A Claim Denial Must State All Bases for Denial

Estoppel Limits Defenses But Insured Must Still Prove Loss is Within Coverage

The covenant of good faith and fair dealing requires that the insured honestly and fully report to the insurer the risk it is taking. A concealment or misrepresentation of a material fact is usually – depending on state law – grounds for rescission. If grounds for rescission exist then other grounds also exist related to the misrepresentation or concealment. For that reason, whenever I advised an insurer about its right to rescission to also deny the claim for every possible ground including breaches of material conditions of the policy. Failure to do so can be expensive to the insurer.

In Durham v. Auto Club Group Ins. Co., Court of Appeals of Michigan, Not Reported in N.W.2d, 2016 WL 7233319 (12/13/16) a claim under a homeowners insurance policy for a fire loss the trial court granted the defendant’s summary disposition motion. Defendant contended that the loss is not covered because the property was not at the time of the loss being used by plaintiff as their residence. The trial court ruled that there is no material factual dispute that the insureds’ were not living in the residence. They had relocated, obtained new jobs and new living quarters.


Waiver Or Estoppel Defenses

The insured has the burden to establish that his claim falls within the terms of the policy. Defendant may contest coverage under the exception to the rule of estoppel. The doctrine of estoppel at issue in this case has long-standing, common-law origins. Where a party gives a reason for his conduct and decision touching anything involved in a controversy, he cannot, after litigation has begun, change his ground, and put his conduct upon another and a different consideration. He is estopped from doing it by a settled principle of law.

The Michigan Court of Appeal has many times held, and it must be accepted as the settled law of the state of Michigan, that, when a loss under an insurance policy has occurred and payment refused for reasons stated good faith requires that the company shall fully apprise the insured of all of the defenses it intends to rely upon, and its failure to do so is, in legal effect, a waiver, and estops it from maintaining any defenses to an action on the policy other than those of which it has thus given notice.

On its face, defendant’s October 22, 2013, letter to plaintiffs’ purporting to rescind the insurance policy as of the date of its last renewal on November 9, 2012, on the basis of fraud and concealment, does not refer to the residency defense based on the policy definition of “residence premises” that defendant later asserts in its motion for summary disposition. Defendant argues that its letter included the residency defense because it “clearly identified” that defendant’s decision to rescind the policy and to deny coverage for the claim was based on the fact that plaintiffs did not occupy the insured property at the time of the loss. The October 22, 2013 rescission letter, in fact, alleges misrepresentation at the time the policy was “accepted” or renewed on November 9, 2012, not the condition of the residence at the time of the loss.

The Court of Appeal incorrectly considered that part of the policy that defendant relied on to rescind the policy was General Policy Condition No. 4, Fraud and Concealment. To rely on the contract condition is a claim of breach of contract not a request for the equitable remedy of rescission. Regardless, it set its ruling on that mistake of law since rescission makes the policy non-existent and puts the parties in the position they were in before a policy was issued.

The trial court ruled there was no evidence to support that plaintiffs committed fraud or concealed material facts thereby making Condition No. 4 unavailable to the insurer as a ground for voidance since it has no effect on rescission.

While the rescission letter concerns whether the property was “owner-occupied,” the only time frame stated in the letter referenced when the policy was accepted or renewed on November 9, 2012, not the date of fire.

Because the circumstances establish a prima facie case for the application of the doctrine of estoppel of policy defenses, the burden of persuasion that the doctrine should not apply must rest with defendant.

In the present case, defendant denied the claim after a full investigation, so it had knowledge of all necessary facts to assert its residency defense when it denied plaintiffs’ claim. Therefore, it can be said that defendant’s failure to assert the residency defense was a knowing waiver. Further, the blanket reservation of rights provided absolutely no notice to plaintiffs of the later asserted defense.

Finally, defendant asserts that even if the denial letter does not include the policy’s residency requirement, plaintiffs cannot expand the policy’s coverage through the doctrines of waiver or estoppel. Depending on the coverage provided by the policy at issue, there may be merit to this argument. The Michigan Supreme Court has held that waiver and estoppel could not be used to create a new contract.

The exception to waiver or estoppel of defenses saves defendant’s residency defense only if the policy does not provide coverage for a fire loss unless, at the time of loss, the insureds occupy the insured dwelling. Reading the insurance policy in this case as a whole, we conclude that it clearly extends coverage for the insured premises stated in the declarations sheet while the insureds use it “principally as a private residence.”

In summary, the court found the case law that defendant relies on is distinguishable on the basis of differing policy language and differing facts. Because the policy language in this case covers the residence premises stated in the declarations, “used as a private residence by you,” and grants permission to the insureds to leave the premises “unoccupied without limit of time,” a genuine question of material fact remains for a jury to decide whether plaintiffs continued to use the Benton Township home principally as a private residence at the time of the fire loss at issue.

Therefore, the trial court erred by granting summary disposition to defendant. The case was reversed and remanded for trial at which defendant’s defenses are limited as discussed in the opinion and the trial court erred by granting summary disposition to defendant because a genuine question of material fact remains and because the doctrine of estoppel or waiver of defenses applies to this case.

Consequently, the Court of Appeal reversed and remanded for trial on the issue of whether, despite not actually occupying the insured dwelling at the time of the fire, plaintiffs still, as a matter of fact, used the insured dwelling principally as a private residence. The tort relied upon the estoppel doctrine but also by requiring plaintiffs to sustain their burden of proving coverage.


Rescission is an equitable remedy. If an insured lies to the insurer when it acquires the policy, as did the plaintiffs when they failed to advise the insurer they no longer occupied the dwelling, sufficient in many states to allow rescission although failure to prove fraud is insufficient to allow an declare the policy void for the breach of the contract term. The insurer should have stated the grounds for rescission and, in the same letter, advise the insured of the policy condition requiring use as a residence premises in the letter. They will probably win on remand since they can prove the plaintiffs did not use the dwelling as a residence premises.

ZALMA-INS-CONSULT                      © 2016 – Barry Zalma

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant and expert witness specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 49 years in the insurance business.

Mr. Zalma is the first recipient of theLEGEND-TROPHY-2 first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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