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 later claims that the policyholder breached the insurance policy by defending and settling the claim without its consent?
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).
In Maryland Casualty Co. v. Wausau Chem. Corp., 809 F. Supp. 680 (W.D. Wisc. 1992), the insurance carriers argued that they were not obligated to provide coverage to their policyholder, Wausau Chemical, for response costs pursuant to the 1990 consent decree because the insurance policies at issue contained language that "the insured shall not, except at his own cost, voluntarily make any payment, assume any obligation or incur any expense," and that by agreeing to take remedial measures under the consent decree, Wausau Chemical breached this provision. Wausau Chemical responded that claims by the EPA can hardly be termed "voluntary" because of the consequences that await potentially responsible parties who decline to participate in negotiations and force the EPA to remediate the site itself and sue later to recover costs. These consequences include punitive damages penalties of up to three times the cleanup costs, see 42 U.S.C. §§ 9606(b), 9607(a), and civil penalties of up to $ 25,000 per day, see 42. U.S.C. § 9604(e)(5)(B) (1992). Wausau Chemical argued that the only realistic alternative for a potentially responsible party is to engage in settlement negotiations and agree to perform remedial actions. The court agreed with Wausau Chemical:
The legislative history of CERCLA provides evidence that the stiff penalties for failure
to negotiate with EPA were intended to make the primary force behind cleanup
efforts voluntary settlements, rather than drawn-out litigation. See H.R. Rep. No. 253,
99th Cong., 2d Sess., pt. 1 at 101 (1985) ("negotiated private party actions are essential
to an effective program for cleanup of the nation's hazardous waste sites and it is
the intent of this Committee to encourage private party cleanup at all sites"). To hold
that such settlements are "voluntary" for purposes of an insurance policy exclusion
would frustrate the intent of Congress. . . .
In failing to take any affirmative steps to intervene at that point, the insurers could
not attempt to exclude coverage now because the agreement was "voluntary." See
Broadhead v. Hartford Cas. Ins. Co., 773 F. Supp. 882, 895 (S.D. Miss. 1991)("it is generally
recognized that once an insurer denies coverage and liability, the insured has the right
to settle with its claimant rather than proceed to trial"); Chemical Applications Co. v. Home
Indem., 425 F. Supp. 777, 779 (D. Mass. 1977) ("an insurer who refuses to defend a suit
at all may not assert that the insured's reasonable settlement was unauthorized [under a
voluntary payment exclusion clause]"). Because the insurers responded to notice of
the Potentially Responsible Party letter by expressing their intention to remain
uninvolved and deny coverage at all costs, forcing Wausau Chemical to go it alone,
they cannot now assert that a cost-saving settlement was voluntary and was excluded
under the policy. Id. at 695-696.
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.