22nd Aug 2016
First party property policies
First party homeowners policies do not contain a specific reference to the words “sue and labor”. The phrase “sue and labor” appears historically in marine and inland marine insurance policies. The phrase may express the duty implied in law on the part of the insured to labor for the recovery and restitution of damaged or detained property. [Grebow v. Mercury Ins. (2015) 241 Cal. App. 4th 564, 575] The sue and labor clause applied when a party took steps to prevent an imminent loss would be covered if it occurred, such as collapse. [Grebow v. Mercury Ins. (2015) 241 Cal. App. 4th 564, 575] First party homeowners policies have changed the scope of the clause. The mitigation clause in a homeowners policy is not the same as the usual sue and labor clause. A mitigation clause in a homeowners policy now only applies AFTER the loss occurs. [Grebow v. Mercury Ins. (2015) 241 Cal. App. 4th 564, 575]
Two provisions describe the modern “sue and labor” reimbursement rights. They are [Grebow v. Mercury Ins. (2015) 241 Cal. App. 4th 564, 569-570]:
SECTION 1 – EXCLUSIONS
The policy states that the insurer does not insure for:
“4. Neglect, meaning failure to use all reasonable means to save and preserve the property at and after the time of the loss.”
Under SECTION 1 – CONDITIONS, the policy sets forth duty of the insured:
SECTION 1 – CONDITIONS
“2. Your Duties after loss.
a. Give prompt notice to us or our representative;
c. Protect the property from further damage; …”
Sue and labor provisions are contained in first party property policies.
CGL property policy
The complete commercial general liability policy contains, in addition to liability coverage, property coverage. The property policy contains a sue and labor provision:
To indemnify or pay on behalf of the insured any sum or sums which the insured may be obligated to pay or incurs as expenses, on account of: [a] sue and labor expense, to the extent reasonably incurred, arising from an occurrence covered hereunder … [Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 765, 15 Cal. Rptr. 2d 815 (1st Dist. 1993)]
Earlier “Multiple Perils Personal Property” insurance policies also contained sue and labor provisions. Such provisions stated:
In case of actual or imminent loss or damage it shall be lawful and necessary for the insured, their factors, servants or assigns, to sue, labor and travel for, in and about the defense, safeguard and recovery of the property insured hereunder, or any part thereof, without prejudice to this insurance … [Young’s Market Co. v. American Home Assur. Co., 4 Cal. 3d 309, 311, 93 Cal. Rptr. 449, 450, 481 P.2d 817 (1971)]
Historically, sue and labor clauses were contained in marine policies insuring vessels
These provisions generally provided “… that the insured agrees to sue, labor and travel in and about the defense, safeguarding and recovery of the property, for which the insurer agrees to contribute in proportion to the sum insured.” [6 Appleman (1972) INSURANCE LAW AND PRACTICE § 3794, p. 160; Young’s Market Co. v. American Home Assur. Co., 4 Cal. 3d 309, 313, 93 Cal. Rptr. 449, 452, 481 P.2d 817 (1971)]
Purpose of sue and labor clause; historical perspective
The “sue and labor” clause appearing in most marine and inland marine insurance policies is of ancient lineage, its forebears extending back—according to a leading case on the subject—at least into the 17th century. Such a clause makes express the duty implied in law on the part of the insured to labor for the recovery and restitution of damaged or detained property, and it contemplates a correlative duty of reimbursement separate from and supplementary to the basic insurance contract. [Young’s Market Co. v. American Home Assur. Co., 4 Cal. 3d 309, 313, 93 Cal. Rptr. 449, 452, 481 P.2d 817 (1971)]
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. Under this clause the assured recovers the whole of the sue and labor expense which he has incurred and without regard to the amount of the loss or whether there has been a loss or whether there is salvage and even though the underwriter may have paid a total loss under the main policy. [Young’s Market Co. v. American Home Assur. Co., 4 Cal. 3d 309, 313, 93 Cal. Rptr. 449, 452, 481 P.2d 817 (1971)] See § M40 MITIGATION EXPENSES—COVERAGE.
Limitations on recovery: Covered peril requirement
There is a fundamental limitation upon the insurer’s duty under a “sue and labor” clause to compensate the insured for expenses incurred in the preservation and protection of the insured property: The expenses in question must be incurred to preserve the insured property from a peril insured against under the basic policy. [Young’s Market Co. v. American Home Assur. Co., 4 Cal. 3d 309, 314, 93 Cal. Rptr. 449, 452, 481 P.2d 817 (1971) (insurer not liable for reimbursement of legal expenses incurred by insured to resist confiscation efforts by the State of Texas; cargo not covered under the basic policy); Shell Oil Co. v. Winterthur Swiss Ins. Co., 12 Cal. App. 4th 715, 766, 15 Cal. Rptr. 2d 815, 848 (1st Dist. 1993) (insurer under liability policy not compelled to give credit for attorney fees incurred by insured in defending the insured property from environmental claims made against insured by governmental agencies in that first party coverage does not give rise to a credit under liability policy’s duty to defend provisions); Grebow v. Mercury Ins. (2015) 241 Cal. App. 4th 564 (insurer under homeowners policy not compelled to reimburse insured for expenses incurred to prevent a two story home from falling down; the policy contained a very restrictive “collapse” provision stating that reimbursement for “collapse” occurs only when the collapse is sudden and complete, breaking down or falling in or crumbling into pieces or into a heap of rubble, and did not include settling, cracking, shrinkage nor a substantial impairment of the structural integrity)]
References in bold are to Mr. Cornblum’s legal text CALIFORNIA INSURANCE LAW DICTIONARY AND DESK REFERENCE (2015, 2016), published by ThomsonReuters (1-800-344-5008 to order 3-Volume text). 2016 Edition now available.