Source: http://www.sandrunrisk.com/blog/voluntary-payments-defense-not-a-viable-defense-to-defeat-coverage-when-insurance-carriers-refuse-to-make-a-coverage-determination
Timestamp: 2019-04-20 14:10:13+00:00

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What is a policyholder to do when it puts its insurance carriers on notice of a claim, but the insurance carrier does not acknowledge coverage and leaves its policyholder to its own devices to defend and settle the claim, Then ater claims that the policyholder breached the insurance policy by defending and settling the claim without its consent? In Sanderson v. Ohio Edison Co., 69 Ohio St.3d 582 (1994, the insurance carrier was given notice of the suit, but took the position that coverage was not available under the policies, and refused to defend the suit or participate in any settlement negotiations. The policyholders settled the claim by admitting liability and allowing the court to determine the amount of damages. The Ohio Supreme Court held “Where an insurer unjustifiably refuses to defend an action, leaving the insureds to fend for themselves, the insureds are at liberty to make a reasonable settlement without prejudice to their rights under the contract. By abandoning the insureds to their own devices in resolving the suit, the insurer voluntarily forgoes the right to control the litigation and, consequently, will not be heard to complain concerning the resolution of the action in the absence of a showing of fraud, even if liability is conceded by the insureds as a part of settlement negotiations.” Id. at 587.
Even if the voluntary payments condition applies, whether an insurance carrier is released from its coverage obligations may depend on whether it was prejudiced by the alleged violation. See, e.g., Ferrando v. Auto-Owners Mut. Ins. Co., 98 Ohio St.3d 186, 781 N.E.2d 927, syllabus (2002) (defenses based on violation of consent-to-settle provisions may be rebutted by proof that the insurance carrier was not prejudiced); Abercrombie & Fitch Co. v. Federal Insurance Co., 370 Fed. Appx. 563 (6th Cir. 2010).
Insurance carriers often raise the voluntary payment argument to try and defeat coverage for CERCLA claims presented to them by their policyholders. Most courts that have addressed the voluntary payments issue have found that the severe penalties to be incurred by non-compliance in a CERCLA action renders a policyholder’s “voluntary” participation to be “damages” and not “voluntary” at all. See e.g., SnyderGeneral Corp. v. Century Indem. Co. 113 F.3d 536, 539 (5th Cir. 1997) (Texas law); Hazen Paper Co. v. U.S. Fid & Guar., 555 N.E.2d 576 (Mass. 1990); Farmland Indus., Inc. v. Republic Ins. Co., 941 S.W.2d 505 (Mo. 1997).
would frustrate the intent of Congress. . . .
The primary purpose of policy provisions prohibiting a policyholder from making a voluntary payment, i.e., settling a claim without the insurance company’s consent, is to prevent fraud or collusion between the claimant and the policyholder. The voluntary payment issue cannot be used as a defense to defeat coverage when a policyholder is required to take action to protect its own interests for many months before its insurance carrier made a decision on coverage. In CERCLA actions, a policyholder cannot refuse to meet with or work with government environmental protection agencies merely because the insurance carrier has been unable to decide on coverage for several months. Insurance carriers will be hard pressed to prove fraud and collusion by their policyholder under these circumstances.

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