Cannot Create Coverage by Waiver

Insured Only Gets Coverage Purchased

There are many reasons for which people buy insurance. Insurers provide multiple coverages on a homeowners policy from the basic ISO form and additional coverages provided by endorsement for an extra premium. The insured is provided the option to buy limited or expansive insurance coverages. When the insured refuses to buy extended coverages that would have covered a loss had it been purchased, the insured often file suit to change the coverage to that which he or she needed rather than what the insured purchased.

Carl Budny tried to increase the coverage he bought, the trial court granted summary judgment in favor of Budny’s insurer, MemberSelect Insurance Co. (MemberSelect) he appealed and in CARL BUDNY v. MEMBERSELECT…, Court of Appeals of Iowa, Slip Copy, 2017 WL 104964 (January 11, 2017) resolved the dispute.


On or around August 11, 2014, Budny purchased homeowners insurance from AAA Insurance, a MemberSelect company. He was given the option to purchase several riders. Budny purchased two riders, “H-290: Personal Property Replacement Cost,” and “H-500: Protection Plus Homeowners Package.” The latter also included within it “H-210: Special Jewelry and Furs Coverage.” He refused to buy extended water damage coverage.

Budny’s insurance policy provides coverage for direct risks of physical loss not specifically excluded and caused by an accidental discharge or overflow of water or steam from within a plumbing, heating, air conditioning or automatic fire protection sprinkler system or domestic appliance caused by or resulting from water or any other substance from outside the residence premises plumbing system that enters the dwelling or additional structure through household sewers, drains or drainage fixtures or a sump pump, sump pump well or any other system designed to remove subsurface water which is drained from the foundation area; or water or any other substance originating from inside the dwelling or additional structure which escapes the plumbing system through a floor drain inside the dwelling or additional structure.

In November 2015, sewage backed up into Budny’s basement, causing water damage. He reported the damage to his insurance agent. According to Budny, the agent told Budny the loss was covered which was disputed by the agent.

On December 14, the insurance company denied Budny’s claim, citing the EXCLUSIONS paragraph. Budny subsequently sued, asserting claims for breach of contract, waiver, promissory estoppel, unjust enrichment, reasonable expectations, implied warranty, and bad faith. The district court granted MemberSelect’s motion for summary judgment, and Budny filed a timely notice of appeal.


Budny contends MemberSelect waived any policy defenses when the agent told Budny the claim was covered. Waiver is “the voluntary or intentional relinquishment of a known right.” Scheetz v. IMT Ins. Co., 324 N.W.2d 302, 304 (Iowa 1982). The essential elements of waiver are the existence of a right, actual or constructive knowledge of the right, and an intention to relinquish the right.

Whether the agent represented to Budny that his claim would be covered is a disputed fact but it is not a material one. Even if the court assumed, viewing the record in the light most favorable to the non-moving party, the agent did make such a statement, Budny cannot prevail. In addition the agent lacked the authority to waive the clear dictates of the policy, including the provision stating, “No change or waiver may be effected in this policy except by endorsement issued by us.”

In Iowa, the doctrine of waiver or estoppel cannot be successfully invoked to create a liability for benefits not contracted for at all.  The district court concluded Budny’s breach-of-contract claim failed as a matter of law because the policy specifically excluded coverage of the claim. Under the circumstances, waiver cannot create liability for coverage not part of the policy.

Promissory Estoppel

Promissory estoppel requires a party to prove (1) a clear and definite oral agreement; (2) proof that plaintiff acted to his detriment in reliance thereon; and (3) a finding that the equities entitle the plaintiff to this relief. Budny’s claim fails on all three counts. First, there was no “clear and definite” oral agreement for services Budny did not contract for.


Second, Budny cannot prove he acted to his detriment in reliance on Lee’s representation. Budny argues he would not have hired ServPro but for Lee’s statements to him. Even viewing the record in the light most favorable to Budny, the court found the assertion unlikely. Budny had raw sewage in his basement. If he did not hire ServPro, he would have hired someone else. Whatever difference in expense might have resulted is not sufficient to satisfy this element. Third, the equities fail to favor Budny’s relief. He contracted for certain services and now seeks additional ones he opted not to buy. While his situation is unfortunate, it would be inequitable to force insurers to provide coverages policyholders request after a loss. A court may not strain the words or phrases of the policy in order to find liability that the policy did not intend and the insured did not purchase.  Inherent in most insurance coverage is the risk of damage not covered by the policy. The district court did not err in granting summary judgment on this claim.

Implied Warranty

Insurance policies in Iowa come with an implied warranty. To recover on a theory of implied warranty, an insured must show that the insurer had reason to know the particular purpose for which the policy is purchased; that the insured relied upon the company’s skill or judgment in furnishing such coverage; and that the resulting implied warranty was breached.  Budny failed to prove an entitlement to the implied warranty.

Bad Faith

Finally, Budny asserts MemberSelect acted in bad faith. The elements of bad faith are (1) the insurer lacked a reasonable basis for denying the claim and (2) it knew or had reason to know it lacked a reasonable basis. A reasonable basis exists for denial of policy benefits if the insured’s claim is fairly debatable either on a matter of fact or law. A claim is fairly debatable when it is open to dispute on any logical basis. Stated another way, if reasonable minds can differ on the coverage-determining facts or law, then the claim is fairly debatable.

MemberSelect had a reasonable basis for denying the requested coverage — to wit, that Budny did not contract for said coverage. The district court held Budny did not contract for the coverage.  The trial court judgment was affirmed.


When an insured refuses to opportunity to cover a risk and refuses the opportunity he may not later claim he secretly intended to acquire that coverage and that the insurer should pay for the loss that was clearly excluded. This type of argument must, and did, fail because the lack of coverage was due solely to the actions of the insured. He should not and cannot change the terms and conditions of his policy after a loss.

ZALMA-INS-CONSULT                      © 2017 – 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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