Forfeiture is not often discussed when interpreting insurance policy terms. But it should be. Often, when a policyholder fails to do something timely or does something wrong, the insurance company counsel is heard in court arguing for a knockout punch to the policyholders pocket—“give the policyholder no money.”

Shaun Marker is a Merlin Law Group attorney based in our West Palm Beach office. He wrote a blog, Can An Insurance Company Waive A Defense Based On Lack Of Insurable Interest, with the following applicable thought about why forfeitures are not favored by courts when construing insurance contract benefits:

If the crafty conditions, with which fire insurance companies fence in the rights of the assured, and the subtle arguments which their counsel found upon them, were always to prevail, these corporations would be reduced almost to the single function of receiving premiums for little or no risk.

Forfeitures are not encouraged in the law. When forfeitures of insurance policies rest on substantial grounds, going to the risk, this court will uphold them…But when forfeitures are alleged on purely technical grounds, not going to the risk, the rule is universal, that the contract of insurance is to be upheld, if it can be without violation of any principle of law.1

When it comes to claims handling, Merlin Law Group attorney Larry Bache has noted that courts will enforce waivers of contract defenses, In North Carolina, the Insurer Can Waive Its Right to Claim Forfeiture, even if the waiver is from payment of small amounts on a claim:

In general, any act, declaration, or course of dealing by the insurer, with knowledge of the facts constituting a cause of forfeiture * * * which recognizes and treats the policy as still in force and leads the person insured to regard himself as still protected thereby will amount to a waiver of the forfeiture * * * and will estop the insurer from insisting on the forfeiture or setting up the same as a defense when sued for a subsequent loss. Such waiver may be inferred from acts as well as from words. Acts of an insurance company in recognizing a policy as a valid and subsisting contract, and inducing the insured to act in that belief and incur trouble or expense, is a waiver of the condition under which the forfeiture arose.

As a general rule, in order to waive a policy provision or a forfeiture, there must be a prior knowledge of the circumstances, a waiver being the intentional relinquishment of a known right and requiring both knowledge of the existence of the right and an intention to relinquish it.

Knowledge of facts which the insurer has or should have had constitutes notice of whatever an inquiry would have disclosed and is binding on the insurer. The rule applies to insurance companies that whatever puts a person on inquiry amounts in law to ‘notice’ of such facts as an inquiry pursued with ordinary diligence and understanding would have disclosed.

An adjustment of a loss with knowledge of grounds of forfeiture has been deemed a waiver of the forfeiture, in the absence of any provision to the contrary….

Thus, if the company pays certain small losses on a policy, it waives any defense of which it has knowledge and is estopped thereafter to rely upon such defense in future losses.2

The late policyholder attorney Eugene Anderson co-authored an excellent law review article, Draconian Forfeitures of Insurance: Commonplace, Indefensible, and Unnecessary,3 which argues against cancellation of policy benefits on technicalities but argues that courts and insurance companies often find or argue to the contrary:

Forfeiture is a common law rarity and an insurance law ubiquity. Each year, millions, if not billions, of dollars of insurance are forfeited by policyholders who have not punctiliously complied with all of the “conditions” included in the fine print in their insurance policies.’ Failure to give prompt notice of an accident, failure to file a timely proof of loss, or an innocent or minor misrepresentation in an insurance policy application-to cite only three common examples- may prompt an insurance company to deny coverage on a policy- holder’s otherwise valid claim. Worse, the courts may approve this forfeiture of insurance coverage even when the harm suffered by the insurance company from the policyholder’s technical noncompliance is nil, or at any rate, is far less than the harm suffered by the policy-holder who is denied much needed insurance coverage.

The punishment does not fit the crime. Forfeiture is a draconian, anachronistic, archaic, and profoundly anti-consumer sanction. Outside insurance law, “hornbook” remedies for breach of contract no longer include forfeiture, if indeed they ever did. Forfeiture is mentioned in most contexts only in connection with a discussion of agreed contractual remedies, such as liquidated damages or specific performance, and even then it is often described as an unenforceable penalty.’ A homeowner can be late in making a mortgage payment but still keep his home. At common law, even a dog got one bite. There is no free bite, however, no opportunity to “kiss and make up,” for the insurance policyholder. When an insurance company can show the policyholder’s noncompliance with any condition in the insurance policy, the insurance claim may be denied…

Tomorrow, Tuesday at 2 With Chip will go over forfeiture of policy benefits, how the new Colorado cooperation law should be implemented in other states to prevent forfeitures, and the range of how various states treat this topic.

Thought For The Day

If once you forfeit the confidence of your fellow-citizens, you can never regain their respect and esteem.
–Abraham Lincoln
1 Appleton Iron Co. v. British American Assur. Co., 46 Wis. 23, 1 N.W. 9 (Wis. 1879).
2 Gouldin v. Inter-Ocean Ins. Co., 248 N.C. 161, 164-65, 102 S.E.2d 846, 848-49 (1958).
3 Eugene R. Anderson, Richard G. Tuttle, and Susannah Crego, Draconian Forfeitures of Insurance: Commonplace, Indefensible, and Unnecessary, 65 Fordham L. Rev. 825 (1996).