Voluntary Payment by Insured Leads to Denial of Coverage

We insure a company under a standard Businessowners Liability policy. Our insured was hired to do a kitchen renovation and, in the process, stained a custom-made carpet with a soiled tarp that had been laid in preparation for painting. The insured paid to have the carpet cleaned twice, but the stain was still visible so he agreed to replace the claimant's rug. There is an exclusion under “Duties in the Event of Occurrence, Offense, Claim or Suit” indicating that if an insured voluntarily makes payment for damages without an insurance company's consent, the claim can be denied. As this is a claim we normally would have honored, we wanted to clarify the intent of this exclusion and if it would apply to this particular claim.

Michigan Subscriber

The voluntary payments provision in the BOP would apply to the situation you describe. When an insured chooses to pay all or part of a claim without the insurer's consent, the insurer will not be obligated to reimburse the insured.

Often for an insurer to be relieved of its obligations under the policy it must show not only that the insured breached the contract, but also that the insurer was prejudiced as a result. In the majority of cases, however, courts regard voluntary payment clauses in particular as enforceable without a showing of prejudice by the insurer. .