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Where a developer performed repairs to correct water intrusion before reporting to its Commercial General Liability (CGL) insurer, a court held it had lost its right to demand that its insurance carrier indemnify it for the cost of repairs. The developer investigated the problems and spent $1.24 million in performing repairs – thereby avoiding any lawsuits being filed against it.

After the repairs were completed, the developer made a claim under its CGL policy to recover its costs. The insurer, General Star Indemnity Company, denied any duty to indemnify the developer because it had not been notified by the insured of the underlying problems before making the repairs and thereby incurring the “damages” for which it sought indemnity from the insurance company.

The court agreed with General Star that the developer had violated the terms of the policy requiring no voluntary payments to be made. That provision states: “Should any claim or suit to which this policy applies appear likely to exceed the Retained Limit, no loss expenses or legal expenses shall be incurred on behalf of the company without its prior consent.” This provision, according to the court, must be enforced in the absence of economic necessities, breach by the insurance company, or other extraordinary necessities. The purpose of the provision is to give the insurance company control over the defense and settlement of a claim. An insured is not permitted to unilaterally settle a claim before it has been established and before the insurance company has had an opportunity to defend it. As stated by the court, “In short, the provision protects against coverage by fait accompli.”  By this, the court in essence held that the voluntary payments provision is equivalent to a policy exclusion and that there is no requirement that the insurance company demonstrate that it has been prejudiced by the actions of the insured in order to enforce this provision. Jamestown Builders, Inc. v. General Star Indemnity Co., 77 Cal. App.4th 341, 91 Cal. Rprt.2d 514 (1999).

About the author: Article written by J. Kent Holland, Jr.,  a construction lawyer located in Tysons Corner, Virginia,  with a national practice (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners.  He is founder and president of a consulting firm, ConstructionRisk, LLC, providing consulting services to owners, design professionals, contractors and attorneys on construction projects.  He is publisher of ConstructionRisk.com Report and may be reached at Kent@ConstructionRisk.com or by calling 703-623-1932.  This article is published in ConstructionRisk.com Report, Vol. 1, No. 5 (May 2000).

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