Legal Memorandum: Denial of Insurance Coverage

Issue: When can an insurer be estopped to deny coverage because it took an insured’s agent’s statement after it had attempted to reserve its rights?

           In Evanston Ins. Co. v. Security Assurance Co., 684 F. Supp. 1423 (N.D. Ill. 1988), the insured argued that its insurer was estopped to deny coverage because it had obtained documents and taken statements from the insured’s agents during a period in which the insured had been "lulled" into the belief that the insurer was not contesting coverage.  Id. at 1427.  The court rejected the insured’s argument because it found the insured’s cooperation was not caused by its reasonable belief that the insurer would cover the underlying claim and because no evidence was submitted showing that the insured was prejudiced by the insurer’s conduct.  Id.  Significantly, a major factor in the court’s decision was that the insured was itself an insurance company.  The court noted, however, that the insured’s argument would "carry some weight when the insured is an unsophisticated individual, relying on his or her insurer to `do right’ by him or her."  Id. 

The reason for the rule that precludes the insurer from obtaining information from the insured under these circumstances is that "to allow the insurer to attempt to obtain information from the insured in order to bolster an undisclosed policy defense would, in effect, allow the company to take advantage of its fiduciary relationship with the insured in order to strengthen its position against the insured." Allan D. Windt, Insurance Claims and Disputes § 2.05 at 31 (1988). 

[…]