The Volunteer Doctrine – Don’t Be an “Officious Intermeddler”
February 27, 2024
In general, volunteerism is a good thing, but not if you are a surety seeking subrogation, reimbursement or indemnity. In this Surety Today: The Blog post, we look at the volunteer doctrine. Under the volunteer doctrine, indemnity and subrogation are not available to a volunteer or “officious intermeddler,” who has no legal obligation to pay nor any interest to protect in making the payment. Employers Mut. Liab. Ins. Co. v. Pacific Indem. Co., 167 Cal.App.2d 369, 376–77, 334 P.2d 658, 662 (1959). As the Restatement puts it, “[a] surety who is under no obligation to pay a debt is a mere volunteer if it makes payment.” Restatement Third, Suretyship and Guaranty § 24(1)(f). Thus, as a general matter, a party may be considered to be a volunteer if the party made payment, but had no right or interest of its own to protect and acted without obligation, moral or legal, and without being requested by anyone liable on the obligation. 73 Am. Jur. 2d Subrogation § 21 (citations omitted). Stated differently, a “volunteer,” “stranger,” or “intermeddler” is one who thrusts oneself into a situation on one’s own initiative and not one who becomes a party to a transaction upon the urgent petition of a person who is vitally interested and whose rights would be sacrificed did the party not respond to importunate appeal. Mort v. U.S., 86 F.3d 890 (9th Cir. 1996).
Thus, one who settles under threat of civil suit is not a “volunteer.” Hartford Ins. Co. v. Ohio Cas. Ins. Co., 145 Wash. App. 765, 189 P.3d 195 (Div. 1 2008); Meckel v. Continental Resources Co., 758 F.2d 811, 814 n.1 (2d Cir. 1985)(quoting New York Stock Exchange v. Sloan,1980 U.S. Dist. LEXIS 13316 (S.D.N.Y. Aug. 15, 1980)). Payments are considered “involuntary” when the payor makes them under a legal obligation or to preserve rights or property. Argonaut Insurance Company v. Rio Marine, Inc., 477 F. Supp. 3d 576 (S.D. Tex. 2020); Norfolk & Dedham Fire Ins. Co. v. Aetna Cas. & Sur. Co., 132 Vt. 341, 318 A.2d 659 (1974). Thus, a person cannot be considered a “stranger” when the person paying the debt has an interest to protect. Esurance Property & Casualty Insurance Company v. Michigan Assigned Claims Plan, 507 Mich. 498, 968 N.W.2d 482 (2021).
In many jurisdictions, even if payment was made without legal liability, that would not necessarily make the payor “officious” if the payor made a reasonable mistake regarding their legal obligation to pay. Hill v. Cross Country Settlements, LLC, 402 Md. 281, 936 A.2d 343 (2007). In New York, it has been observed that whether a claim is paid by the surety that would have been sustained in the event that the surety had refused to pay and litigated its liability is immaterial in determining whether the surety was a volunteer in making the payment. 63 N.Y. Jur. 2d Guaranty and Suretyship, Defenses to subrogation claim—Voluntary payment, § 449, citing American Surety Co. of New York v. Palmer, 240 N.Y. 63, 147 N.E. 359 (1925); City Trust, Safe Deposit & Surety Co. of Philadelphia v. Haaslocher, 101 A.D. 415, 91 N.Y.S. 1022 (1st Dep’t 1905). The payment is sufficient to entitle the surety to recovery if it is made in good faith and because of the surety’s supposed liability on its undertaking. Lyth v. Green, 21 A.D. 300, 47 N.Y.S. 478 (4th Dep’t 1897). “Where a surety on a fidelity bond is called upon to pay an amount which the principal should have, but had not, accounted for and paid over, the surety is not required to resort to litigation to determine the amount due in order to assure itself of its right to subrogation; rather, it may act pursuant to a reasonable determination that it is liable on its bond.” 63 N.Y. Jur. 2d Guaranty and Suretyship § 449, citing Fidelity & Cas. Co. of N.Y. v. Finch, 3 A.D.2d 141, 159 N.Y.S.2d 391 (3d Dep’t 1957). Similarly, in Florida, it has been held that if the surety makes payment while having a reasonable good faith belief that it was exposed to make the payment, the surety will not be considered a volunteer. Thurston v. International Fidelity Ins. Co., 528 So. 2d 128 (Fla. 3d DCA 1988); Liberty Mut. Ins. Co. v. Aventura Engineering & Const. Corp., 534 F. Supp. 2d 1290 (S.D. Fla. 2008). In Cont’l Ins. Co. v. Fid. & Deposit Co. of Maryland, 914 F.2d 262 (9th Cir. 1990), the court observed that a party making a good-faith payment under a reasonable belief that the payment is necessary to protect his own rights or interests is entitled to recovery even if it subsequently develops that he had no interest to protect. “The liability of an insurer need not be ironclad in order for it to settle a claim without a subsequent finding that the payment to the insured was voluntary.” Weir v. Federal Ins. Co., 811 F.2d 1387, 1395 (10th Cir.1987) (citing Agricultural Ins. Co. v. Smith, 262 Cal.App.2d 772, 778–79, 69 Cal.Rptr. 50, 55 (1968)).
However, the opposite is also true. Where the defense of the principal or a co-surety is of such a character that the surety who pays the debt could have effectively alleged the defense to protect itself, the surety cannot, if it knew the facts upon which the defense was based, recover indemnity or contribution if the surety pays the debt. 23 Williston on Contracts § 61:74, Status of surety who pays when not bound (4th ed., 2023)(citations omitted).
The determination of whether a party acted as a volunteer is typically made based on all of the surrounding facts.
SUBROGATION
Let’s look at the volunteer doctrine in the context of subrogation. Of course, equitable subrogation “is subrogation that arises by operation of law,” and “is not based on contract or privity of parties, but is ‘purely equitable in nature, dependent on the facts and circumstances of each particular case.’” XL Specialty Ins. Co. v. DOT, 269 Va. 362, 369, 611 S.E.2d 356, 360 (2005) (quoting Centreville Car Care, Inc. v. North Am. Mortg., 263 Va. 339, 345, 559 S.E.2d 870, 872 (2002)). The doctrine of equitable subrogation applies when an individual pays a debt for which another is primarily liable, and which in equity and good conscience should have been discharged by the latter. However, as my partner George Bachrach stated “[p]erformance as a ‘volunteer’ does not provide the foundation necessary for the surety’s subrogation rights.” George J. Bachrach, The Surety’s Rights to Obtain Salvage: Exoneration, Reimbursement, Subrogation, and Contribution, Brief, SPRING 1999, at 24, 31. Indeed, “[a]ll courts subscribe to the rule that subrogation will not be permitted a mere ‘volunteer.’” Columbia Cmty. Bank v. Newman Park, LLC, 177 Wash. 2d 566, 576, 304 P.3d 472, 476 (2013), citing Note, Subrogation of Purchaser to Rights of Senior Mortgagee against Junior Encumbrances, 48 Yale L.J. 683, 686 (1939) (footnote omitted).
In Liberty Mutual Insurance Co. v. N. Picco & Sons Contracting Co., Inc., 2008 WL 190310 (S.D.N.Y. January 16, 2008) the surety for the general co-prime contractor on a New York school project completed the work under a takeover agreement and remediated extensive water damage. The surety sued the obligee to recover payment for extra work and sued the obligee, the obligee’s construction manager, the architect and several co-prime contractors to recover the cost to repair the water damage. The construction manager, architect and three of the co-primes moved to dismiss the complaint or for summary judgment. The court held that the completing surety was subrogated to the rights of the obligee and was not a “volunteer” as to the water damage remediation costs even though the surety alleged the water damage was not the responsibility of either the surety or the principal. The surety performed the remediation work in order to complete the project in a timely and efficient manner and minimize its losses. Therefore, it acted to protect its interests and not as a volunteer.
In Picco & Sons it was argued that Liberty was not obligated under the Bond or Takeover Agreement to perform the water damage remediation and was a “volunteer” and should have refused to undertake the extra work. The court noted that the defendants sought to ensnare Liberty in a “fiendish Catch 22.” If Liberty had not remediated the water damage, its completion work would have been useless. Liberty would have finished the school in such a way as to make it unsafe and uninhabitable. The defendants would have then argued that Liberty should not be paid for such senseless work. The alternative, as defendants argued in the case was that Liberty would remediate the water damage and then be precluded from seeking compensation as a “volunteer.”
The court noted that Liberty was protecting all parties’ interests when it undertook the water damage remediation work and by beginning the remediation work when it did, Liberty contained the costs of the project for all parties. The court further observed that from a policy perspective, the court believes a decision holding that Liberty merely “volunteered” to fix the damage would enable a future party standing in Liberty’s shoes to turn a blind eye to apparent health hazards, known to all, and complete construction which would then have to be immediately undone to create a safe product. Future parties would also be less likely to undertake this necessary remediation work if they knew that they would be barred from seeking subrogation.
Finally, the Court noted that that the bond at issue was a performance bond, which required Liberty to ensure that the construction project was completed in the event of Picco’s default. Likewise, the Takeover Agreement provided that Liberty would complete the Project. In undertaking the completion itself, Liberty clearly had an interest in seeing that the work would be completed in the most efficient way that would produce a useable finished product. Thus, the court held that Liberty was not precluded from seeking subrogation by the volunteer doctrine.
INDEMNITY
Another area where the volunteer doctrine defense may be asserted is by indemnitors. The surety will have paid a claim, incurred costs and expenses or completed work and when the surety seeks indemnity, the indemnitors may contend that they are not liable because the surety acted as a volunteer and should not have paid the claim. In many jurisdictions, the volunteer defense in the indemnitor scenario has been rendered moot because of the terms of the indemnity agreement. Specifically, most indemnity agreements provide that the indemnitors are liable to the surety even if the surety pays a claim that was not valid or if the surety was not liable, if the surety acted reasonably, in good faith or under the mistaken belief that liability existed. Similarly, many indemnity agreements provide that in the event of any payment by the Surety, the Indemnitors agree that in any accounting between the Surety and the Indemnitors that the Surety shall be entitled to charge for any and all disbursements made by it in good faith in under the belief that it is or was liable for the sums and amounts so disbursed, or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed. See Fid. & Deposit Co. of Maryland v. Bristol Steel & Iron Works, Inc., 722 F.2d 1160, 1163 (4th Cir. 1983).
In International Fidelity Ins. Co. v. Spadafina, 192 A.D.2d 637, 596 N.Y.S.2d 453, 454 (2d Dep’t 1993), under the terms of the Indemnity Agreement, the surety had the right to make payments and settle all claims, unless the defendants requested that the surety litigate and posted collateral to secure the amount of a possible judgment and expenses of litigation. The Spadafina court noted that this right to make payments and settle claims is limited only by the surety’s obligation to settle claims in good faith. See Spadafina, 596 N.Y.S.2d at 454; National Surety Co. v. Fulton, 192 A.D. 645, 183 N.Y.S. 237, 238 (1st Dep’t 1920). The court stated, because of the terms of the indemnity agreement it is irrelevant whether the indemnitor was actually liable for the payments claimed by the subcontractors or actually defaulted on their contracts with the owners, so long as the surety acted in good faith in making the payments and completing the performance under the construction contracts. Spadafina, 596 N.Y.S.2d at 454. In the absence of an indication of fraud or collusion between the surety and the claimants, the subcontractors’ and owners’ claims of default invoked the indemnification agreement and its settlements clause. See BIB Construction, 625 N.Y.S.2d at 553; Ebasco Constructors, Inc. v. A.M.S. Constr. Co., 195 A.D.2d 439, 440, 599 N.Y.S.2d 866, 867 (2d Dep’t 1993); Banque Nationale de Paris S.A. v. Insurance Co. of North America, 896 F.Supp. 163, 164 (S.D.N.Y.1995) (under virtually identical settlements clause, surety free to settle claims in good faith where debtor/indemnitor deposited no collateral). In Transamerica Ins. Co. v. Avenell, 66 F.3d 715, 719–720 (5th Cir. 1995), the Fifth Circuit came to the same conclusion under Texas law. It held that the contractor’s demand that the surety not settle the claim for which it was seeking indemnification did not preclude summary judgment in the surety’s favor, because the contractor failed to post the collateral required by the settlements clause. Id. at 719–20.
The Second Circuit has adopted this position as well in Arch Ins. Co. v. Centerplan Constr. Co., LLC, 368 F. Supp. 3d 350, 365–67 (D. Conn. 2019), aff’d, 855 F. App’x 11 (2d Cir. 2021). There, the Court noted that under the terms of the indemnity agreement, it is not essential that a principal be liable for the claims upon which the surety seeks to be indemnified. So too have numerous other courts concluded that actual liability is not a precursor to indemnification under an indemnity agreement. See e.g., Fid. & Deposit Co. v. Bristol Steel, 722 F.2d 1160, 1163 (4th Cir. 1983) (under the letter of the contract, surety had the right to reimbursement for payments made in good faith, whether or not the principal had defaulted and liability existed); Pacific-Peru, 558 F.2d at 952 (ruling that the argument that surety suffered no actual liability under its bond is no defense to indemnification under express language of surety agreement); Frontier Ins. Co. v. Int’l Inc., 124 F.Supp.2d 1211, 1215 (N.D. Ala. 2000) (holding that a principal’s actual liability is not a prerequisite to surety’s right to reimbursement under indemnity contract); United States Fid. & Guar. Co. v. Feibus, 15 F.Supp.2d 579, 583 (M.D. Pa. 1998) (holding that the terms of the indemnity agreement governed and its language “does not require that payments be made only in the face of actual liability under the bonds”); Gen. Acc. Ins. Co. of Am. v. Merritt-Meridian Constr. Corp., 975 F. Supp. 511, 517 n.4 (S.D.N.Y. 1997) (concluding surety had right to indemnification for claims it reasonably determined it was liable for, regardless of actual liability); Emp’rs Ins. Wausau v. Able Green, Inc., 749 F. Supp. 1100, 1102-03 (S.D. Fla. 1990) (explaining this case involves interpretation of language contained within a General Indemnity Agreement and finding surety entitled to reimbursement for payments made in good faith, regardless of whether any liability actually existed); Fireman’s Fund Ins. Co. v. Nizdil, 709 F. Supp. 975, 976-77 (D. Or. 1989) (“Any claim asserted against the surety, regardless if it is valid or outside the scope of the bond triggers the obligation to indemnify the surety.”); U.S. Use Int’l Bhd. Elec. Workers v. United Pac. Ins. Co., 697 F. Supp. 378, 381 (D. Id. 1988) (holding that, “upon the express terms of the Agreement, the Indemnitors are liable to indemnify [Surety] no matter what the legal defenses or other avenues of resolution may have been”). Because actual liability is not required under the terms of the Indemnity Agreements, any “volunteer” argument fails.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com), or any member of the Wright, Constable & Skeen, Surety and Fidelity practice group.
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