Insurance policies assign several duties to the insured in the event of an occurrence that may result in a claim. For example, insureds must notify the insurer of any occurrence that may result in a claim and provide details of the incident involved. Most insurance policies require that an insured promptly notify the insurer of a claim or a lawsuit. See, e.g., Maryland Cas. Co. v. Clements, 15 Ariz.App. 216, 487 P.2d 437 (1971).
An insured must also provide the insurer with information to support the claim. See, e.g., House v. State Farm Fire and Cas. Co., 17 Fed.Appx. 684 (9th Cir. 2001) (interpreting California law). The insured’s duty to give notice of claims or lawsuits is discussed in detail in Practical Tools for Handling Insurance Cases, § 2:4 (Thomson Reuters 2011).
The insured also has a duty to cooperate. Standard insurance policies require the insured to cooperate with the insurance company in the investigation, settlement, or defense of a claim or suit. See, e.g., Belz v. Clarendon America Ins. Co., 158 Cal.App.4th 615, 69 Cal.Rptr.3d 864, 869 (2nd Dist. 2007); Morris v. Economy Fire and Cas. Co., 848 N.E.2d 663, 666 (Ind. 2006).
Another duty exists through the voluntary payments provision of the standard policy which states that no insured, except at the insured’s own cost, will voluntarily make a payment, assume any obligation, or incur any expense, without the insurance company’s consent.
The purpose of a voluntary payments provision in conjunction with the cooperation clause provides the insurer with an opportunity to protect itself and its insured by investigating any incident that may lead to a claim under the policy, and by participating in any resulting litigation or settlement discussions.
Under a voluntary payments clause, any insured that settles a claim without the insurer’s knowledge or consent does so at the insured’s own expense. Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267, 1271 (Ind. 2009) (a voluntary payment provision that clearly prohibits the assumption of financial obligation must be given its plain and ordinary meaning). See also, Travelers Ins. Cos. v. Maplehurst Farms, Inc., 953 N.E.2d 1153, 1161 (Ind. Ct. App. 2011) (when an insured enters into a settlement agreement without the insurer’s consent in violation of a voluntary payment provision, that obligation cannot be recovered from the insurer).
Voluntary payments clauses guard against the problem of moral hazard. See West Bend Mut. Ins. Co. v. Arbor Homes, LLC, 703 F.3d 1092, 1096 n.2 (7th Cir. 2013); see also Amerisure Ins. Co. v. National Surety Corp., 695 F.3d 632, 635 (7th Cir. 2012) (describing a moral hazard as a situation where the party seeking the risk will not bear the costs of its behavior); Metavante Corp. v. Immigrant Savings Bank, 619 F.3d 748, 773 (7th Cir. 2010) (describing moral hazard as the tendency to take additional risks or run up extra costs when another party is financial liable).
The Seventh Circuit Court of Appeals recently considered a voluntary payments clause and found that the clause was not a notice provision per se but a consent provision. In West Bend Mut. Ins. Co. v. Arbor Homes, LLC, 703 F.3d 1092 (7th Cir. 2013), an Indiana-based general contractor, Arbor Homes (Arbor), hired a plumbing subcontractor, Willmez Plumbing (Willmez), to do the plumbing work on the construction of a new home. Due to a failure to connect the home’s plumbing to the main sewer line during the construction raw sewage was being discharged into the crawlspace of the home. The environmental cleanup of the sewage was comprehensive and costly. The purchasers of the home refused to accept the new construction that had been filled with sewage and then cleaned. Thereafter, Arbor and Willmez discussed possible resolution of the situation. Arbor told Willmez to place its insurer, West Bend, on notice of the claim. Arbor also sent a letter to Willmez memorializing the parties’ understanding of a settlement with the homeowners and Willmez’s responsibilities under the settlement. Arbor requested that Willmez or West Bend contact Arbor immediately if Willmez or the insurer needed any additional information regarding the settlement. Willmez represented to Arbor that it had forwarded that letter to West Bend. Hearing nothing from West Bend, Arbor assumed that West Bend had no objections to the settlement and thereafter signed the settlement agreement with the homeowners.
Arbor filed suit against Willmez in state court alleging negligence, breach of contract and breach of the settlement agreement. Arbor’s lawyer sent a copy of the Complaint to West Bend on October 12, 2007 with a notation that Arbor was an additional insured on the West Bend policies. West Bend denied liability coverage and filed a federal declaratory judgment action. West Bend alleged that it was not aware any problem with the home until May 4, 2007 and that it did not learn of Willmez’s agreement to cover a large part of the damages until October 2007, when it received a copy of Arbor’s lawsuit. West Bend was not aware of the terms of the settlement with the homeowners under until April 2008.
Seventh Circuit Court of Appeals noted that neither Arbor nor Willmez obtained West Bend’s consent before settling the homeowners’ claim. Although Arbor had relied on Willmez to place West Bend on notice and then construed West Bend’s subsequent silence as a lack of objection to the settlement, there was no evidence that West Bend consented to Willmez’s settlement with Arbor or Arbor’s settlement with the homeowners. The evidence was uncontroverted that West Bend knew nothing of the damage to the home until after Willmez and Arbor agreed on their respective liabilities to each other and to the homeowners. Thus there was no evidence that West Bend “consented” to any settlement in compliance with the voluntary payments provision of the policy.
The question of whether West Bend was on notice of the proposed settlement and stood silent was not relevant to the Court. The Court found that the clear language of the voluntary payments clause required the insurer to consent to a payment obligation or expense before the insurer could be liable for that amount. The voluntary payments clause was not a notice provision, per se, but was a consent provision.
The West Bend Court’s observation that a voluntary payments clause is not a notice provision is significant. Implicit in the Court’s decision is that consent must exist in fact and not by implication. Under the Court’s ruling, it is legally insufficient for an insured to demonstrate consent by acquiescence and implication. The fact that the insured may notify the insurer of an impending settlement which goes unresponded to is not synonymous with consent.
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