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Voluntary Payment Provision: Don't Rush to Do the Right Thing

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By Robyn Hagan Cain on January 08, 2013 3:29 PM

As children, we're encouraged to do the right thing. Make a mistake? Admit it. Tell a lie? Confess. Hurt someone? Apologize.

As adults, all that do-good nonsense becomes a thing of the past. We can't be forced to incriminate ourselves. We should never admit fault at the scene of an accident.

While the Seventh Circuit Court of Appeals admires a business that strives to do right by its customers, it acknowledges that the law is governed by the adult-world CYA rules. Those people who approach the world with a childlike perspective? They're just suckers who voided their insurance coverage.

Case in point: Arbor Homes builds single-family homes in central Indiana. In 2005, Arbor contracted with Willmez Plumbing Inc. for plumbing services in connection with the construction of new homes. Willmez's subcontractor forgot to connect one home's drainage system to the city's sewer, causing the crawl space in the home to fill with raw sewage.

Arbor did the right thing. It paid more than $65,000 for cleaning, repairs and follow-up testing for the home.

The homeowners, however, were unwilling to accept a brand new home that had been filled with sewage and then cleaned -- can you blame them? -- and demanded that Arbor buy the tainted home and build them a new home. Arbor and Willmez discussed settlement terms, and Arbor told Willmez to place its insurer, West Bend, on notice of the claims.

In a letter detailing their understanding, Arbor requested that Willmez or West Bend contact Arbor immediately if they needed any additional information regarding the settlement. (Willmez told Arbor that it forwarded this letter to West Bend.) Hearing nothing from West Bend, Arbor assumed the insurer had no objections.

Arbor signed a settlement agreement to buy the tainted home, build another new home for buyers (using a different plumbing contractor), pay for all of the closing costs and moving expenses related to the new home, and compensate the buyers for any increase in their mortgage rate on the purchase of the second home.

When Arbor tried to collect payment from Willmez, West Bend denied coverage under the voluntary payments provision of the insurance contract, which stated, "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."

Here, neither Arbor nor Willmez obtained West Bend's consent before settling, so West Bend was off the hook.

Though the appellate court acknowledged that "Arbor's quick and decisive aid ... was laudable," it concluded that failure to obtain West Bend's consent to the settlement relieved the insurer of any obligation to pay for the damages under the voluntary payments provision.

Doing the right thing is apparently overrated. So before you let your clients rush to be the kind of company a customer respects, make sure you get the insurer's consent.

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