The U.S. Fourth Circuit Court of Appeals recently held that the principle of equitable estoppel cannot extend coverage to a third party not otherwise insured under South Carolina law. First Financial Ins. Company v. Brumbaugh, 2014 WL 57558 (4th Cir. Jan. 8, 2014). 

The insurer issued a policy to a sole proprietor operating a business. Midway through the policy’s term, the insured stopped operating the business. However, a former co-worker opened a new business, operating in the same location under the same name. After receiving the final bill for the premium of the original policy at the business address, the former co-worker paid the last installment without attempting to cancel the policy or transfer coverage to his own name. After the original policy’s expiration, the insurer issued a new policy to the former co-worker in his own name. The insurer, however, did not attempt to rescind the prior policy or to return the last premium installment. 

Just prior to the expiration of the original policy, but after the former co-worker assumed the business operation, an employee was involved in a vehicle collision that resulted in a third party’s death which led to a wrongful death lawsuit against the co-worker. The insurer sought a declaration that the original policy did not cover the underlying lawsuit. The district court held that the insurer was equitably estopped from denying coverage because it had induced the former co-worker into believing that the original insured’s rights had been transferred to him by failing to return the premium after learning that that insured had ceased operating the business. The insurer appealed. 

Reversing, the Fourth Circuit noted that under South Carolina law estoppel cannot extend coverage or create primary liability coverage, and found that the former co-worker was not an insured under the original policy, and estoppel could not be used to create coverage as to his liability. The court stated that equitable estoppel could only be used to create coverage when an insurer misleads its insured, not a stranger to the policy, to believe that the risk in question is covered.