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As corporate counsel, you might occasionally find yourself in the role of corporate conscience. Like Jiminy Cricket with a J.D.
When a customer or client has a legal beef with your company, you have to start the process of resolving that conflict. On one hand, you want to do right by your customers. On the other hand, you have to consider the broader implications. Businesses may get a bad wrap for their laser-like focus on the bottom line, but they can also run into trouble when they are too eager to do the right thing.
Recently, the Seventh Circuit Court of Appeals considered an insurance appeal in which Arbor Homes, an Indiana home builder, found itself without insurance coverage based on its rush to right a wrong.
In 2005, Arbor contracted with Willmez Plumbing Inc. for plumbing services in some of its new home construction projects. Willmez's subcontractor forgot to connect one home's drainage system to the city's sewer, causing the crawl space in the home to fill with raw sewage.
It seems that Arbor did that right thing to address the buyer's complaints. It paid more than $65,000 for cleaning, repairs and follow-up testing for the home. When the homeowners were unwilling to accept a sewage-tainted home, Arbor agreed to build them a new house.
During this process, Arbor and Willmez discussed possible resolutions of the homeowners' claims, and Arbor told Willmez to place its insurer, West Bend, on notice of the claims.
Arbor, interpreting West Bend's silence on the settlement terms as acceptance, signed a settlement agreement with the buyers. That was a mistake.
When Arbor tried to collect payment from Willmez, West Bend denied coverage under the voluntary payments provision of the insurance contract, which stated, "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." Here, neither Arbor nor Willmez obtained West Bend's consent before settling, so West Bend was off the hook.
Though the Seventh Circuit agreed that "Arbor's quick and decisive aid ... was laudable," it concluded that failure to obtain West Bend's consent to the settlement relieved the insurer of any obligation to pay for the damages under the voluntary payments provision.
The home buyers in this case were clearly entitled to a remedy, but Arbor shouldn't have settled without express consent from the insurer.
Hopefully, you work for a company that shares Arbor's commitment to its customers. If you do, be prepared to make a case for why a speedy settlement may not be in your company's best interest. As an individual, such delays may weigh on your conscience; as counsel, they may benefit your company.