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.