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It’s A Policy, Not A Payday Loan: The Voluntary Payments Provision Deconstructed

May 13, 2020

From time to time, the issue of whether an insurer has a duty to reimburse a payment made by an insured without the permission of the insurer is analyzed by a court. A standard ISO form in a Commercial General Liability policy contains the following, or similar provision, “No insured will, except at the insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.” How have Florida courts analyzed this provision? This blog discusses whether settlement agreements entered without an insurer’s consent, repair costs that were not approved by an insurer and pre-tender defense costs are subject to this provision.

Initially, it is clear that if an insurer erroneously declines to provide a defense to an insured, the voluntary payment provision has no effect on whether an insurer is required to pay post-tender defense costs. Rolyn Cos., Inc. v. R & J Sales of Texas, Inc., 671 F.Supp. 2d 1314, 1327 (S.D. Fla. 2009), approved 412 Fed. App’x 252 (11th Cir. 2011). Additionally, an insured may avoid the voluntary payment provision by making a payment involuntary for circumstances outside of its control such as an immediate response to protect the insured’s legal interests. Id. However, if an insured enters into a settlement agreement with a claimant, without the approval of the insurer, either before notice is provided to the insurer or while being defended by the insurer, no coverage is owed. Zurich Am. Ins. Co. v. Frankel Enter., 287 Fed. App’x 775, 778 (11th Cir. 2008); Nationwide Mut. Fire Ins. Co. v. Donnelly, 2009 WL 3584329, *3 (M.D. Fla. October 28, 2009) (not reported).

Additionally, courts hold that the voluntary payment provision excuses an insurer from paying for costs of repair that were not approved by the insurer. In Rolyn, the Stonebridge Gardens condominium community – with 16 buildings, over 400 individual units and 4 condominium associations – was damaged and subsequently condemned due to Hurricane Wilma. Id. at 1316. Two of the associations retained Rolyn Companies, Inc. (“Rolyn”), a general contractor, to repair the buildings. Rolyn, in turn, retained R & J Sales of Texas, Inc. d/b/a Precision Restoration and Roofing (“Precision”) to repair the roofs. Id. Shortly after Precision began to repair the roof on one building, it rained heavily and damaged a building. Id.

Rolyn was sued by a unit owner and Rolyn tendered its defense and indemnity to its insurer, Crum & Forster Specialty Insurance Company (“Crum & Forster”), and to Precision’s insurer, Admiral Insurance Company (“Admiral”). Id. Crum & Forster agreed to provide a defense to Rolyn; however, Rolyn chose to repair the interiors of the all the units without Crum & Forster’s permission. Id. Rolyn then filed a lawsuit against Precision, Crum & Forster, and Admiral for damages and declaratory relief. Id. at 1317.

Crum & Forster filed a motion for summary judgment, arguing that the costs that Rolyn incurred were made voluntarily in violation of the voluntary payment provision. Id. at 1326. Although courts generally enforce voluntary-payment provisions, Rolyn argued that the payments were not made voluntarily because it was facing a lawsuit and Rolyn was responsible for the acts of its subcontractors. Id. at 1329. The court disagreed and explained:

According to the plain language of the policy, this provision applies, i.e., Rolyn must obtain consent before making a payment, even if Rolyn is sued. If payments may be made voluntarily in the event of being sued, a fortiori they may be made voluntarily at the threat of being sued. This of course does not mean that all payments made on being sued are “voluntary;” an insured may incur costs if it must respond immediately to protect its legal interests, such as to avoid default. See Jamestown Builders, 91 Cal.Rptr.2d at 518. But nothing here shows such a need. To the contrary, Rolyn worked with Precision for months, giving it “every opportunity to return to the Project and fix the problems caused by its defective workmanship.” (Pl.’s Opp’n 2).

Because Rolyn did not obtain Crum & Forster’s consent prior to making payments and incurring costs repairing the building and because Crum & Forster did not wrongfully refuse to defend Rolyn, no coverage was owed. Id. at 1328. See also, Hathaway Dev. Co., Inc. v. Illinois Union Ins. Co., 274 Fed. App’x 787, 791 (11th Cir. 2008) (holding no coverage existed because the insured repaired defects and made payments to residents without the insurer’s consent).

Another issue where the voluntary payment clause is analyzed is whether it applies to pre-tender defense costs. In EmbroidMe.com v. Travelers Property Casualty Company of America, 845 F.3d 1099, 1102 (11th Cir. 2017), EmbroideMe.com, Inc. (“EmbroidMe”) was sued for copyright infringement. EmbroideMe chose not to immediately tender the claim to its insurer, Travelers Insurance Company (“Travelers”), but instead hired its own lawyers and litigated the case for 18 months. Id. EmbroideMe subsequently tendered its defense and indemnity to Travelers. Id. Travelers agreed to provide a defense, but it refused to reimburse EmbroideMe for its pre-tender legal bills. Id. EmbroideMe argued that it was entitled to reimbursement for pre-tender defense costs because Travelers did not notify EmbroideMe of this coverage defense within 30 days of receipt of the tender as required by the Claims Administration Statute. Id.

The court disagreed with EmbroideMe and held that the insurance policy stated that EmbroideMe would not be reimbursed by Travelers for any expenses it elected to incur and pay without the consent of Travelers. Id. at 1106. The court explained:

In short, the clear language of the policy – if not common sense – would alert even the most unsophisticated insured to the reality that, if sued, it could not expect its insurer to reimburse it for attorney’s fees it unilaterally incurred unless the insured had first obtained Travelers’ permission to incur those expenses.

Id. The court further held that the insurer’s denial of pre-tender defense costs did not constitute a coverage defense for which the 30-day timeframe in the Claims Administration Statute applied. Id. at 1110.

In that case, Travelers agreed to defend EmbroideMe after it received its tender; thus, Travelers did not breach the insurance policy. Therefore, Travelers could enforce the voluntary payment provision in the policy to deny pre-tender defense costs incurred by EmbroideMe.com. However, an issue remains regarding whether the voluntary payment provision precludes pre-tender defense costs if an insurer denies a defense to an insured, but it is later held that the insurer owed a defense to the insured. Although this question has yet to be answered, based on the holding in EmbroideMe.com, a court would still likely hold that an insurer would not owe pre-tender costs. A tender provides notice to an insurer of a claim, and its potential duty to defend should not begin until notice is provided, regardless whether a court later determines that the carrier had a duty to defend. A carrier cannot breach its duties under a policy until it receives a tender from its insured, additional insured, or omnibus insured.

These are just a few examples of the issues surrounding the voluntary payment provision in a typical commercial general liability policy and how courts analyze such a provision.