Introduction

Most liability policies include a Condition that the policyholder not voluntarily pay or incur any expense or obligation without the insurer’s consent. The purpose of this provision is to prevent collusion[1] and invest the insurer with complete control over the defense. It is enforceable without a showing of any prejudice. However, courts have declined to enforce such provisions where payments were not voluntary, in cases of economic necessity, extraordinary circumstances, and where the insurer breached the duty to defend.

Contract Provision

A typical CGL policy provides in part: “CONDITIONS – 2. Duties In The Event Of Occurrence, Offense, Claim Or Suit – d. No insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense . . . without our consent.” The meaning of this provision is subject to standard rules of contract interpretation.[2] “Recovery of pre-tender defense expenses is dependent upon the normal rules of interpretation of an insurance contract and the particular circumstances of a case.”[3] One court questioned the clarity of this language since “the provision does not specifically refer to the costs of defense and there is a question what a reasonable insured would understand reading the provision.”[4]

The Purpose of the No Voluntary Payment Provision

The purpose of no-voluntary-payment provision “is to prevent collusion as well as to invest the insurer with the complete control and direction of the defense or compromise of suits or claims.”[5] “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.”[6] “Thus, where the insured has failed to demand a defense and relinquish control over the case, it cannot expect the quid pro quo of pre-tender voluntary payments, expenses, or other obligations incurred by the insured pre-tender without the insurer’s consent.”[7]

No Showing of Prejudice Required

“[A] no-voluntary-payment provision can be enforced without a showing of prejudice: [T]he existence or absence of prejudice to [the insurer] is simply irrelevant to [its] duty to indemnify costs incurred before notice. California courts consistently enforce no-voluntary- payment provisions without a showing of prejudice.”[8]

Exceptions

“California law enforces such no-voluntary-payments provisions in the absence of economic necessity, insurer breach, or other extraordinary circumstances”[9] “[W]hen the insured has requested and been denied a defense by the insurer[,] the insured may ignore the policy’s provisions forbidding the incurring of defense costs without the insurer’s prior consent, and under the compulsion of that refusal undertake his own defense at the insurer’s expense.”[10]

“[A]n insurer cannot deny all liability, and at the same time be permitted to stand on a provision inserted in the policy for its benefit.”[11] “An insurer’s unwarranted refusal to defend a suit against the insured has been held to relieve the latter from his contract obligation to leave the management of such suits to the insurer, and to justify him in defending the action on his own account. [Fn. omitted.] And where the insured is thus compelled to conduct his own defense, it is uniformly held that he may recover the expenses of litigation, including costs and attorneys’ fees, from the insurer.”[12]

“[P]re-tender expenses are not barred if they were incurred involuntarily. Generally, voluntariness is a question of fact.”[13] “[W]here the urgency of time pressures requires the insured to expend money pre-tender, the no voluntary payments provision will not apply.”[14] Some courts permit a short delay while the insurer tries to locate a policy.[15]

Editorial

It is doubtful that purpose of the rule is served when the insurer may not control the defense because of disqualifying conflicts of interest.[16] Since the purpose of the provision is to permit the insurer to control the defense, the provision serves no purpose when the policyholder is permitted to control the defense because the insurer has asserted a reservation of rights. No California case litigates and holds whether the no-voluntary-payment provision applies where the insurer’s reservation creates disqualifying conflicts of interest. The insurer is fully protected by a vast body of law regulating the circumstances under which the insurer must pay defense costs, including Civil Code §2860.[17]