Many policyholders are surprised to find out they are without coverage after a loss because of a condition that existed at the time the insurance contract was formed. Insurance companies have many claims personnel that may overlook a pertinent issue during the application process and others take the premiums knowing a claim can be denied based on that condition. The doctrines of waiver and estoppel may be able to afford coverage in those circumstances and rectify a truly inequitable result.

While waiver and estoppel have been held applicable to nearly every area in which an insurer may deny liability, some jurisdictions hold these concepts are not available to prevent an insurer from denying coverage where it knows the policyholder is not in compliance with policy conditions. The justification for this rule is the insurer should not be required by waiver or estoppel to pay a loss for which it did not charge a premium. Fortunately for policyholders, when an insurer issues a policy with knowledge that a condition under the policy is arguably not met, many courts find the insurer has waived that provision and is estopped from denying coverage.

The Supreme Court of Arkansas extended the waiver and estoppel doctrines to provide coverage under an insurance policy in Home Mut. Fire Ins. Co. v. Riley, 480 S.W.2d 957 (1972). In Riley, the insured notified the insurer that a tenant was moving out of the insured property. The agent made no mention of the policy requirement that coverage would be dropped if the house remained unoccupied for 30 days. The insured was told by the insurer that the residence was still covered, even though it remained unoccupied for more than 30 days. After a fire destroyed the insured property, the insurer denied coverage, citing the unoccupancy exclusion. The Court found this evidence was sufficient to show waiver of the occupancy requirement and ruled the insurer was estopped from denying coverage.

Likewise, the Supreme Court of Indiana, in Huff v. Travelers Indemnity Company, 363 N.E.2d 985, 993 (Ind. 1977), described this type of provision as a “broken condition” that cannot be breached. When a policy is agreed to, even though one of the terms is openly violated at the time of formation, the policy should be read and enforced as if the condition did not exist. A policy entered into with “broken conditions” cannot be breached for non-compliance with those conditions.

These courts, among others, continue to protect policyholders from unfair treatment by insurance companies. But policyholders cannot count on courts to protect them against their own mistakes. Policyholders should read their policies, and ask their insurers to clarify any questionable provisions.