genuine factual dispute with respect to Westfield's justifiable reliance and resulting prejudice, Westfield is not entitled to an adjudication of law points or summary judgment on the basis of estoppel.
The issue of reasonable expectations was raised in Westfield's motion to adjudicate law points. In that motion Westfield contended that Universal's policy provided coverage to Bi-State for the accident in question because the exclusion upon which Universal relied to deny coverage eliminated the dominant purpose of the policy issued to Bi-State. The district court agreed, ruling that [t]he doctrine of reasonable expectations supports a finding of coverage and obligated the court to ignore the policy exclusion. On appeal, Westfield argues that [i]n making its coverage determination, the district court went beyond the specific terms of the policy and used extrinsic evidence to ascertain the reasonable expectations of the insured. Westfield contends, therefore, that the district court made a finding of fact that the Universal policy provided coverage and that this finding is binding on this court because it is supported by substantial evidence. To the extent that the district court did, in fact, resolve a contested issue of fact in ruling on the reasonable expectations issue, its decision was improper. A motion for adjudication of law points is not intended to be used to resolve factual disputes, but rather to determine legal matters on uncontroverted pleadings. Mortensen, 590 N.W.2d at 38. As Westfield's argument illustrates, the issue of reasonable expectations is a factual matter, not a legal matter. Moreover, the record shows no uncontroverted pleadings establishing the factual predicates for application of the reasonable expectations doctrine. Under the reasonable expectations doctrine the objectively reasonable expectations of applicants and intended beneficiaries regarding insurance policies will be honored even though painstaking study of the policy provisions would have negated those expectations. The doctrine is carefully circumscribed and does not contemplate the expansion of coverage on a general equitable basis. It can only be invoked when an exclusion (1) is bizarre or oppressive, (2) eviscerates terms explicitly agreed to, or (3) eliminates the dominant purpose of the transaction. A preliminary criterion must be satisfied before we apply the doctrine. The policy must either be such that an ordinary layperson would misunderstand its coverage, or there must be circumstances attributable to the insurer which would foster coverage expectations. Krause, 589 N.W.2d at 727 (emphasis added) (citations omitted). We note initially that the district court made no express determination that either of the preliminary criterion was satisfied before it proceeded to decide that the exclusion eliminated a dominant purpose of the policy. However, such a conclusion was apparently an unwritten premise of the court's ultimate decision that the doctrine of reasonable expectations applies. The question now is whether the district court correctly concluded that an ordinary layman would misunderstand the coverage provided by the policy or that the uncontroverted pleadings established circumstances attributable to [Universal] which would foster coverage expectations. See id. The parties agree that the Universal policy includes coverage for garage operations and auto hazard. This coverage requires Universal to pay all sums the INSURED legally must pay as damages ... because of INJURY to which this insurance applies, caused by an OCCURRENCE arising out of GARAGE OPERATIONS or AUTO HAZARD. Although the auto hazard includes coverage for the use of any auto owned by Bi-State and furnished for the use of any person or organization, this coverage is limited by an exclusion for INJURY arising out of the ... use ... of any ... AUTO, while ... leased or rented by YOU [Bi-State] to others. The only exception to this exclusion is for a lease or rental to Bi-State's customers for a term of two months or less when it temporarily replaces the CUSTOMER'S AUTO or when the customer is awaiting delivery of an AUTO purchased from [Bi-State]. We do not think an ordinary layperson would misunderstand the exclusion; it clearly excludes coverage for leased vehicles unless the vehicle replaces a customer's current or soon-to-arrive auto for a lease period of two months or less. In the case at bar, Bi-State leased the vehicle in question to Dollar for a six-month period. An ordinary layperson, reading the exclusion and its exception, could not reasonably conclude that such a situation would be covered. Accordingly, Westfield has not established that an ordinary layperson would misunderstand [the policy] coverage. See id. The alternative prerequisite for the reasonable expectations doctrine is proof of circumstances attributable to the insurer that fostered coverage expectations on the part of Bi-State. There is nothing in the record indicating what coverage expectations Bi-State had. Because the uncontroverted pleadings do not establish either of the preliminary criterion for application of the reasonable expectations doctrine, the district court erred in ruling, as a legal matter, that this doctrine prevented Universal from relying on its policy exclusion to deny coverage. Consequently, we reverse the district court's determination that Universal had coverage under its policy for Bi-State's liability. The case is reversed and remanded for trial of the issue of Universal's liability to Westfield based on the principles of equitable estoppel and reasonable expectations and for determination of the pro rata share of the settlement damages to be assigned to Westfield, Economy, and Universal (if found to be liable). REVERSED AND REMANDED FOR FURTHER PROCEEDINGS. NEUMAN, J., takes no part, and McGIVERIN, S.J., [] participates in place of CARTER, J., who takes no part.