Seventh Circuit Court of Appeals: Insurer not obligated to reimburse additional insured that settled without consent

The United States Court of Appeals for the Seventh District held that an insurer is not obligated to reimburse an additional insured because it failed to obtain consent prior to making voluntary settlement payments.

In West Bend Mutual Insurance Company v. Arbor Homes LLC, the Court  denied Arbor and the plumbing subcontractor’s claim for damages paid out to a homeowner caused by a sewer leak.

Facts: During construction of a new home, Arbor’s plumbing subcontractor forgot to connect the home’s drainage system to the city sewer main.  Upon moving into the home, the new owners noticed a foul smell and raw sewage backing up into their basement.  Arbor paid $65,000 to remediate the damages.  However, the homeowners wanted a new home.  Arbor and the homeowners entered into a settlement agreement wherein Arbor agreed to buy back the home, build another new home, and pay all expenses.

After incurring the damages, Arbor tendered the claim to its plumber and the plumber’s insurance company, West Bend, to be compensated for the damages as an additional insured.  The insurance company refused to pay for the damages relying on the following provision in the policy:

No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.

Arbor mistakenly thought that its plumber provided adequate notice to West Bend and construed its silence as a lack of objection to the settlement.  However, West Bend was never notified until several months after the settlement was finalized and therefore never consented to any voluntary payments.

Decision: The Court held that although Arbor behaved very admirably in addressing the problem, West Bend had no obligation to reimburse Arbor for the damages incurred.  The Court stated that the voluntary payment provision relieved West Bend of the obligation to pay not because the insured provided late notice but because West Bend did not consent to any voluntary payments or obligations assumed by Arbor.

A note to take from this case is do not rely on others when placing insurance companies on notice.  Make sure before handling any claim to place the insurance company on notice, understand the insurance policy and requirements, keep the insurer up to speed on developments, and obtain consent prior to settling any claims.

By: Roy Rodabaugh is an attorney focusing in the area of construction law