4th Circuit Holds Insurer Not Equitably Estopped From Denying Coverage

In an unpublished opinion, the 4th Circuit Court of Appeals reversed a South Carolina District Court judge’s finding that an insurer was equitably estopped from denying coverage to a new owner of the insured business for a wrongful death claim. First Financial Ins. Co. v. Brumbaugh, No. 12-2452, 2014 WL 57558 (4th Cir. Jan. 8, 2014).

First Financial insured Gary Denaux d/b/a Wholesale Transmission. The policy declarations indicated the form of business was “individual” rather than a partnership or limited liability company. The policy provided, “Your rights and duties under this policy may not be transferred without our written consent, except in the case of death of an individual named insured.” The policy provided coverage from May 23, 2007 to May 23, 2008. Midway through the policy term, Denaux ceased operating the business. A former co-worker, English, formed a limited liability company, and English and his friend, Garey Gorey, opened a transmission business at the same location with the same name – Wholesale Transmission. English received at that location a bill for the last policy premium payment, which he paid.

In April 2008, First Financial sent an insurance application to the independent insurance agent who had obtained the policy for Denaux and who was also acting as English’s agent. On May 2, 2008, the agent sent a completed application to First Financial with an explanation that Denaux was no longer the owner of the company. On June 6, 2008, First Financial issued a new policy to Edward English d/b/a Wholesale Transmission, retroactively effective as of May 23, 2008, the day the Denaux policy had expired.

However, 11 days before the expiration of the Denaux policy (presumably May 12) and before the English policy became effective, one of English’s employees was involved in an auto-accident that resulted in a death. The deceased’s personal representative filed a wrongful death suit against the employee/driver, Wholesale Transmission, Denaux, English, and English’s LLC.

First Financial brought a declaratory judgment action to resolve the coverage issue. Default judgment was entered against all defendants except the PR. The defaulting parties admitted Denaux, the named insured, could not be liable, directly or vicariously, for the death, and that he had sold the business four months prior to the accident.

English’s employee was not an insured under Denaux’s policy at the time of the accident. He was not an employee of Denaux; he was employed by English at a different business than that owned by Denaux. Denaux had no power or right to control and direct the employee at the time of the accident. Denaux did not transfer his rights and duties under the policy to English, or any other party or entity. He neither sought, nor obtained, First Financial’s written consent to do so.

On cross motions for summary judgment, the district court held that the Denaux policy did not provide coverage because First Financial had not consented in writing to the transfer of the policy to English and his employees. The court held, however, after conducting a bench trial to resolve the court’s additional question, that First Financial was equitably estopped from denying coverage because it reasonably induced English to believe Denaux’s rights under the policy had been transferred.

The 4th Circuit reversed, holding the doctrine of equitable estoppel did not apply. Equitable estoppel applies when the party to be estopped (1) engages in conduct which amounts to a false representation, or conduct which is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) has the intention that such conduct shall be acted upon by the other party; and (3) has actual or constructive knowledge of the real facts. Estoppel can be established through a party’s silence when that party owes the other a duty to speak but refrains from doing so and thereby leads the other to believe in the existence of an erroneous state of facts. The party asserting estoppel must demonstrate: (1) lack of knowledge, and the means of knowledge, of the truth as to the facts in question; (2) reliance upon the conduct of the party estopped; and (3) a prejudicial change of position in reliance on the conduct of the party being estopped.

Although estoppel is a flexible doctrine that requires consideration of the relative equities between the parties, the doctrine’s reach is not unlimited. In Pitts v. N.Y. Life Ins. Co., 148 S.E.2d 369, 371–72 (S.C. 1966), the S.C. Supreme Court discussed the general principle of insurance law that conditions or restrictions on coverage may not be extended by waiver or estoppel. According to this principle, estoppel cannot be used to extend the coverage of an insurance policy or create a primary liability, but may only affect the rights reserved therein. The Pitts opinion went on to hold that this general principle is not binding when circumstances warrant application of the doctrine: where the insurer over a long period of time after the date prescribed by it for the termination of a particular coverage has continued to demand, accept and retain the premium fixed by it for that coverage, it may be reasonably inferred that the insured, who in the normal course of things relies upon the insurer’s billing, has been misled by such conduct to believe that the insurer has continued to accept the coverage. Pitts, 148 S.E.2d at 371.

The PR argued that First Financial misled English into believing the Denaux policy provided him coverage by failing to return the premium after learning that Denaux had ceased operating his business. The Court of Appeals concluded the PR’s requested result would impermissibly create a primary liability by estoppel because the special circumstances warranting application of the doctrine and Pitts (and Jost v. Equitable Life Assurance Society of the United States, 248 S.E.2d 778 (S.C. 1978)) were absent. The Court distinguished those cases because in each the insurance carrier had misled its named insured, with whom the carrier had an existing contractual relationship, to think that coverage continued to exist. Here, English was not a named insured and First Financial had not duty to inform English, or his agent, that English lacked coverage under the Denaux policy. Further, at the time of the accident, the policy was still effect for Denaux and his covered employees.

DISSENT: A lengthy dissent argued that the majority had conflated circumstances which allow for the application of equitable estoppel in specific cases with the requirements of the general rule, i.e., that the majority had read cases to add additional requirements to equitable estoppel in South Carolina.