The following entry is excerpted from the Reporters’ Notes, Black Letter and Comment from Proposed Final Draft No. 2 of Section 5. Waiver.
REPORTERS’ NOTE (abridged)
a. The function of waiver. The general contract doctrine of waiver is discussed in Restatement Second, Contracts § 84 (Am. Law Inst. 1981) (“[A] promise to perform all or part of a conditional duty under an antecedent contract in spite of the non-occurrence of the condition is binding.”). Waiver allows for contract modification without the typical element of consideration. See 8-40 Joseph M. Perillo, Corbin on Contracts § 40.2 (2017) (“Certain kinds of antecedent events called ‘past consideration’ may cause reliance. We need not be surprised, therefore, to find that a promisor can sometimes turn a conditional duty into an unconditional one by a ‘waiver’ of the condition without any consideration.”). For a general overview of what constitutes waiver in insurance contracts, see 1 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 5.07 (Lexis 2017).
b. Agency law applied to waiver. 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.”); see also 2 Steven Plitt, Daniel Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance § 31:113 (3d ed. 2017) (“Where it is claimed by the insured that conduct of the insurer’s agent has worked a waiver of the policy’s provisions relating to cancellation, the question of the authority of the insurer’s agent may of course arise.”); 3 id. § 48:1 (“In accord with general principles of agency law, the insurer is bound by the actions of his or her agent within the scope of the agent’s authority.”); 5 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 41.04 (Lexis 2017) (“Under [the waiver doctrine], the actions and knowledge of the insurer’s agent, bearing either actual or apparent authority, will typically be imputed to the insurer.”). See generally Anetsberger v. Metro. Life Ins. Co., 14 F.3d 1226, 1234 (7th Cir. 1994) (applying Illinois law) (“A question presented by plaintiffs’ waiver and estoppel arguments . . . is whether [the individual’s] statement bound [the insurer]. To bind the principal, the agent must have either actual authority, apparent authority, or the principal must ratify [the individual’s] actions.”); Pressley v. Travelers Prop. Cas. Corp., 817 A.2d 1131, 1138 (Pa. Super. Ct. 2003) (citation omitted) (“[A]n insurer is liable for the acts of an agent that had authority to bind coverage and had advised the policyholder that he had done so.”)
c. Waiver and estoppel compared. For a general discussion of the similarities and differences between waiver and estoppel, see 17 Steven Plitt, Daniel Maldonado, Joshua D. Rogers & Jordan R. Plitt, Couch on Insurance§ 239:96 (3d ed. 2017) (“The most commonly articulated difference [between waiver and estoppel] is that estoppel requires reliance by the insured on the insurer’s actual or implied indications that it will not enforce some right. In contrast, waiver is merely an expression of an intent by words or conduct that the provision in question shall not bind the insured, and no reliance or misleading of the insured is required for waiver.”) (citations omitted); 1 Jeffrey E. Thomas, New Appleman on Insurance Law Library Edition § 5.07 (Lexis 2017) (“Waiver and estoppel are often discussed together because the same conduct may result in the application of either doctrine.”).
§ 5. Waiver
A party to an insurance policy waives a right under the policy if
(1) that party, with actual or constructive knowledge of the facts giving rise to that right, expressly relinquishes the right, or engages in conduct that would reasonably be regarded by the counterparty as an intentional relinquishment of that right, and
(2) the relinquishment or conduct is communicated or known to the counterparty
a.The function of waiver. Waiver is a general contract-law doctrine that permits the enforcement of terms different from those in the original contract (or, as is more common in the insurance context, permits the non-enforcement of terms that are in the original contract) without requiring all of the elements of a new contract (such as consideration) or all of the elements of estoppel (such as detrimental reliance). A party to a contract can waive only terms that benefit the waiving party. Thus, for example, an insurer, but not an insured, can waive a condition in the policy. A party to an insurance policy can waive a policy term expressly by stating its intent to waive the term. A party can waive a term impliedly by taking actions that, from the perspective of an objectively reasonable person in the circumstances of the counterparty, manifest the intent to waive the term. Enforcing express waivers of contract terms serves a similar function to that of enforcing contracts generally, by enabling parties to make legally binding commitments that others can trust will be honored. Enforcing some waivers also protects the reliance interests of non-waiving parties. Such reliance interests can be and sometimes are also protected by the doctrine of estoppel. See § 6. However, estoppel can provide insufficient protection of reliance interests when proving reliance is difficult or impossible. The treatment of waiver retractions provides an example of how waiver serves the function of protecting the reliance interests of non-waiving parties. See Comment h.
b. Agency law applied to waiver. Because of the important role of insurance intermediaries in selling and administering insurance policies, waiver cases often present questions about whether the intermediary can waive the right of an insurer. These questions are complicated by the imperfect fit between the law of agency and insurance business titles, such as “insurance agent” and “insurance broker.” The law of agency determines which people can enter into contracts or otherwise act on behalf of other parties and under what circumstances. An agent can act on behalf of a principal when both the principal and the agent manifest assent for the agent to act for the principal and subject to the principal’s control. Thus, the law of agency determines who can enter into contracts on behalf of whom and who can waive contractual rights on behalf of whom. In the insurance context, agency law dictates that an insurer’s or policyholder’s agent can typically waive the rights of its principal when it has either actual or apparent authority to do so, or when the principal later ratifies its agent’s actions. An agent has actual authority to act for a principal when the principal’s manifestations, to a reasonable person with the agent’s knowledge and in the agent’s circumstances, designate or imply that course of action. By contrast, an agent has apparent authority when the agent lacks actual authority but a third party the agent transacts with reasonably believes, in a manner traceable to the principal’s manifestations, that the agent has authority to act for the principal. Agency law also applies to estoppel. See § 6, Comment f. Although an “insurance broker” is usually the agent of the policyholder under agency law, an insurance broker can be the agent of the insurer for at least some purposes (for example, when accepting premiums). Similarly, although many “insurance agents” are agents of the insurer under agency law, there are also insurance agents that can be agents of the policyholder under agency law for some purposes. The application of agency law is highly fact-specific and not necessarily controlled by the business title of the person involved.
c. Waiver and estoppel compared. Both waiver and estoppel raise two important practical concerns. First, both doctrines reduce insurers’ ability to maintain control over the risks that they assume, by allowing their agents to obligate insurers to assume risks that the insurers do not wish to assume. This loss of insurer control in the long run increases the price of insurance for all policyholders. Second, both doctrines create the risk that some policyholders will misrepresent what an agent said to them in order to obtain coverage. In the worst case, insurers may have to go to trial to enforce even the most basic terms in the insurance policy, as the credibility of witnesses is a fact question that requires resolution by a jury. Balanced against these two concerns is the concern that insureds will be harmed by false or incorrect assurances of coverage made by insurers’ agents.
Estoppel requires insureds to prove that such harm in fact occurred, in the form of a showing of detrimental reliance. See § 6. Such proof is not required by the waiver doctrine. The detrimental-reliance requirement of estoppel doctrine serves two purposes. First, it limits insurers’ involuntary assumption of risk to cases in which the insured can prove that the countervailing concern—harm to the insured—in fact occurred. Second, it serves an evidentiary role. The fact of detrimental reliance makes more credible the insured’s assertion that the agent made the promise that the insured seeks to enforce.
d. There is no general rule against post-loss waiver. In the context of first-party insurance, the general rule is that, although the words or actions of an insurance company’s representative that take place at the time of contracting (and before an insured loss has occurred) may, under the right circumstances, effect a waiver of a condition or exclusion in the policy, no such waiver can occur after the loss has occurred. This rule does not, however, generally apply in the context of liability insurance. Statements or actions by an insurer that take place after the loss that gives rise to the underlying legal action can provide a basis for waiver. One obvious example is when an insurer waives a ground for contesting coverage by undertaking the defense of a legal action without reserving the right to contest coverage. See § 15 and accompanying Comments. Two other examples are an insurer that waives a coverage defense in order to retain control over settlement under the rule in § 25(3) and an insurer that waives its coverage limits in order to avoid exposure to consequential damages for breach of the duty to make reasonable settlement decisions. See § 24, Comment b. Post-loss estoppel is available in both the liability and the first-party context. See § 6, Comment g.
e. Use of extrinsic evidence. Proof of the elements of waiver 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 with respect to express or implied representations that were made by the parties to each other. Evidence regarding the actions of the parties that is indicative of objective intent also is permissible. Proving estoppel also typically requires the court to consider such evidence. See § 6, Comment d. For a discussion of the use of extrinsic evidence in connection with the interpretation of insurance policy terms, see § 3, Comment d.
f. Express and implied waiver. A waiver may be express or implied. In either event, however, the words or other conduct alleged to constitute the waiver are examined from an objective perspective. As in contract law generally, objective manifestation of the intent to waive is sufficient. Therefore, if the statement or other action of the insurer would be understood by a reasonable person in the insured’s circumstance as manifesting an intent on the part of the insurer to waive a right of the insurer, then the insurer has waived the right, provided the other requirements of this Section are met.
g.The knowledge requirement. Although waiver is sometimes defined as “a voluntary relinquishment of a known right,” the waiving party need not have detailed knowledge of the specific right being waived. Rather, it is enough that the waiving party knows or should know the facts on which the waiver is based and knows or should know of the terms of the contract and of any actions or omissions on the part of the non-waiving party that might implicate a right under the contract. Thus, it is possible for a party to waive a legal right about which there is some uncertainty. This rule has the effect of imposing on the waiving party, which in most insurance cases is the insurer, the risk associated with not having perfect knowledge of rights or obligations under the contract—an allocation of risk that is especially appropriate when the waiving party is the insurer that supplied the insurance policy term creating the right being waived.
h. Communication and retraction. A waiver must be communicated to the non-waiving party or to the party’s agent. Once that communication has occurred, the waiver is binding on the waiving party, unless the waiver is effectively retracted. Effective retraction requires communication of the retraction, the presence of sufficient time or other conditions necessary for the other party to satisfy the original contractual requirement, and the absence of detrimental reliance on the waiver by the other party. If there has been such detrimental reliance, the waiver cannot be retracted; and the waiver would also satisfy the requirements of estoppel. This would be a case in which the results under a waiver and estoppel rule are indistinguishable.
1. A liability insurance policy states that the policy can be cancelled for nonpayment of premiums if a premium payment is received more than 30 days after the insurer has sent the policyholder a letter informing him or her of the overdue premium and warning of the impending cancellation of the policy if the premium is not remitted. The policyholder calls the insurer five days before the 30-day deadline arrives and says that the premium will not be submitted by the deadline. The insurer agrees orally to extend the deadline for one additional week beyond the original 30-day late-payment period. The insurer has expressly waived the original late-payment deadline.
2. Same facts as Illustration 1, except that, after the insurer orally agrees to extend the 30-day deadline by an additional week but before the original 30-day deadline passes, the insurer contacts the policyholder and indicates that it has changed its mind and the waiver is being retracted. Such a retraction of the waiver is effective, and the original 30-day condition is restored, so long as the policyholder, at the time of the retraction, has a reasonable opportunity to satisfy that original condition. If, for example, the insurer waits to issue the retraction until it was too late for the policyholder to satisfy that condition, whether because there is not enough time or because the policyholder has relied to its detriment on the waiver, that retraction is ineffective and the waiver of the deadline remains in effect.
3. Same facts as Illustration 1, except that the policyholder does not communicate with the insurer regarding the late payment, but rather simply sends the check for the premium to the insurer 38 days after the date of the notice-of-overdue-premium letter—that is, eight days beyond the original 30-day grace period. The insurer, upon receiving the premium check, deposits the check. The policyholder receives notice of that deposit through an automatic email message sent by the bank. The insurer has impliedly waived the 30-day payment condition for that premium payment only. The action of depositing the check, which was communicated to the policyholder, is inconsistent with the intent to rescind the policy. The insurer in this case cannot retract the waiver, because the time for satisfying the timely payment condition has already passed. 4Same facts as Illustration 3, except that the insurer has so regularly accepted late premium payments (payments received after the 30-day grace period following the notice-of-overdue-premium letter) that a reasonable policyholder would understand that the insurer has waived the timely payment term in the insurance policy on a prospective basis as well. In this case, the insurer has waived the 30-day period on a prospective basis. This prospective waiver, however, can also be retracted, if the insurer communicates with the policyholder acknowledging the past practice of accepting late premium payments but stating that, beginning with the next billing cycle, the company will henceforth strictly enforce the timely-payment-of-premium terms set out in the notice-of-overdue-premium letter and will cancel policies for nonpayment when the payments are received more than 30 days late. Assuming that the policyholder receives this letter in time to comply with the timely-payment-of-premium term for the next billing cycle, the insurer has retracted the prospective waiver of that term.
4. Same facts as Illustration 3, except that the insurer has so regularly accepted late premium payments (payments received after the 30-day grace period following the notice-of-overdue-premium letter) that a reasonable policyholder would understand that the insurer has waived the timely payment term in the insurance policy on a prospective basis as well. In this case, the insurer has waived the 30-day period on a prospective basis. This prospective waiver, however, can also be retracted, if the insurer communicates with the policyholder acknowledging the past practice of accepting late premium payments but stating that, beginning with the next billing cycle, the company will henceforth strictly enforce the timely-payment-of-premium terms set out in the notice-of-overdue-premium letter and will cancel policies for nonpayment when the payments are received more than 30 days late. Assuming that the policyholder receives this letter in time to comply with the timely-payment-of-premium term for the next billing cycle, the insurer has retracted the prospective waiver of that term.
i. Waiver of policy terms. Under general contract law, waiver doctrine is often applied to what some consider relatively minor or technical conditions within the contract, such as conditions of coverage. In the insurance context as well, courts often invoke waiver in such situations, for example in relation to provisions setting deadlines for filing a notice of claim or for paying the premium. (See the Illustrations above.) The doctrine of waiver, however, should not be limited to “minor” or “technical” conditions, for several reasons. First, there is the practical and theoretical difficulty of determining what constitutes a technical condition. When an insurer denies a claim based on the failure to satisfy a condition in an insurance policy, that condition is no longer accurately characterized as minor. Even a requirement that the premium be paid by a certain date is not a minor condition when coverage turns on that requirement. Second, in the case of express waivers, the insurer benefits from being able to bind itself legally to a decision to waive any type of insurance policy provision, just as the insurer benefits from being able to be bound by the insurance contract in the first place. Third, insofar as waiver serves the same function as estoppel (that is, to protect the reliance interests of non-waiving parties in situations in which detrimental reliance is difficult or impossible to prove), this function is not limited to minor or technical terms.
j.The rule that waiver cannot expand coverage. Courts often state that waiver by the insurer cannot expand coverage. What this statement appears to mean is that representatives of the insurer cannot create coverage when none would have existed under the policy, assuming all conditions had been met. Under this understanding, the waiver-cannot-expand-coverage rule is not violated if an insurer expressly or impliedly waives a condition, such as a payment deadline for a premium. In such cases, as shown in Illustration 1, waiver can result in the triggering of an insurer’s obligations with respect to a claim, despite the failure to satisfy a condition. The waiver-cannot-expand-coverage rule, however, would apply to a situation in which an insured contends that its general-liability insurer, owing to the actions or inactions of a representative of the insurer, has waived the policy’s pollution exclusion—or to a situation in which an insured contends that its auto-liability insurer has agreed to provide liability coverage for an automobile not listed in the policy. Permitting waiver to require the insurer to provide coverage in such situations would conflict with this rule of insurance law. To recover in such situations the insured would have to meet the more demanding requirements of estoppel. See § 6, Comment e.
Although waiver generally cannot expand coverage, there are other rules of insurance law, with elements common to waiver, that do operate to expand coverage in certain circumstances. For example, in Chapter 2, under § 19, if an insurer breaches the duty to defend, the insurer may have an obligation to provide coverage, despite the existence of an otherwise applicable exclusion. A similar outcome can occur if an insurer defends a legal action brought against an insured without providing the insured with a valid reservation of rights. See § 15.
k. Burden of proof. The non-waiving party has the burden of proving that the waiving party either expressly waived the right in question or engaged in conduct that would reasonably be interpreted as manifesting the intent to waive. Thus, for example, when an insurer refuses to cover an insured’s claim on the ground that the insured failed to satisfy a condition of coverage, it is the insured that bears the burden of proving that the condition was waived.