Sue and Labor Clauses: The Basis for Mitigating, Expediting and Other Policy Provisions



...otherwise recoverable under this Policy… .

Despite the fact that the primary and excess property policies provided coverage on an “all-risks” causes of loss basis, the court held that no coverage applied for the costs and expenses incurred under either one of the provisions that addressed coverage for mitigating covered losses. The court’s reason was the policies’ exclusion having to do with defects in design and specifications.

The insurers also relied on the inherent vice exclusion. For support, the insurers looked to the case of Port of Seattle v. Lexington Ins. Co., 48 P.3d 334 (2002), where the court determined that the Y2K limitation was an inherent vice. In doing so, the court stated that “[B]ut for the two- digit date field code programmed into the Port’s software, the arrival of January 1, 2000, would not result in a loss. Thus, the Port’s Y2K problemwas an excluded inherent vice because the date field was an internal quality that brought about its own problem.”

Faulty Design or Construction

In the absence of coverage involving concurrent causes or covered ensuing loss situations, such as where there is a clear case of faulty design or construction, and nothing more, it is highly unlikely that a sue and labor clause will respond for the costs and expenses incurred by an insured to correct the situation or to take special measures to prevent further loss. A commonly cited case that provides a good example of this kind of an uninsured event is Southern California Edison Company v. Harbor Insurance Co., 148 Cal Rptr. 106 (1978), which involved a builders risk policy.

The insured in this case sought reimbursement of expenses incurred in mudjacking operations deemed necessary to protect the superstructure of a building from damage resulting from faulty foundation design. The court held that since damage from a faulty design was not covered, the preventive action likewise was not covered.

Another more recent builders risk case is Swire Pacific Holdings, Inc. v. Zurich Insurance Co., 845 So. 2d 161 (Fla. Sup. Ct. 2003). Swire spent approximately $4.5 million in costs to correct the structural deficiencies and filed a claim with the insurer seeking coverage for these costs, which the insurer denied. The court held that a sue and labor clause, when read in conjunction with a design defect exclusion, did not cover expenses incurred by the insured builder to correct design defects. The reason was that the builder acted directly and primarily to correct design defects, even though the builder may have incidentally benefited the insurer by possibly preventing collapse of the building at some unknown point in the future.

However the provisions of the sue and labor clause read, the underlying requirement is that the steps taken are because of an otherwise covered loss. A surprising number of cases are litigated where insureds attempt to obtain coverage for their costs and expenses incurred for situations that are not covered. Some examples are: