The 7th Circuit Court of Appeals praised a homebuilder for its quick response and remedy to a couple’s discovery that their brand new home was full of backed-up sewage. But because Arbor Homes didn’t get the consent of the insurer regarding a settlement, the insurer has no obligation to pay for the cleanup.

Kurt and Joy Lorch purchased a home from Arbor in 2007, but shortly after moving in, they became ill. A smell in the home was caused by raw sewage being discharged into the home’s crawl space. A&M Plumbing, hired by Willmez Plumbing to perform work on the Arbor homes, failed to connect the home’s plumbing to the main sewer line.

As part of Willmez’s contract with Arbor, it agreed to take out insurance and Arbor was named as an additional insured. Subcontractors hired by Willmez were bound to the same terms as Willmez.

Arbor acted quickly and cleaned up the home, but it eventually acquiesced to the Lorches’ request that the company purchase their home and build the couple a new one. Arbor told Willmez to place its insurer West Bend Insurance Co. on notice of the Lorches’ claims, but West Bend was not informed of the proposed settlement or eventual execution until it was completed. Arbor completed the settlement on the belief that the insurer’s silence meant it had no objections.

Arbor sued Willmez, and insurer West Bend sought a declaration it had no duty to defend or indemnify Arbor, denying coverage under various theories, including that Arbor wasn’t an additional insured. It later conceded that Arbor should have been treated as such.

The District Court granted summary judgment in favor of West Bend, finding the insurer was relieved of any duty under the fungi and bacteria exclusion as well as the voluntary payments provision. In West Bend Mutual Insurance Co. v. Arbor Homes LLC, 12-2274, the 7th Circuit focused on the voluntary payments provision of the contract, which says that the insured must tell West Bend as soon as practicable of any occurrence and of any claims or lawsuits and that an insured cannot voluntarily make a payment without West Bend’s consent.

“There is no evidence that West Bend ‘consented’ to any settlement as required by the voluntary payments provision,” Judge Ilana Diamond Rovner wrote. “Although Arbor behaved admirably in expeditiously resolving the matter for the homeowners, it failed to protect its own interests when it relied on Willmez to notify West Bend about the incident, and failed to obtain West Bend’s consent for any settlement. Having no opportunity to participate in the investigation or settlement, West Bend is entitled to enforcement of the plain language of the contract: Arbor’s settlements with Willmez and with the Lorches without the consent of West Bend is at Arbor’s own expense.”