Settling Without Your Insurer’s Consent is Like Flushing Money Down the Toilet

Many insurance policies require the insured to obtain the insurer’s consent before settling a claim or making any payments for a claim.  That’s just basic insurance stuff.  So, too, is the concept that, if you have a claim asserted against you, it’s really important that you read (and re-read) your policy.  The builder in this case, however, skipped that last part, and that’s when it really hit the fan.

In West Bend Mutual Insurance Co. v. Arbor Homes LLC, the buyers of a newly-built home became ill shortly after moving in. It turns out that during the construction of the home, a second-tier sub failed to connect the home’s plumbing to the main sewer line. So, raw sewage was being discharged into the home’s crawl space, turning the home into a giant sewer pit.

Faced with a really stinky situation, the homebuilder quickly fixed the problem, and eventually agreed to purchase the home back from the buyers (who, for some reason, didn’t want to live in a former septic tank) and build them a new home.  The builder–an additional insured under the first-tier sub’s policy–told its first-tier sub to put its carrier, West Bend, on notice, but West Bend did not receive notice until after a settlement agreement had been reached.

The builder eventually sued, and the District Court granted summary judgment in favor of West Bend, finding the insurer was relieved of any duty under the fungi and bacteria exclusion as well as the voluntary payments provision.

On appeal, the Seventh Circuit found in favor of West Bend, stating:

Although Arbor behaved admirably in expeditiously resolving the matter for the homeowners, it failed to protect its own interests when it relied on [the first-tier sub] to notify West Bend about the incident, and failed to obtain West Bend’s consent for any settlement. Having no opportunity to participate in the investigation or settlement, West Bend is entitled to enforcement of the plain language of the contract: Arbor’s settlements with [the first-tier sub] and with the [buyers] without the consent of West Bend is at Arbor’s own expense.

Oh, you wanted this to drain to the outside...

Oh, you wanted this to drain to the outside…

About Brian Jones

I represent clients in all aspects of business litigation, but focus my practice on complex litigation and arbitration matters concerning insurance and reinsurance, antitrust, class actions, securities, real estate disputes, and contract matters. I am the co-chair of the Bose McKinney & Evans Insurance Group. I was listed in the 2017 and 2016 "Best Lawyers in America" for Insurance Coverage and named a "Rising Star" in Insurance Coverage by Super Lawyers in Indiana in 2014. I was also named a "Rising Star" in Business Litigation by Super Lawyers in Indiana in 2013 and 2012, and a 2010 “Rising Star” in Business Litigation in Texas. I am a member of the State Bars of Indiana and Texas, the Defense Research Institute, a former member of the Pro Bono College of the State Bar of Texas, and I am licensed to practice before all state courts in Indiana and Texas, as well as all federal courts in Indiana, the Northern, Western, and Southern Districts of Texas, the Northern District of Illinois, and the United States Courts of Appeals for the Fifth, Seventh, and Eleventh Circuits. I received my bachelor’s degree, cum laude, in political science and my master’s degree in teaching from Trinity University, where I was elected to Phi Beta Kappa. I received my doctor of jurisprudence degree from the University of Texas School of Law, where I was the Director of Communications for the Legal Research Board and a member of the Phi Delta Phi Honor Society. Before attending law school, I taught high school geography, government and economics in San Antonio, Texas.
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1 Response to Settling Without Your Insurer’s Consent is Like Flushing Money Down the Toilet

  1. The good ol’ “fungi and bacteria exclusion”! We had something similar happen to a family friend.. not fun times, indeed.


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