Principles of Waiver and Estoppel Can be Used to Establish the Existence of an Effective Insurance Contract

In Dones v. Life Ins. Co. of North America (No. A157662, filed 10/7/20), a California appeals court held that whether an insurer had waived or was estopped to assert that an “active service” requirement prevented inception of coverage for an employee under a group life insurance policy provided by her employer presented triable issues of fact not subject to demurrer.

In Dones, Life Insurance Company of North America (LINA) issued a group life insurance policy to the Alameda County Sheriff’s Department. The deceased was a civilian employee who enrolled for the coverage online. She was on medical leave, remained on leave through the purported effective date of coverage, and died six months later. The premiums were paid out of her paycheck, and out-of-pocket when that became insufficient.

The insurance was provided under a master policy that was not distributed to enrolled employees, who were supposed to be given a certificate describing the coverage. The master policy stated: “If an Employee is not actively at work due to Injury or Sickness. . . . Coverage will become effective on the date the Employee returns to Active Service.” “Active Service” was defined as: “An Employee will be considered in Active Service with the Employer on a day which is one of the Employer’s scheduled work days if. . . 1. He or she is actively at work . . . . performing his or her regular occupation for the Employer on a full-time basis. . . .”

The limitation was referred to in various paper notices and places online, but not clearly spelled out. When the employee died, her beneficiary was advised that the coverage never took effect because she had not returned to active service, and her premiums would be refunded. In the ensuing breach of contract and bad faith lawsuit, the beneficiary alleged that the County was acting as agent for LINA in administering the policy; that she detrimentally relied on a confirmation she received that the insurance was in effect; and that by repeatedly deducting the premiums from her paycheck without notifying her of any deficiency in her application, the County, for itself and as agent for LINA, knowingly and voluntarily waived any requirement that the insured be actively at work for coverage to take effect.

The trial court sustained the County’s and LINA’s demurrers without leave to amend, holding that since it was admitted in the complaint’s allegations that the life insurance benefits would not go into effect until the employee returned to active service, and she did not do so, any failure to provide life insurance benefits was not a breach of contract. The court also rejected the argument that LINA and County waived or were estopped from enforcing the active service requirement based on case law holding that waiver and estoppel cannot be used to create insurance coverage that does not exist in the first instance.

The appeals court reversed, distinguishing a number of cases cited for the rule that the doctrines of waiver and estoppel are not available, based upon the conduct of the insurer, to bring within coverage risks not covered by a policy’s terms, or expressly excluded (as distinguished from the waiver of, or estoppel to assert, grounds of forfeiture). The Dones court said that Aetna Casualty & Surety Co. v. Richmond (1977) 76 Cal.App.3d 645; Manneck v. Lawyers Title Ins. Corp. (1994) 28 Cal.App.4th 1294; Komorsky v. Farmers Ins. Exchange (2019) 33 Cal.App.5th 960; and R & B Auto Center, Inc. v. Farmers Group, Inc. (2006) 140 Cal.App.4th 327, were all distinguishable because they “involve plaintiffs’ attempts to obtain coverage under existing insurance policies for claims not covered by the terms of their policies.” Instead, according to the Dones court, “the present case does not involve the scope of coverage under an existing insurance policy but rather the question whether the policy ever went into effect. None of LINA’s cases involve waiver or estoppel in the context of a condition precedent to operative policy coverage.”

The Dones court cited Salyers v. Metropolitan Life Insurance Company (9th Cir. 2017) 871 F.3d 934, 941, for the proposition that “where, as here, premium payments have been accepted despite the plan participant’s alleged noncompliance with policy terms, ‘giving effect to the waiver . . . does not expand the scope of the [coverage]; rather it provides the plaintiff with an available benefit for which he paid.” (Quoting Gaines v. Sargent Fletcher, Inc. Grp. Life Ins. Plan (C.D.Cal. 2004) 329 F.Supp.2d 1198, 1222.)

The Dones court cited numerous other cases supporting its conclusion, stating: “One thing is clear from all these cases: At least in the context of determining the effect of preconditions to effective coverage, waiver and estoppel are questions of fact. . . . and LINA’s cases do not support a conclusion that these doctrines are inapplicable in the present case. We decline to hold that principles of waiver and estoppel cannot establish the existence of an effective contract of insurance as a matter of law.”

Having concluded that waiver and estoppel were potentially applicable, the Dones court then held that despite a paucity of facts, the mere allegation that the County was acting as an agent of LINA raised factual questions sufficient to overcome a demurrer. The court also rejected a “sham pleading” argument – that amendments made to the complaint by the plaintiff were fatally contradictory.

Although the court found that the County could be deemed an agent of the insurer, the Dones court nonetheless sustained the demurrer without leave as to the County itself. The court duly acknowledged that there was evidence that the deceased did not know LINA’s actual identity, and that an agent can be directly liable if the principal is not disclosed (citing Unlimited v. Commercial Standard Title Ins. Co. (1983) 149 Cal.App.3d 792), but the Dones court stated that: “Application of these principles in the present case would make no sense. As an employee purchasing life insurance through a group plan offered by her employer, [the deceased] was not in the same position as an individual negotiating a commercial transaction with the agent for a seller of goods, lessor of property or the like. . . . She could not plausibly have viewed her selection of the life insurance benefit as a contract for the County itself to provide the actual insurance: The County is not an insurer.”

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October 9, 2020