A North Carolina appeals court held that an insurer must show prejudice if it is to be relieved of liability to pay a claim where an insured breached the voluntary payments clause in Bond/Tec, Inc. v. Scottsdale Ins. Co., No COA04-1591, 2005 WLK 3286012 (N.C. App. Dec. 6, 2006).
Bond/Tec entered into a contract with Newton-Conover City High School to re-roof the school. Bond/Tec posted a performance bond of $50,000, which was held in escrow until the work was satisfactorily completed.
Temporary tie-offs used by Bond/Tec to seal the roof at night failed, and the school incurred over $49,200 in water damage to its property. On July 9, 2003, Joe Bond, president of Bond/Tec, hired Servpro to clean up the water damage. Bond said he would pay for the cleanup himself. He also contacted Bond/Tec's insurer, Scottsdale, for coverage, but coverage was denied on July 14, 2003.
In a letter dated July 25, 2003, the school superintendent summarized discussions Bond had with school administrators in which he “verbally agreed to pay for the full replacement cost of numerous items that were damaged by the water leakage.”
Bond/Tec alleged that Scottsdale breached its CGL policy, but Scottsdale claimed that it “paid a claim for which it was not responsible as a volunteer,” thus breaching the voluntary payment clause of the policy.
The voluntary payment clause states: “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.”
Scottsdale argued that Bond/Tec's decision to reimburse the school was made before the claim was denied. The court, however, said that no evidence was presented to support that argument. While the insurer produced an invoice to Servpro dated July 9, 2003, Bond/Tec said that it did not agree to pay for any other service beyond what Servpro handled.
Joe Bond stated that he “hired Servpro for the purpose of preventing mold and mildew and that he 'in no way agreed to pay Servpro or any other company or entity to make any other repairs prior to the insurance claim being denied.'”
The court found that, if Bond agreed to pay for Servpro's repairs, it did not violate the voluntary payments clause. The court further said, even if Bond/Tec was in violation of the voluntary payments clause, Scottsdale would still not be automatically relieved of its liability.
The court concluded that “an insurer must show prejudice where the insured has breached the voluntary payments clause of the parties' insurance contract.” Scottsdale did not show that it could not investigate or litigate the claim due to payments made by Bond/Tec.
Thus, the court ruled that Scottsdale was not entitled to summary judgment, and the case was remanded to the trial court because a material fact existed as to whether Bond/Tec breached the voluntary payments clause.