by Quenda Behler
A Kansas lawsuit, Potomac Insurance of Illinois v.
Huang, provides a good illustration of the relationship
between the contractor, his customer, and his liability
Liability insurance, part of the standard builder's risk
policy, promises to defend the contractor if he or she is sued,
and promises to pay off any claim the contractor is legally
obligated to pay because of recklessness, stupidity, or
carelessness -- in other words, because he or she injured
someone and/or damaged property.
The Facts of the Case
Builder Anderson had installed windows that leaked like
sieves. He kept trying to fix them but couldn't, and,
eventually, a lot of water damage was done to the inside of the
house. The reason he couldn't fix the windows, it turned out,
was the design of the house, which called for the windows to be
installed flush with the exterior walls. Oh, yeah, and this
million-dollar house had no gutters.
The property owners believed the leaks to be Anderson's fault
and threatened to sue him. He believed their threat, because
they had sued him before, so he paid them $37,000 to have their
floors and windows fixed. Then he put in an insurance claim
against his builders' risk policy, asking for reimbursement.
Potomac Insurance asked the court to decide if it had to pay (a
kind of lawsuit called a request for a Declaratory
There are two questions here: First, can a builder settle a
claim against him by his customer and get reimbursed by his
insurance company, or does he have to wait until the insurance
company either settles it or gives him permission to do so?
Second, suppose this builder would not have lost in court if
the property owners had sued him. Does that mean that
his insurance company does not owe him $37,000?
Can the builder settle the claim? Potomac
Insurance said that it didn't have to pay because Anderson had
not actually been sued. Potomac lost on that question. The
court said that Anderson had a common law right to settle the
claim and that he could recover that money from his liability
insurance carrier, Potomac, as long as he had acted in good
faith and in a reasonable way.
What did the court mean by "good faith" and "reasonable
The court said that those phrases meant keeping the insurance
company fully informed, sending it a copy of all related
paperwork, and paying an amount that did not exceed the real
cost of fixing the floors and windows -- about what the
insurance company would have had to pay anyway.
What if the claim was doubtful? This is the more
interesting question. Potomac Insurance said that if the
property owners had sued Anderson, they probably would have
lost because the leaks weren't his fault. Anderson paid off the
property owners, Potomac said, only because they were
threatening him with a lawsuit.
But the court ordered Potomac to reimburse Anderson for the
$37,000 he paid to the property owners, because, if he had been
sued, Potomac would have had an obligation to defend him even
from false claims. Was the court saying that a builder has the
right to settle a claim himself even if he knows it's false?
The court's language certainly sounds like it, but the court
kind of weaseled around the issue by saying that probably the
builder had not caulked the windows correctly.
I think the court was uncomfortable with letting Potomac off
the hook because Potomac had brought the lawsuit and,
therefore, would not have been interested in presenting
evidence that the property owners could have sued and
The court could have said that Anderson, as part of his claim
against Potomac, had to show how the customers might have won
if they had sued.
What Should You Do?
If you have a hassle with a customer, can you pay him off
yourself and then claim against your insurance company? This
case says that sometimes you can. But you should be careful.
Insurance companies don't like clients settling claims
themselves. The insurance company in this incident sued to
avoid reimbursing the client.
So if you back the cement mixer into your customer's garage
wall, how should you handle it?
If you decide to fix the garage yourself, expecting to get
reimbursement from your insurer, keep the insurer in the loop
every foot of the way. Take dozens of pictures or,
better yet, yards of videotape of the damage and of everything
you do to fix it.
If the customer's claim is dubious -- suppose he says that
your cement mixer cracked his driveway and you know it was
cracked all along -- does the Kansas case mean that you can go
ahead and pay to fix the driveway, and the insurance company
will reimburse you? After all, if insurance companies settle
nuisance suits and doubtful claims every day, why can't
My opinion is that if you used that approach, your insurance
company would give you a hard time. If the claim is doubtful,
that's when you probably ought to let the insurance company
deal with it. After all, they keep platoons of lawyers on staff
for that kind of problem, and you'd rather those attack-trained
lawyers were after the customer with the doubtful claim instead
of you.Quenda Behler Story has practiced and taught law for
over 25 years and is the author of
Plain-English Legal Guide