Most business owners are keenly aware of the sensitive nature of their commercial relationships. Ship one faulty product or fail to deliver exactly as promised and they can be liable not only for any resulting damage but the reputational harm that comes with failing to meet customer expectations.
Understandably, business owners want to remedy the situation as quickly (and least costly) as possible. However, commercial policyholders will be wise to inform their insurers before offering to make any payments or creating any settlements. “No voluntary payment” clauses are routinely included in insurance policies and can prevent coverage if a policyholder settles or offers to settle without informing his or her insurer.
In a recent case, the Ninth Circuit reinforced this sometimes-harsh result. In Piveg, Inc. v. General Star Indemn. Co., No. 16-56003, 2018 U.S. App. LEXIS 3057 (9th Cir. Feb. 8, 2018), Piveg, the policyholder, supplied defective oil used to make softgels. Piveg then cut a deal with the third party to reimburse them for the defective oil. Notice that Piveg did not tender a claim or inform its insurer during these settlement talks.
The Ninth Circuit affirmed the district court’s grant of summary judgment in favor the insurer because Piveg violated its insurance policy’s “no voluntary payment” clause when they agreed to reimburse the third party for its defective product. The court rejected Piveg’s argument that the settlement terms were finalized with the third party only after they tendered the claim to their insurer because a “contract that omits [material] terms . . . is enforceable under California law, so long as the terms it does include are sufficiently definite for a court to determine whether a breach has occurred, order specific performance or award damages.”
This case is just one of many that reinforce how courts in California routinely uphold these clauses and do not require the insurer to show they were prejudiced in any way.
Lastly, at least one California court of appeal has noted that a policyholder may be able to ignore a “no voluntary payment” clause when there exists, “economic necessity, insurer breach, or other extraordinary circumstances.” Jamestown Builders v. General Star Indemn. Co., 77 Cal. App. 4th 341, 346 (1999). When an insurer breaches its duties to an insured it seems reasonable to allow the insured to settle a claim, however, there is some question as to what qualifies as an economic necessity or what a court would see as an extraordinary circumstance.
In sum, it is always good practice to keep your insurer informed (and promptly!) of any claims or potential claims on the horizon.
At Kerr & Wagstaffe LLP, our attorneys specialize in insurance policyholder rights. To learn more about the attorneys and their insurance practice, please explore the links at the top of this page.