A recent case from the 7th Circuit U.S. Court of Appeals highlights the importance of notifying your insurance carrier before trying to settle any dispute. In West Bend Mutual Insurance Co. v. Arbor Homes, LLC, a plumber hired by homebuilder Arbor Homes, LLC, forgot to connect a new home’s drainage system to the city’s sewer system. As a result, raw sewage was discharged into the crawl space of the home creating a health hazard that required more than $65,000 for decontmination. Arbor signed a settlement agreement with the homeowners, the Lorches, in which Arbor agreed to buy the tainted home from the Lorches, build another new home for them (using a different plumber), pay for all of the closing costs and moving expenses related to the new home, and compensate the Lorches for any increase in their mortgage rate on the purchase of the second home.
The plumber was insured by West Bend Mutual Insurance Company and Arbor was an additional insured under the same policy. Arbor asked West Bend to pay the settlement costs, but West Bend denied coverage based on Arbor’s execution of the settlement agreement without West Bend’s consent. In support of its denial, West Bend pointed to a provision in the insurance policy stating that “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.”
The 7th Circuit U.S. Court of Appeals (covering Illinois, Indiana and Wisconsin) agreed with West Bend and found that Arbor’s failure to obtain West Bend’s consent to the settlement relieved West Bend of any obligation to pay for the damages caused by the plumber’s negligence. The Court explained that the insurance policy reasonably required West Bend to consent to a settlement because it must have the opportunity to protect itself and its insured by investigating any incident that may lead to a claim under the policy, and by participating in any resulting litigation or settlement discussions. Yet neither Arbor nor the plumber obtained West Bend’s consent before settling.
This case highlights the importance of notifying your insurance carrier of all claims before any settlement agreement is reached. The attorneys at DeBlasio & Gower LLC are experienced in insurance and construction litigation. To schedule an appointment to speak with one of our attorneys, call us at (630) 560-1123 or visit our website at https://www.dgllc.net
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