Coverage for “Sue and Labor” Expenses

Business owners in the path of Hurricane Irma have been aware of the approaching hurricane for several days. Many businesses will take measures to protect their property before Hurricane Irma makes landfall. For some businesses, the costs of these efforts can be substantial. Because of the substantial costs involved, some policyholders may look to their property insurers to pay for these costs as a “sue and labor” expense.

A sue and labor clause imposes a duty on the insured to take reasonable steps to protect insured property in the event of actual or, in some cases, imminent, covered damage. In turn, the insurer will provide reimbursement for the insured’s expenses under appropriate circumstances. For example, and depending on the specific policy language, an insured may be able to recover the costs of moving personal property to a safe location. Many policy forms in use today designate this coverage as “Preservation of Property” or include it among the “Duties in the Event of Loss.”    

The concept of sue and labor, which has existed in ocean marine insurance since the seventeenth century, is designed to benefit the insurer by reducing the amount of loss it would have to pay. But sue and labor coverage is available only in limited circumstances. To be recoverable, several criteria must be met.

First, the expenses must have been incurred to avert or minimize a loss for which the insurer would have been liable under the policy. Thus, if the loss sought to be avoided would not be covered under the policy, there is no sue and labor coverage. See, e.g., GTE Corp. v. Allendale Mut. Ins. Co., 372 F.3d 598 (3d Cir. 2004) (no coverage for expenses incurred to avoid Y2K problems with computer system where policy excluded coverage for design defects and inherent vice); Port of Seattle v. Lexington Ins. Co., 48 P.3d 334 (Wash. Ct. App. 2002) (no coverage for expenses incurred to avoid Y2K problems with computer system where the claimed loss would have occurred after the policies expired); Swire Pac. Holdings, Inc. v. Zurich Ins., 845 So. 2d 161 (Fla. 2003) (no coverage for expenses incurred by insured to correct structural deficiencies where policy excluded coverage for loss caused by design defects.).

Second, the loss being averted or minimized must be actual or “imminent.” Webster’s Third New International Dictionary defines “imminent” as “ready to take place; near at hand; impending.” At what point does the threat of property damage from a covered cause of loss like a hurricane become imminent such that the cost of preventive measures to protect the property is covered under a sue and labor provision? The issue has not yet been decided by the courts and, thus, is subject to debate.

Third, the expenses must be incurred primarily for the benefit of the insurer. For example, the court in Einard LeBeck, Inc. v. Underwriters at Lloyd’s of London, 224 F. Supp. 597 (D. Or. 1963), found that the rental value of moving equipment which was left in place under a synagogue which the insured was transporting and the cost of demolition of the synagogue after it was determined that the building could not be moved were not primarily for the benefit of the insurer.

Fourth, to be recoverable under a sue and labor clause, expenses must be preventative rather than corrective or remedial. For example, in American Home Assurance Co. v. J. F. Shea Co., 445 F. Supp. 365, 370 (D.D.C. 1978), the insured sought sue and labor coverage for expenses it incurred to repair a recently excavated subway tunnel to prevent a collapse. The court found that the sue and labor provision applied but specifically recognized that expenses for “corrective” rather than “preventive” activities were not proper sue and labor costs.

A sue and labor clause provides a mechanism for an insured to recover expenses incurred to minimize or prevent loss or damage to covered property due to an imminent covered cause of loss. But expenses incurred to minimize or prevent losses for which there is no coverage, as well as expenses that are corrective or remedial in nature, are not recoverable. Depending on the factual circumstances, an insured may be able to satisfy all or only some of these criteria required for sue and labor coverage.