The following entry contains the complete text of the Black Letter, Comments, and Reporters’ Notes from Proposed Final Draft No. 2 of Section 6. Estoppel.

§ 6. Estoppel

A party to an insurance policy who makes a promise or representation that can reasonably be expected to induce detrimental reliance by another party to the policy is estopped from denying the promise or representation if the other party does in fact reasonably and detrimentally rely on that promise or representation.

Comment:

a.The function of estoppel. Estoppel is a general contract-law doctrine that permits the enforcement of terms different from those in the original contract, without requiring all of the elements of a new contract, for example, new consideration. Estoppel requires some action or representation on the part of the promisor and reasonable and detrimental reliance on the part of the promisee. Note that conduct other than speech can in some circumstances reasonably be interpreted as a promise or representation, as exemplified by certain cases regarding the loss of grounds for contesting coverage when an insurer exercises the right to defend without reserving the right to contest coverage. See § 15, Comment a. Although estoppel and implied waiver are often considered interchangeable in insurance cases, there are important differences between these doctrines that are reflected in this Section and § 5. See § 5, Comments a, b, c, and f. The core function of estoppel is to protect the parties’ reliance interests. Thus, while waiver requires only proof of an express or implied waiver by a party of a right contained in the policy, estoppel requires the counterparty to also prove his or her reasonable and detrimental reliance on the first party’s promise or representation.

b. Equitable and promissory estoppel. Within contract law, a distinction is sometimes drawn between equitable estoppel and promissory estoppel. Equitable estoppel occurs when one party falsely represents certain facts to be true, inducing detrimental reliance by a counterparty. In such situations, it has long been held that the party that made the misrepresentation is “estopped” from denying the fact in question. The doctrine of promissory estoppel involves a promise by one party about some future action that then induces detrimental reliance by a counterparty. In such cases, if the counterparty has relied reasonably to his or her detriment, the promisor is estopped from reneging on the promise, even in the absence of the normal requirements for a contract, such as consideration and mutual assent. By defining estoppel to include promises and representations, including conduct that a reasonable person would regard as a promise or representation, this Section captures both equitable and promissory estoppel in one rule.

c. Reasonable and detrimental reliance. If one party either expressly or impliedly, through its actions or inactions, makes a promise or representation to a counterparty that induces reasonable and detrimental reliance by the counterparty, the first party is estopped from denying coverage on the ground that the promise or representation is inconsistent with the terms of the policy. The counterparty’s detrimental reliance, however, must be reasonable under the circumstances. In determining whether an insured’s reliance on a promise or representation of the insurer was reasonable, a court should take into account the sophistication of the insured and the practical reality that ordinary people do not read, and cannot reasonably be expected to read, their insurance policies. In general, it is reasonable for a policyholder or applicant for insurance to rely on the representations of the insurer’s agent with respect to the meaning and significance of questions in the insurance application or renewal process, as well as to what will and will not be covered by the policy. Thus, even if the promise or representation of an insurer’s agent contradicts the clear language of the policy, it will generally be reasonable for the policyholder to rely on that promise or representation. The exception to this general rule is when (a) the agent is attempting to invite the policyholder to collude with the agent to defraud the insurer and (b) the policyholder is or should be aware of this collusive intent. In such a situation, reliance by the policyholder on the agent’s misrepresentation would be unreasonable. What constitutes detrimental reliance by the insured on a promise or representation by the insurer will depend on the circumstances of each case. Detrimental reliance can include an insured’s decision not to seek alternative coverage when the insurer represents that a particular risk will be covered. In some situations, detrimental reliance may include a decision by the insured to engage in a particular activity, and thus to expose itself to the risk of a lawsuit, based on a promise or representation of coverage by the insurer.

d. Use of extrinsic evidence. Proof of the elements of estoppel typically requires the court to admit and consider evidence beyond the insurance policy and the facts of the underlying legal action. Such evidence can include, but is not limited to, testimony on the part of the policyholder and the insurer, or agents of the policyholder and the insurer, with respect to expressed or implied representations that were made by the parties to each other. Evidence of the actions of the parties, which could be considered indicative of objective intent, also is permissible. For a discussion of the use of extrinsic evidence in connection with the interpretation of insurance policy terms, see
§ 3, Comment d. 

e. Estoppel can expand coverage. Courts have frequently said that estoppel cannot be used to expand coverage beyond the risks defined in the policy, so much so that it might appear that this is the prevailing rule. However, if the elements of estoppel are satisfied, coverage is necessarily expanded beyond what it would have been in the absence of estoppel, and many courts have used estoppel doctrine to prevent an insurer from raising a ground for contesting coverage. For example, courts regularly have used estoppel to prevent an insurer that has been providing a defense without a reservation of rights from belatedly raising a ground for contesting coverage, so much so that proof of detrimental reliance is no longer required. See § 15.

Illustrations:

1. The policyholder is a small-business owner who purchases a general-liability insurance policy from an insurer to cover risks associated with his business. After the policyholder receives the policy, he calls the agent for the insurer to discuss the policy terms. The policyholder expresses concern that he heard from a business associate that this kind of policy contains an exclusion that excludes a liability risk against which the policyholder wishes to insure. The agent assures the policyholder that an endorsement to the policy contains language that removes the exclusion in question. The endorsement is long and complex, and contains terms that the policyholder would require expert assistance to understand. As it turns out, the agent, whom the policyholder has reason to believe is knowledgeable in these matters, has in fact misinformed the policyholder. The particular endorsement in question does not contain the language promised by the agent, although such an endorsement is available in the insurance market and the policyholder would have purchased that coverage had it been offered to him. A suit is then filed against the policyholder that involves the risk that is expressly excluded by the exclusion. Because the policyholder reasonably relied to his detriment on the agent’s representation, the insurer is estopped from enforcing the exclusion in question.

2. Same facts as Illustration 1, except that, in response to the policyholder’s inquiry about the exclusion, the agent acknowledges that the policy does contain the exclusion but, without making any reference to an endorsement, tells the policyholder simply to ignore the exclusion and assume that the risk in question is covered, saying “what the insurer doesn’t know won’t hurt it.” When the suit is filed against the policyholder, the insurer is not estopped from invoking the exclusion, because the policyholder’s detrimental reliance on the agent’s representation was not reasonable.

3. Same facts as Illustration 1, except that an endorsement affording the coverage is not available. Because the endorsement was not available and the policyholder did not otherwise change his behavior as a result of the agent’s conduct (for example by changing a business practice to reduce the risk), the policyholder did not detrimentally rely.

f. Agency law applied to estoppel. The law of agency applies to estoppel as well as waiver. See § 5, Comment b. For example, if a person deemed to be an agent of the insurer represents that a particular exclusion or condition has been waived by the insurer or that the exclusion or condition will not be applied to the insured for some reason, and the insured reasonably and detrimentally relies on that representation, the insurer is estopped from asserting the condition or exclusion as a basis for denying coverage. In some cases, an insurer may give the agent actual authority to make such representations on its behalf to vary the terms of the insurance agreement. In other cases, insurers’ agents may have apparent authority. In general, apparent authority requires that the insured reasonably believe that the agent is authorized to make the representation in question on behalf of the insurer and that the insurer have, through a statement or action, done something to create this belief. Whether a person not employed by the insurer is the agent of the insurer and for what purposes he or she is an agent of the insurer depends on the facts and circumstances of each case and does not necessarily depend on the insurance business title used to describe that person. For example, even a broker hired by the policyholder for the purpose of assisting the policyholder in the selection of insurance coverage may be an agent of the insurer for certain purposes.

g. Post-loss statements and conduct can give rise to estoppel. Some courts in the first-party context have held that post-loss statements and conduct by an insurer or its agents cannot give rise to estoppel. Such a rule lacks a coherent justification, as there is no reason to suppose that pre-loss misrepresentations by an insurer are systematically more likely to be misleading or to induce reliance by insureds than post-loss misrepresentations by the insurer. Nor is there evidence that insureds’ reliance on post-loss representations or promises by the insurer’s agents is more likely to be unreasonable than their reliance on the agent’s pre-loss representations or promises. In both situations, there is the possibility of reasonable and detrimental reliance by the insureds. In any event, post-loss estoppel is clearly available in the context of liability insurance. Therefore, if an insurer’s agent, before or after the loss, makes a promise or representation upon which the insured reasonably and detrimentally relies, then the insurer is estopped from denying coverage.

Illustration:

4. A trucking company is sued for bodily injury arising out of a serious trucking accident. The accident is covered under a liability insurance policy, which contains a condition requiring the insured to notify the insurer “in writing” as soon as practicable after a suit is filed against the insured, but no later than 30 days after the suit is filed. An agent of the insured calls an agent of the insurer the day after the suit is filed and, over the course of a long telephone conversation, recounts all of the relevant facts of the accident and answers all of the insurer’s questions. The agent of the insured then asks the insurer whether the insured needs to do anything else to trigger coverage under the policy. The agent of the insurer says: “No. You have done everything necessary. The ball is now in our court. We will be in touch if and when we need you to do anything further.” The insured relies on this statement by the agent of the insurer and does not send anything to the insurer in writing. The agent for the insurer, however, fails to pass the information along to the relevant department, and the insurer does not follow up on the suit. On the 35th day after the lawsuit was filed, having heard nothing from the insurer, the agent of the insured again calls the insurer for an update on the status of the case. The insurer at that point informs the insured’s agent that it will not provide a defense to the suit because it was not notified in writing about the suit, which is a condition of coverage. The insurer is estopped from invoking this notice condition, because the insured reasonably and detrimentally relied on the representations of the agent of the insurer. Estoppel applies even though both the representation by the insurer and reliance by the insured took place after the loss.

h. Burden of proof. The burden of proof rests with the party seeking to invoke estoppel to show that the other party made a promise or representation that would reasonably be expected to induce, and in fact did induce, detrimental reliance.

REPORTERS’ NOTE

a. The function of estoppel. The doctrine of estoppel is discussed in Restatement Second, Contracts § 90 (Am. Law Inst. 1981) (“A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.”). As with waiver, estoppel results in an enforceable promise without need for consideration. See 3-8 Joseph M. Perillo, Corbin on Contracts § 8.7 (2017) (“They should practically always be approved as clearly falling within Restatement of Contracts § 90, stating when a promise without any agreed consideration (agreed equivalent in exchange) is made enforceable by reason of a change of position in reasonable reliance on it.”). For estoppel to apply, one party must show that it relied, to its detriment, on a representation or action of another party; this requirement is not part of a claim of waiver. See 3 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 16.03 (Lexis 2017); 6 Steven Plitt, Daniel Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance § 85:5 (3d ed. 2017) (“To bind an insurer by an estoppel, there must have been conduct on its part or by its agent which led the insured, erroneously and to his or her detriment, to believe that a condition in the policy would not be relied upon by the insurer. Where the facts are equally known to both parties, there can be no estoppel, for in such case, there is no reliance by one party upon the acts or representations of the other.”); 2 Allan Windt, Insurance Claims and Disputes § 6:33 (6th ed. 2017) (“The coverage afforded by an insurance policy should be extended by estoppel whenever the insurer’s actions prior to its final coverage denial are justifiably relied on by the insured to his or her prejudice. . . . For example, an insurer’s admission that coverage exists does not serve to estop the insurer from denying coverage if the insured did not reasonably rely to its detriment on the admission.”). See also Schoff v. Combined Ins. Co. of Am., 604 N.W.2d 43, 48 (Iowa 1999) (internal quotations omitted) (“[E]stoppel allows individuals to be held liable for their promises despite an absence of the consideration typically found in a contract. Courts have applied the principle of estoppel in effect to form a contract, when the promisee suffered detriment in reliance on a promise.”); Verschoor v. Mountain W. Farm Bureau Mut. Ins. Co., 907 P.2d 1293, 1298 (Wyo. 1995) (internal quotations omitted) (“[T]he elements necessary to a claim (or defense) of promissory estoppel [are] (1) a clear and definite agreement; (2) proof that the party urging the doctrine acted to its detriment in reasonable reliance on the agreement; and (3) a finding that the equities support the enforcement of the agreement.”).

b. Equitable and promissory estoppel. Equitable estoppel was traditionally limited to situations in which one party misrepresented a fact to another party and the latter relied to his or her detriment on that misrepresentation. 4 Richard A. Lord, Williston on Contracts § 8.6 (4th ed. 2017). Promissory estoppel developed later and encompasses promises with respect to future action made by one party on which another party detrimentally relies. For a general statement of the doctrine of promissory estoppel, see Restatement Second, Contracts § 90(1) (Am. Law Inst. 1981) (“A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.”); see also 46 C.J.S. Insurance § 1146 (2016) (“[S]ome authorities make a distinction between waiver and estoppel and, although recognizing that the coverage of the policy cannot be extended by waiver, hold that the company may be estopped to deny a broader or different coverage than that specified by the terms of the policy. A similar distinction has been drawn between equitable estoppel and promissory estoppel.”). For a thorough discussion of estoppel doctrine, see Joseph M. Perillo, Contracts 418-424 (7th ed. 2014).

c. Reasonable and detrimental reliance. For the proposition that reliance must be reasonable and detrimental for estoppel to apply, see Hous. Gen. Ins. Co. v. Lane Wood Indus., Inc., 571 S.W.2d 384, 391 (Tex. Civ. App. 1978) (“The doctrine of estoppel is intended to promote justice and the reliance of the party asserting it must have been in good faith. It is true there is no estoppel where the knowledge of the parties is equal.”); Harris v. Criterion Ins. Co., 281 S.E.2d 878, 881 (Va. 1981) (citations omitted) (“The doctrine of estoppel applies only when the insured can prove he justifiably relied on the insurer’s conduct and was thus misled . . . Unwarranted reliance will not invoke the application of estoppel.”).

e.Estoppel can expand coverage. For examples of courts stating that the doctrine of estoppel cannot be used to expand coverage, see Deardorff v. Farnsworth, 343 P.3d 687, 691 (Or. Ct. App. 2015) (“[E]stoppel . . . is not available to avoid an express exclusion; that is, it cannot expand the scope of an insurance contract.”) (citation omitted); Ulico Cas. Co. v. Allied Pilots Ass’n, 262 S.W.3d 773, 775 (Tex. 2008) (“[E]stoppel cannot be used to re-write the contract of insurance and provide contractual coverage for risks not insured.”); Republic Ins. Co. v. Silverton Elevators, Inc., 493 S.W.2d 748, 757 (Tex. 1973); Maxwell v. Hartford Union High Sch. Dist., 814 N.W.2d 484, 491 (Wis. 2012) (citations omitted) (“the doctrine of . . . estoppel based upon the conduct or action of the insurer or its agent is not applicable to matters of coverage as distinguished from grounds for forfeiture.”). See generally 1 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 5.07[2] (Lexis 2017) (“[I]t is often said that the doctrines cannot be used to create or expand coverage, so there must be some other basis for the claim of coverage other than merely the application of waiver and estoppel.”).

For rejection of the proposition that estoppel cannot be used to expand coverage, see Darner Motor Sales, Inc. v. Universal Underwriters Ins. Co., 682 P.2d 388, 394-395 (Ariz. 1984) (Although “[t]he majority rule is considered to be ‘that the doctrines of waiver and estoppel are not available to bring within the coverage of an insurance policy risks not covered by its terms, or expressly excluded therefrom, there are strong reasons to recognize a rule which allows an insured to raise the issue of estoppel to establish coverage contrary to the limitations in the boiler-plate insurance policy when the insurer’s agent had represented the coverage as greater than the language found in the printed policy.”) (citations omitted); see also Harr v. Allstate Ins. Co., 255 A.2d 208, 219 (N.J. 1969) (“[E]quitable estoppel is available, under appropriate circumstances, to bring within insurance coverage risks or perils which are not provided for in the policy or which are expressly excluded”); Bill Brown Constr. Co. v. Glens Falls Ins. Co., 818 S.W.2d 1, 12 (Tenn. 1991) (“We are persuaded that the effort to distinguish between insuring, exclusionary, and forfeiture clauses is pointless and . . . that the better view is that an insurer may be estopped to deny coverage for any loss by the misrepresentations of its agent upon which the insured reasonably relies.”); Hunter v. Farmers Ins. Group, 554 P.2d 1239, 1243 (Wyo. 1976) (“There are some circumstances, if present, where the plaintiff could rely upon an agent’s representations even as against a contrary provision in the insurance policy, based upon not only principles of agency but considerations of equitable estoppel.”). Although there are still cases asserting that the majority rule is that estoppel cannot expand coverage, the proposition is doubtful, given that there are so many widely acknowledged exceptions to the rule. Further, the majority rule is often cited in cases when the necessary elements for estoppel have not been presented. See, e.g., Sellers v. Allstate Ins. Co., 555 P.2d 1113, 1116-1117 (Ariz. 1976) (en banc).

For a discussion of the many contexts in which estoppel in fact has been used in the insurance context to expand coverage, see Robert H. Jerry, II & Douglas R. Richmond, Understanding Insurance Law 382-386 (5th ed. 2012); 3 Jeffrey E. Thomas, Appleman on Insurance Law Library Edition § 16.03 (Lexis 2017) (“The substantial body of caselaw expressly allowing coverage to be expanded by estoppel has developed largely in the context of misrepresentations of the scope of coverage at the time of sale.”).

f. Agency law applied to estoppel. For a statement of the general rule for apparent authority in agency law, see Restatement Third, Agency § 2.03 (Am. Law Inst. 2006) (“Apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.”). For a discussion of these agency-law principles as they relate to insurance, see Northington v. Dairyland Ins. Co., 445 So. 2d 283, 286 (Ala. 1984) (“[I]n order for a principal to be held liable under the doctrine of apparent authority and estoppel, the principal must have engaged in someconduct which led a third party to believe that the agent had authority to act for the principal.”); Indep. Fire Ins. Co. v. Able Moving & Storage Co., 650 So. 2d 750, 752 (La. 1995) (“Apparent authority is an estoppel principle which operates in favor of third persons seeking to bind a principal for unauthorized acts of an agent. When the apparent scope of an agent’s authority, the indicia of authority, is relied upon by innocent third parties to their detriment, the principal is liable.”); 2 Steven Plitt, Daniel Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance § 31:113 (3d ed. 2017) (“[A]n insurer is not estopped . . . by [an] agent who had no authority to act.”); 6 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 61.04 (Lexis 2017) (“Estoppel frequently involves the insured’s interaction with an agent of the insurer. In most cases, insurers are bound by the acts of their agents, either through actual or apparent authority.”).

g. Post-loss statements and conduct can give rise to estoppel. Some courts have held that, in the context of first-party insurance, even if estoppel may be used in some situations to expand coverage, this can only occur if the representation on which the insured reasonably relied takes place prior to the issuance of the policy. On this view, promissory estoppel with respect to insurance policies cannot be applied to representations made by agents of the insurer after the policy has been issued. The leading case in this area is a property-insurance case, Roseth v. St. Paul Prop. & Liab. Ins. Co., 374 N.W.2d 105, 107 (S.D. 1985) (internal citations omitted) (“The requirement that the estopping conduct occur ‘before or at the inception of the policy’ is consistent with the underlying rationale of the minority rule. The minority rule was born out of the inequities which result where an insured relies to his detriment on an insurer’s superior knowledge in purchasing a policy of insurance and consequently is deprived of the opportunity to purchase the desired coverage elsewhere.”). It is worth noting that, while the majority provided a justification for extending the doctrine of estoppel to precontractual dealings, it failed to offer any explanation for why postcontractual misrepresentations should be precluded from estoppel protections. Id. Indeed, it is this absence of reasoning that motivated the dissent. Id. at 110-111 (Henderson, J., dissenting) (“For, if you mislead a man into economic ruination or damage, by representations, concealment of material matters, or detrimental reliance prior to an insurance contract, the doctrine of equitable estoppel comes into play; but if the misrepresentation or misleading and detrimental reliance is all post-contract, estoppel is not activated, a dichotomy or forked reasoning process is established; and the brain, that complicated organ, is swept with fluctuation and oscillation.”). Moreover, the majority in Roseth relied heavily on a New Jersey decision, Harr v. Allstate Ins. Co., 255 A.2d 208, 221 (N.J. 1969), which never itself ruled out the applicability of estoppel doctrine in disputes involving postcontractual insurer misrepresentation and insured reliance. For a case permitting post-loss estoppel to expand coverage in the context of liability insurance, see Mut. Ins. Co. of Arizona v. Bodnar, 793 P.2d 560, 565 (Ariz. Ct. App. 1990) (insurer estopped from relying on insured’s failure of notice because insurer failed to allow the insured to eliminate the prejudice by using its own funds to buy out the default).