Insurance Claims: A Tale of Stench and Loss

U.S. 7th Circuit Contract Cases


West Bend Mutual Insurance Co. v. Arbor Homes LLC

A recent Seventh-Circuit case should serve as a cautionary tale that business owners need to consider the requirements of applicable insurance policies when trying to resolve a quality issue with a customer.

When Arbor Homes LLC’s plumbing contractor, Willmez Plumbing Inc., made a major mistake, Arbor worked with its customers, the Lorches, to make them whole. Unfortunately for Arbor, it didn’t comply with the requirements of the plumber’s commercial general liability insurance policy with West Bend Mutual Insurance Co. — under which Arbor was an additional insured — which allowed West Bend to successfully deny the claim.

The details are interesting: The plumber forgot to connect the drainage system of a new home to the city’s sewer. Soon after Kurt and Joy Lorch, the buyers, moved in, they reported a stench to Arbor and began to feel ill because raw sewage had been collecting in the crawl space under the house. Arbor had the sewage removed and the house decontaminated. Arbor instructed Willmez to put West Bend on notice of the Lorches’ claims and of a proposed settlement. Hearing nothing from West Bend, Arbor assumed the insurance company had no objections to the settlement and signed a settlement agreement with the Lorches. Among other things, the builder agreed to repurchase the home, build a new home for the Lorches, and pay their moving expenses.

Arbor sued Willmez and made a demand under the plumber’s insurance policy. West Bend denied coverage under several theories and ultimately prevailed under the policy’s voluntary payments provision, which stated, “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.”

Here’s the Seventh Circuit’s summary of the situation:

[N]either Arbor nor Willmez obtained West Bend’s consent before settling. Instead, Arbor relied on Willmez to place the insurer on notice and then construed the insurer’s subsequent silence as a lack of objection to the settlement with the Lorches. Arbor now can produce no evidence that West Bend consented to Willmez’s settlement with Arbor or Arbor’s settlement with the Lorches. West Bend has produced uncontroverted evidence that it knew nothing of the damage to the home until after Willmez and Arbor agreed on their respective liabilities to each other and to the Lorches. And West Bend knew nothing of the terms of the settlement agreement signed with the Lorches until after Arbor’s lawsuit against Willmez was underway. There is no evidence that West Bend “consented” to any settlement as required by the voluntary payments provision. Although Arbor behaved admirably in expeditiously resolving the matter for the homeowners, it failed to protect its own interests when it relied on Willmez 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.

Whenever a contract dispute involves a loss that might be covered by insurance, it’s important that the parties are careful to comply with the policy’s requirements for preserving and making a claim. Failing to do so can result in an unfortunate loss of coverage.

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