Estoppel Cannot Expand Coverage Per Oregon Court

On February 4, 2015, the Oregon Court of Appeals issued an opinion in Deardorff v. Farnsworth, 268 Or App 844, — P3d — (2015), addressing the circumstances in which estoppel applies to prevent an insurance company from relying on a provision in a policy to deny coverage.  In the case, the insurance company denied a claim for defense of a lawsuit based on the application of an exclusion contained in a business insurance policy.  During the process of procuring the policy, the agent inquired whether the insurance company offered care, custody or control (CCC) insurance.  A representative of the insurance company responded that “[l]iability exposure for property of others in the insured’s CCC, that is covered in liab[ility] form.”  The agent later contacted the insurance company to bind coverage, and the policy was issued.

When the policy was issued, the insured’s agent represented to the insured that the policy included property and liability care, custody, or control (CCC) coverage.  Despite the agent’s representation, the policy did not include CCC liability coverage; specifically, the policy excluded, “‘Property damage’ to * * * [p]ersonal property in the care, custody or control of the ‘insured’.”  The policy did, however, include CCC property coverage that was excess to “other insurance.”

After the policy was issued, the insureds were transporting horses in California that were owned by others when the trailer they were in caught fire, killing the horses.  The insurers for the horse owners paid for the loss, but then filed suit against the insured in California alleging they had negligently caused the death of the horses.  The insureds tendered defense of the matter to the insurance company, who denied coverage pursuant to the CCC liability exclusion in the policy.  The insureds defended the California action themselves and incurred costs doing so.

The insureds filed an action against the insurance company seeking to recover their defense costs from the California action.  The trial court granted summary judgment in favor of the insureds, finding that the insurance company was estopped from denying liability coverage for the loss of the horses and that the insurance company had breached the insurance contract.  The trial court’s application of estoppel relied on the insurance company’s communication to the agent that CCC liability coverage was “covered” under the liability form.  The insurance company appealed.

On appeal, the insurance company argued that the trial court incorrectly granted summary judgment on the ground that it was estopped from relying on provisions in the insurance policy to deny liability coverage for the loss of the horses.  The Court of Appeals began its analysis by drawing a distinction between policy provisions that are considered “conditions of forfeiture” and those provisions that relate to the “scope of coverage.”  Under Oregon law, conditions of forfeiture—which exists where, initially, there is coverage, but some action of the insured nullify coverage—are subject to estoppel; whereas, provisions relating to the scope of coverage—which define the parameters of coverage available under the policy—are not.  See ABCD … Vision v. Fireman’s Fund Ins. Cos., 304 Or 301, 744 P2d 998 (1987) and DeJonge v. Mut. fo Enumclaw, 315 Or 237, 843 P2d 914 (1992).   The court concluded that provision at issue was an express exclusion that relates to the scope of coverage and, therefore, is not subject to estoppel.

The court analyzed two cases (Farley v. United Pac. Inc. Co., 269 Or 549, 525 P2d 1003 (1974) and Allstate Ins. v. State Farm Ins., 67 Or App 623, 679 P2d 879 (1984)) that presumably provided exceptions to the general rule that estoppel cannot be applied to express exclusions.  However, the court determined that the exception did not apply here.  It summarized the legal principals in concluding that the “pertinent case law establishes that—in the absence of an insurance agent’s interpretation of an ambiguous policy provision—estoppel cannot be used to negate an express exclusion in an insurance policy.”  In this case, the agent did not make such an interpretation.

The attorneys of Maloney Lauersdorf Reiner regularly represent clients in insurance coverage litigation matters and routinely provide coverage advice to their clients.  Please contact us with any questions about this case or any other matter you see addressed in the MLR Insurance Coverage Blog.

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