The “No Voluntary Payments” Clause and Why it’s Important

When problems occur, it’s natural to want to resolve those problems quickly and efficiently. This may be a reasonable (and even admirable) reaction, but what should you do when insurance is involved? Here, we explain the “no voluntary payments” clause, which appears in most insurance policies, and the consequences for an insured party that repairs defects or settles a claim without its insurance provider’s knowledge or consent.   

What is a “no voluntary payments” clause and what does it mean?

• Most liability policies, including Professional Liability/E&O policies, contain a clause similar to the following:

No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense without the insurer’s consent.

• While it may be tempting to immediately correct errors, remediate property damage, or begin negotiations to settle a dispute, a “no voluntary payments” clause requires the insured parties to obtain their insurance provider’s consent before voluntarily taking such actions.

What are the consequences of failing to obtain an insurance provider’s consent?

• Failure to obtain such consent may release the insurance provider from its obligations under the policy, including its obligations to pay or indemnify the insured for any amounts the insured incurred in its remediation/settlement efforts (even if such amounts otherwise would have been covered by the policy).
• In some states, an insurance provider cannot deny coverage on this basis unless it can demonstrate that it has been substantially “prejudiced” or injured by the actions taken by the insured without the provider’s consent. 
• Many other states, however, allow the insurance provider to deny coverage regardless of whether the provider was prejudiced. Courts in these states assert that “no voluntary payments” provisions safeguard the provider’s contractual right to protect itself and its insured by exercising its rights to investigate claims and to participate in any remediation or settlement discussions. 

Does the “no voluntary payments” clause allow any exceptions? 

• Many policies carve out an exception to the prohibition on voluntary payments for costs incurred to administer first aid. Also, case law typically allows an exception for emergencies where an imminent and substantial threat to health or safety is at stake. 
• If an insurer wrongly refuses to defend the insured, the insurer cannot later use the “no voluntary payments” clause to avoid reimbursing the insured for reasonable settlement amounts or costs incurred while the insured was protecting its own interests.   
• Other exceptions also may be allowed for unavoidable or involuntary payments made by an insured, including if:
  • The insured is unaware of the identity of the insurer
  • A payment is legally mandated
  • Immediate action is necessary to protect the insured’s legal interests (i.e., where action is required to avoid a default judgment against the insured)
• Rather than trying to guess what may be considered voluntary or involuntary, the better approach is for the insured to report any incident, accident, dispute, or claim to their insurance provider as soon as possible and in accordance with their policy’s reporting obligations. Then, the insured should involve their insurance provider in any investigation/negotiation process early to avoid any surprises about whether something is, or could be considered, a voluntary payment.

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Bulletin provided by Phelps Dunbar, LLP. Disclaimer: the information contained in this bulletin is for general guidance and educational purposes only and does not constitute legal advice. Discussion of insurance policy language is descriptive only; every policy has different language and is subject to different terms and conditions. Please refer to your own policy for its specific language.