First appearing in the realm of marine insurance, “Sue & Labor” clauses have gradually made their way into many present day
First appearing in the realm of marine insurance, “Sue & Labor” clauses have gradually made their way into many present day property insurance policies. Named for the language originally used, modern sue and labor clauses take many forms and employ such language as “preserve,” “protect” or “save.” A sue and labor clause imposes on an insured the duty to act when a loss occurs to preserve or protect insured property from further damage, and typically provides that reasonably necessary expenses are to be considered incurred at the insurer’s request. “It is the benefit conferred [by the insured] which creates the duty on the part of the insurer to reimburse the insured for prevention and mitigation of expenses.” Swire Pacific Holdings, Inc. v. Zurich Ins. Co., 139 F. Supp. 2d 1374, 1382 (2001) (S.D. Fla. 2001) (citing Southern Cal. Edison Co. v. Harbor Ins. Co., 83 Cal. App. 3d 747, 759 (Cal. App. 1978). When presented with a claim for sue and labor expenses, one must consider several important questions to properly evaluate coverage.
Were the claimed expenses incurred to protect the property from a peril insured against under the subject policy? A sue and labor clause requires that an insured act to protect his property to minimize or prevent further damage only in the event or threat of a covered peril. Thus, an insurer is not required to reimburse an insured for expenses incurred preventing damage that is not covered under the subject insurance policy. It is said that when an insured acts to prevent a loss that is not covered by the policy, “there is no duty or benefit to the insurer; the obligation [for reimbursement] only exists when the action taken [by the insured] is to prevent a loss for which the underwriter would be liable.” GTE Corp. v. Allendale Mutual Ins. Co., 372 F.3d 598 (3rd Cir. 2004); Port of Seattle v. Lexington Ins. Co., 111 Wn. App. 901 (Wash. App. 2002) (there is no such duty for reimbursement where the policy does not apply).
It is the insured who bears the burden to prove that his sue and labor expenses were the result of a covered loss. See Continental Food Products v. Ins. Co. of N. America, 544 F.2d 834 (5th Cir. 1977). If the insured’s claimed damages are attributable to anything included within any of the policy’s exclusions, the insurer has no obligation to reimburse its insured. See American Home Assurance Co. v. J.F. Shea Co., 445 F. Supp. 365 (D.D.C. 1978). A test used by one court in making such a determination was whether the insurer would be liable at all for the claimed loss. If not, there is “no contractual obligation to repay sue and labor.” Reliance Ins. Co. v. The Yacht Escapade, 280 F.2d 482, 489 (5th Cir. 1960); see Tillery v. Hull & Co., 717 F. Supp. 1481, 1486 (M.D. Fla. 1988), aff’d 876 F.2d 1517 (11th Cir. 1989).
In addition, some courts have held that an insured’s efforts to preserve or protect property must not only prevent a covered loss, but must also be to the primary benefit of the insurer. In Edison Co. v. Harbor Ins. Co., the California Court of Appeals found that the only reason the insured building was threaten by a covered loss was because of the building’s design defects, an excluded cause of loss under the policy. 83 Cal. App. 3d 747, 759 (Cal. App. 2d Dist. 1978). Although Southern Cal. Edison Co.’s mitigation efforts prevented a covered loss, i.e. collapse of the building, such efforts were primarily made to correct the building’s design defect and thus, the benefit to the insurer was merely incidental and insufficient to bring the costs incurred by the insured in protecting the property under sue and labor coverage.
Are the efforts taken and expenses incurred reasonable? Typically, an insured’s obligation under a sue and labor clause will only extend to damages which can be lessened by reasonable efforts and expense. See e.g. Central Nat. Ins. Co. v. Dixon, 188 Ga. App. 680, 682 (1988); Farm Bureau Ins. Co. v. Ward, 258 Ar. 685, 528 S.W.2d 910 (1975). That is to also say, an insured is not under any obligation to make efforts to preserve or protect the property beyond what is reasonable. What measures are to be considered reasonable is often a question for the jury to decide and depend on the type of loss, the extent of loss, and the type and magnitude of the efforts required to mitigate the damages. Couch on Insurance 3d, §4.07[b]. “It is frequently said that the duty of an [insured] is to reduce damages as far as possible. It is more correct to say that by consequences which the [insured], acting as prudent men would do, can avoid, he is not legally damaged.” Nicholas v. Tanner, 117 Ga. 223, 226, 48 S.E. 489 (1902). In other words, as a result of a sue and labor clause and more generally, an insured’s common-law duty to mitigate his damages, an insured will only be able to recover for damages to his property he was unable to avoid through reasonable efforts to protect the property. When making such a determination, courts may take into account an insured’s ability to afford the costs necessary to preserve the property. Busek v. Contintental Casualty Ins. Co., 378 F.3d 284, 293 (3rd Cir. 2004).
However, it is important to note that an insured’s actions do not have to be successful to recover under a sue and labor clause. See. e.g. Insurance Co. of N. America v. Gypsum Co., 870 F.2d 148, 154 (4th Cir. 1989). An insured must simply take action to preserve the property as a reasonable person would do.
Does the claim expand coverage under the subject policy? Generally speaking, sue and labor clauses do not extend or create coverage beyond what is contained in the policy, and are not to be considered separate insuring agreements. Said another way, sue and labor clauses do not “operate as an enlargement of the perils underwritten against.” Continental Food Products, Inc. v. Ins. Co. of N. America, 544 F.2d 834, 837 (5th Cir. 1977). “Although the duty of reimbursement is said to be separate and supplementary to the basic insurance policy, a sue and labor clause does not extend or create coverage; the recovery under a sue and labor clause is tied irrevocably to the obligations undertaken by the insurer in the basic insurance policy.” Southern California Edison Co. v. Harbor Ins. Co., 83 Cal. App. 3d 747, 758 (1978).
Accordingly, sue and labor clauses do not cover voluntary improvements to covered property by an insured. Instead, such costs are considered a regular cost of business. Aflac Incorporated v. Chubb & Son, Inc., 260 App. 306, 306-07, 581 S.E.2d 317 (2003); of v. Lexington Ins. Co., 111 Wa. App. 901 ( App. 2002). The rationale being that property insurance policies do not afford coverage for sums expended to improve or better property wholly apart from any indemnification purpose. Aflac Incorporated v. Chubb & Son, Inc., 260 App. 306, 306-07, 581 S.E.2d 317 (2003). Any alternative interpretation of a sue and labor clause would allow an insured to “recover for improvements and measures taken to address a host of uninsured risks.” GTE Corp. v. Allendale Mutual Ins. Co., 372 F.3d 598, 618 (3rd Cir. 2004).
An interesting and relatively recent point of contention has been whether sue and labor clauses cover expenses incurred to avoid Y2K issues. Relying on court decisions which held that coverage was available under certain policies to prevent a loss, insureds have argued that their efforts taken prior to year 2000 to ensure computers were compatible prevented a loss under the policy, were to the benefit of the insurer and thus, were reimbursable under a policy’s sue and labor clause. See e.g. GTE Corp. v. Allendale Mut. Ins. Co., 372 F.3d 598, 617-18 (2004); State of v. Allendale Mut. Ins. Co., 337 49, 154 P.3d 1233 (2007). Generally, these claims were denied because the insureds could not meet their burden that their efforts were taken to prevent a covered loss under the policy. GTE Corp, 372 F.2d at 617-18.
In sum, when considering claims of coverage under a sue and labor clause, an insurer should remember several basic concepts. First, the efforts taken by the insured must be for the purpose of preventing a covered loss under the policy. Second, efforts taken by the insured and the subsequent expenses incurred must be reasonable in light of the type and extent of the loss. Finally, and perhaps most importantly in light of recent caselaw, sue and labor clauses are not meant to extend coverage under the policy or provide for an insured’s general costs of doing business. An insurer must remember sue and labor coverage is not a separate insuring agreement and is meant only to reimburse an insured for expenses incurred in satisfying his duty under the policy.