An “Administrative Mistake,” or a Waiver of a Defense? (hint: it’s a waiver)
The situation in this recent case out of the District of Nebraska, Kermeen v. State Farm Fire & Cas. Co., No. 8:14-CV-416 (behind paywall), was possibly the result of lack of communication between departments at a large insurance company. But, even if the error was entirely innocent, it had very real consequences. Maybe a court might save you from clerical errors, but this alleged administrative mistake on the part of State Farm didn’t win the court’s sympathy at all.
The Kermeens had a homeowner’s insurance policy from State Farm. In March 2014, during the term of the policy, a fire damaged the Kermeens’ house and they made a claim for their losses. State Farm claimed to have sent the Kermeens a letter the following month asserting that it appeared that the fire had been set on purpose and that such activity on the part of the Kermeens would void the policy as of the date of the fire.
In June 2014, a couple of months later, a hail storm damaged some of the Kermeens’ property. The Kermeens filed another claim with State Farm. State Farm never paid for the hail claim and instead continued investigating the circumstances of the fire. Finally, in November 2014, the Kermeens filed suit alleging that State Farm breached the homeowners policy by failing to pay the hail claim. State Farm responded in an answer in January 2015 that the Kermeens had intentionally set the March fire and that therefore the policy was void as of March 2014 and so didn’t cover the hail damage in June. State Farm didn’t formally reject either the fire or the hail claim until July 2015.
The problematic thing for State Farm, however, was that it had been accepting premiums from the Kermeens on the homeowners policy this entire time. Even when State Farm finally formally declared the policy void as of March 2014, it failed to refund any of the premiums that the Kermeens had paid between March 2014 and July 2015. State Farm stated that it fully intended to refund those premiums in July when it denied the Kermeens’ claims, and that its failure to do was “an administrative mistake.” State Farm also continued to accept premiums on the homeowners’ policy from the Kermeens after July, another thing that State Farm claimed was “an administrative mistake.” So, altogether, State Farm accepted nearly two years’ worth of premiums from the Kermeens before it finally refunded them in February 2016–after the summary judgment motion in question in this case had been filed, arguing that State Farm had waived its ability to rely on voidness due to its failure to refund the premiums.
State Farm tried to argue that, by refunding the premiums eventually, it indicated that it was not waiving the voidness defense. State Farm also asserted that its other statements to the Kermeens, including telling the Kermeens in communications several times that the policy would be void as of the date of the fire and its answer filed in this case, further indicated that it had not waived the voidness defense.
The court disagreed with State Farm. In contrast to the clerical error that was forgiven in the CitiMortgage case, the court wasn’t inclined to overlook State Farm’s “administrative mistake” here. The court stated that State Farm knew that it was going to declare the policy void as early as January 2015 when it answered the complaint and still failed to refund any premiums to the Kermeens for over a year. This failure to return any of the premiums was inconsistent with a stance that the policy was void and thus constituted a waiver of State Farm’s ability to raise voidness as a defense. It didn’t matter that State Farm may have repeatedly declared the policy void to the Kermeens if State Farm continued to retain the premiums under that policy–and, indeed, continued to accept further premiums. Therefore, the Kermeens were entitled summary judgment for the damages caused by the hail storm.