Insurance applications are important in the insurance marketplace. Applications are part of the risk analysis insurers make in determining whether they will issue a policy. There is exhaustive case law on issues of misrepresentations, ambiguities, and incomplete applications. The issue I want to discuss is whether an insurer can waive its right to deny a claim based on an application misrepresentation.

The answer in most jurisdictions is yes. An insurer, through its conduct, can waive its right to deny or claim forfeiture based on an application misrepresentation defense.

For example, two policyholders, a husband and wife visit their local insurance agency. They sit down and the agent asks the policyholders a series of questions. One questions is whether the policyholders ever filed bankruptcy. This is a joint application and the application does not ask this question specific to either policyholder. Husband answers the question no. Husband actually filed a business bankruptcy over thirty years ago, but did not disclose this to the agent. The insurer agrees to insure the policyholders.

One year later, the policyholders suffer a $12,000 water loss to their home. The insurer adjusts the loss and pays the claim. Insurer never raised an issue with any misrepresentation on the application. The policyholders use the monies for repairs and have no idea there is an issue with their application.

Another year passes and the policyholders suffer a horrific fire loss – a total loss worth approximately $600,000. The policyholders report their claim. The insurer adjusts the loss, just like during the policyholders’ prior $12,000 water loss claim. This time, the insurer denies the fire claim alleging a material misrepresentation because this insurer does not issue a policy if the applicant ever filed a bankruptcy.

Sure, there is an argument that a business bankruptcy filed over thirty years ago is irrelevant. You likely see an additional issue with the ambiguous question. However, do we even need to get into these issues? Probably not. The policyholders justifiably relied on the insurer that they were in fact insured. The fire claim is under the same application as the prior water loss claim. The only difference is the monetary amount. Had the insurer notified the policyholders of any application issue during the adjustment of the $12,000 water loss claim, the policyholders could have procured new insurance. Instead, they are standing outside their burned down home with no help from their insurer.

In the majority of jurisdictions throughout the country, the law is clear that an insurer can waive its right to claim forfeiture under these circumstances. In Gouldin v. Inter-Ocean Insurance Company,1 the North Carolina Supreme Court summarized the law on waiver:

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. 29 Am. Jur., Insurance, Sec. 784, p. 670. See also, Blue Bird Cab Co. v. American Fidelity & Casualty Co., 219 N.C. 788, 15 S.E.2d 295.

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.

The facts in our example fall right in line with North Carolina’s highest court. The insurer cannot pick and choose what claims to pay. In our example, the insurer had, at the very least, inquiry notice and therefore constructive knowledge, of any misrepresentation on the application defense and failed to act. As a result, the insurer would likely be required to recognize the $600,000 fire claim.

1 Gouldin v. Inter-Ocean Ins. Co., 248 N.C. 161, 164-65, 102 S.E.2d 846, 848-49 (1958).