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



...coverage under this provision, the court explained, the insured’s actions must have been taken to protect insured property from a risk of covered loss that was imminent in fact. Because there was, in fact, no imminent risk of covered loss, the court said, WaMu’s actions were not taken to prevent a covered loss. Its expenditures, instead, were not primarily for the benefit of the insured and are not compensable under the sue and labor clause. (In other words, since imminent loss was at best questionable, in light of two different opinions, the loss was not imminent in fact.)

As mentioned, there are variations of the sue and labor clause. An example of one that is more restrictive than the preceding one reads:

In the event of any loss or damage insured against, it shall be lawful and necessary for the insured, his or their factors, servant and assigns, to sue, labor and travel for, in and about the defense, safeguard and recovery of property insured hereunder, or any part thereof, without prejudice to this insurance, nor shall the acts of the Insured or Underwriters, in recovering, saving and preserving the property insured in case of loss be considered a waiver or an acceptance of abandonment.

Note that the above provision, unlike the preceding one, does not mention anything about an imminent loss. It is easier said than done, but in the event of an imminent loss — and not one that is in dispute — the insured still needs to obtain the insurer’s acknowledgement, even though time is of the essence. However, if immediate action were to end up benefiting the insurer, it would not be surprising if the insurer were to honor such conduct despite what the above condition says. In fact, it says nothing about paying a portion of those expenses. But if the steps taken benefit the insurer, some expenses are likely to be paid as well. The problem is to make sure the loss is covered, i.e., results from a covered cause to covered property.

Y2K Remediation

Next to construction-related subjects, one of the issues in which the sue and labor clause was commonly raised involved the highly anticipated year 2000 or Y2K rollover date recognition problems of computers. As explained by the court in the case below, computer programmers wrote computer codes using only two digits to specify the calendar year, instead of four digits. When a year was designated as “88,” the computer would presume that the first two digits were “19,” and it would read the date as “1988.” The year 2000, therefore, presented a problem, because computers with time- sensitive applications would not be able to recognize that 2000 followed after 1999 and would, instead, erroneously read the number as 1900. As it turned out, this potential problem did not materialize into any major crisis, although there were some court cases.

One of these was GTE Corporation v. Allendale Mutual Insurance Co., et al., 258 F.Supp.2d 364 (U.S. Dist. Ct. Dist. N.Y. 2003), where GTE filed an action seeking coverage for costs and expenses incurred in remediating its computer systems to avoid year 2000-related date recognition problems. One of GTE’s arguments was that the costs associated with preventing Y2K- related loss were covered by the sue and labor provisions of its property policies.

In 1999, GTE filed a claim with its insurers seeking reimbursement of the costs it incurred for its Y2K program. GTE contended that its remediation costs were covered under its primary policies’ sue and labor provisions, which read like the foregoing one repeated that covered both imminent and actual loss. GTE also argued that the preservation and protection of property clauses under its excess property policies also covered these costs. This latter provision read in part:

In case of actual or imminent physical loss or damage of the type insured against by this Policy, the expenses incurred by the Insured in taking reasonable and necessary actions for the temporary protection and preservation of property insured hereunder shall be added to the total physical loss or damage...