Aon Environmental Services Group
By Claire Juliana of Aon Risk Solutions
In insurance, one of the most oft-cited and applied conditions raised by insurance companies is the Voluntary Payments condition1. It exists in all forms of insurance and a typical clause provides that an insured will not, except at that insured’s own cost, voluntarily make a payment, enter into a settlement, assume any obligation, or incur any expense, other than for first aid, without the insurer’s consent. What constitutes a prohibited “voluntary payment” so as to relieve an insurer of its obligations under a liability insurance policy was the topic of a recent case from the Western District of Pennsylvania. First Commonwealth Bank and First Commonwealth Financial Corporation v. St. Paul Mercury Insurance Company, 2014 U.S. Dist. LEXIS 141538 (Oct. 6, 2014).
The facts in First Commonwealth are unfortunately quite common today in the context of cyber-attacks. There, one of the insured (bank) clients was the victim of malicious software (“malware”) that allowed an unknown third party to access the client’s computer systems and ultimately several unauthorized wire transfers in excess of three million dollars. Thereafter, the insured’s client made demands upon the insured to refund/credit the funds that had been withdrawn and consequently, the insured refunded the client’s account using its own funds. Thereafter, it notified its insurer of the loss and sought to recover the funds under its liability policy. The insurer, however, refused to provide coverage stating that by refunding the amounts without its prior consent, the insured was in breach of the insurance contract and thereby the insurer was relieved of its obligation to provide coverage.
The condition at issue in the policy provided that:
“[t]he Insureds agree not to settle or offer to settle any Claim, incur any Defense Costs or otherwise assume any contractual obligation, admit any liability, voluntarily make any payment or confess or otherwise agree to any Damages or judgments with respect to any Claim covered by this Policy without the Insurer's written consent, which shall not be unreasonably withheld. The Insurer shall not be liable for any settlement, Defense Costs, assumed obligation, admitted liability, voluntary payment, or confessed or agreed Damages or judgment to which it has not consented.” (Emphasis added).
The insurer contended that because the insured had “voluntarily” reimbursed its client for the unauthorized transfers without the insurer’s consent in breach of the foregoing provision, the insurer could not be held liable for the monies the insured paid to its client. The insured asserted that it was required by law to refund the client and as such, the payment was not “voluntary”.
The court agreed. According to Black’s Law Dictionary, “voluntary”, the court noted, is defined as “unconstrained by interference; not impelled by outside influence.” Under the particular facts here, the court found it difficult to reconcile a legal mandate requiring the insured to refund an unauthorized payment to its client as a voluntary payment under the terms of the policy. Furthermore, the court dismissed a line of cases relied upon by the insurer concerning settlements without consent, noting that in none of those cases was the insured “compelled by law or other outside influences” and, as such distinguishable from the present case.
In the context of environmental insurance, the voluntary payments condition can often be a great source of debate (and denial of coverage), particularly in situations where an insured takes measures (conducts investigations and undertakes remediation and disposal activities), not necessarily in the context of an imminent and substantial threat to health or safety – but nevertheless pursuant to laws mandating that certain actions be taken. Occasionally an insured will find or become aware of a contamination problem for which it may (preferably will) notify its insurer. But sometimes, the insured fails to include the insurer in the process of working with the regulatory authorities and/or developing the remedy to address the problem and most problematic of all, implements the approved remediation strategy - without the insurer’s participation, consultation and especially consent. And, even though the insured has done the right thing, indeed, often the legally mandated thing, an insurer will likely look to provisions like this as a basis to deny coverage for what the insurer considers to be a “voluntary” payment.
The First Commonwealth case offers a pragmatic and common sense definitional interpretation of what at least one district court in Pennsylvania holds to be “voluntary”, and likely if that court were confronted with the foregoing fact pattern, it might agree that our hypothetical insured was required by law to address the contamination problem and therefore its actions to be outside the ambit of the voluntary payments prohibition. But, the better approach is for insureds to report discovery of or claims alleging environmental conditions as soon as possible and in accordance with their particular policy’s claim reporting obligations. Then, insureds should engage their insurance company in the remediation investigation/selection process early to avoid any surprises about whether something is, or could be construed as, a voluntary payment. Many of the environmental policies have very specific requirements – and may not even use the word “voluntary” – necessarily and contractually obligating insureds to obtain consent to proceed from their insurer except in those limited circumstances where the situation presents an emergency (and even then – careful attention to the duration and reporting obligations concerning these emergency situations should be strictly adhered). In addition, failure to include the insurance company in the process could further jeopardize coverage as insurers generally pay only what is “reasonable and necessary” and, it is indeed an unfortunate situation where an insured is left with uninsured expenses that it would not have otherwise incurred if it had been guided by the insurer in the process. Finally, and perhaps most importantly, most environmental insurers have access to a network of service providers who have been vetted by the insurer for responsiveness, competency and competitive terms and conditions. Often these service providers can be accessed 24/7 and dispatched through a phone call, web page or even mobile device. So, while the First Commonwealth case offers some helpful guidance in understanding what at least that court interprets as “voluntary”, the best way to proceed is with the insurer’s participation and especially confirmed (preferably in writing) consent.
1A Google search of “insurance voluntary payments” generated 110,000,000 results.