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



...year 1613. Some maintain that the concept behind this clause was first put to use many years earlier.

A sue and labor clause usually clarifies that when the insured takes steps to prevent or reduce a loss, the insured will be reimbursed for the expenses incurred in those mitigating efforts, commonly on an allocated basis.

One of the reasons this clause was introduced — and there are different versions — was that early on, underwriters came to realize that if mitigation expenses were not covered, the insured would have less incentive to mitigate losses.

The court in the case of White Star S.S. Co. v. North British & Mercantile Ins. Co., 48 F.Supp. 808 (E.D. Mich. 1943) explained the rationale for the sue and labor clause this way:

The law is well settled that the sue and labor clause is a separate insurance and is supplementary to the contract of the underwriter to pay a particular sum in respect to damage sustained by the subject matter of the insurance. Its purpose is to encourage and bind the assured to take steps to prevent a threatened loss for which the underwriter would be liable if it occurred, and when a loss does occur to take steps to diminish the amount of the loss.

Although the court stated that the sue and labor clause is, in effect, a separate insuring agreement for the benefit of the insured and insurer, it is today a matter of dispute that it is an insuring agreement. It is true that the insured benefits from such a provision because it can be reimbursed for expenses incurred in eliminating or at least reducing a covered loss. The consensus of the courts, however, is that the sue and labor clause is primarily for the benefit of insurer, which may be able to pay less than what otherwise would be payable, if the insured takes certain steps or precautions when loss is imminent or occurs.

In fact, it has been stated by some courts that the sue and labor...