Insurance No Voluntary Payment Provision
In Gribaldo, Jacobs, Jones & Associates v. Agrippina Versicherunges A.G. (1970), the high court stated that where, upon tender of the defense, an insurer wrongly refuses to defend, the insured may undertake its own defense and recover from the insurer the expenses of litigation, including costs and attorneys' fees. (Gribaldo, supra, 3 Cal. 3d at p. 449; see also Isaacson v. California Ins. Guarantee Assn. (1988) 44 Cal. 3d 775, 791 [244 Cal. Rptr. 655, 750 P.2d 297] [where insurer erroneously denies coverage or fails to provide a defense, settlement payment made by insured, if reasonable, creates presumptive evidence of insurer's liability]; Pruyn v. Agricultural Ins. Co. (1995) 36 Cal. App. 4th 500, 527-530 [42 Cal. Rptr. 2d 295] [if insurer wrongfully denies coverage, and insured settles case based on informed, good faith effort, insurer has burden of proving that settlement was unreasonable or the consequence of fraud or collusion].)
In Jamestown Builders, Inc. v. General Star Indemnity Co. (1999) 77 Cal. App. 4th 341 [91 Cal. Rptr. 2d 514], a home developer spent more than $ 1.4 million to repair water intrusion defects in a residential development, all without notifying its insurer. (Id. at pp. 345, 351.)
In a subsequent bad faith action by the developer, the insurer invoked the provision prohibiting voluntary payments. the trial court dismissed the action on demurrer.
The Court of Appeal affirmed, stating: "California law enforces such no-voluntary-payments provisions in the absence of economic necessity, insurer breach, or other extraordinary circumstances. . . . They are designed to ensure that responsible insurers who promptly accept a defense tendered by their insureds thereby gain control over the defense and settlement of the claim." (Id. at p. 346, citations omitted.)
The Court of Appeal went on to explain that, unlike a notice provision or a cooperation clause, a no-voluntary-payment provision can be enforced without a showing of prejudice:
'The existence or absence of prejudice to [the insurer] is simply irrelevant to [its] duty to indemnify costs incurred before notice. the policy plainly provides that notice is a condition precedent to the insured's right to be indemnified; a fortiori the right to be indemnified cannot relate back to payments made or obligations incurred before notice. . . . the prejudice requirement . . . applies only to the insurer's attempt to assert lack of notice as a policy defense against payment even of losses and costs incurred after belated notice.' " (Jamestown Builders, supra, 77 Cal. App. 4th at p. 350, quoting Xebec Development Partners, Ltd. v. National Union Fire Ins. Co. (1993) 12 Cal. App. 4th 501, 566 [15 Cal. Rptr. 2d 726], italics in original.)
The Ninth Circuit Court of Appeals is in agreement. (See Faust v. the Travelers (9th Cir. 1995) 55 F.3d 471, 472-473 [California courts consistently enforce no-voluntary-payment provisions without a showing of prejudice, but insurer must show prejudice with respect to breach of notice provision or cooperation clause].)