                             In the

United States Court of Appeals
               For the Seventh Circuit

No. 12-2274

W EST B END M UTUAL
INSURANCE C OMPANY,
                                                  Plaintiff-Appellee,
                                 v.

A RBOR H OMES LLC,
                                              Defendant-Appellant.


            Appeal from the United States District Court
     for the Southern District of Indiana, Indianapolis Division.
     No. 1:09-cv-832-TAB-TWP—Tim A. Baker, Magistrate Judge.


   A RGUED S EPTEMBER 28, 2012—D ECIDED JANUARY 8, 2013




 Before P OSNER, R OVNER and SYKES, Circuit Judges.
  R OVNER, Circuit Judge. A plumber hired by homebuilder
Arbor Homes, LLC, (“Arbor”) made one of the biggest
mistakes a plumber can make: he forgot to connect the
home’s drainage system to the city’s sewer. The question
here is whether Arbor or the plumber’s insurer is liable
for the resulting damages to the newly built home. Al-
though Arbor behaved very admirably in addressing the
problem for the new homeowners, it failed to protect
2                                             No. 12-2274

its own interests, and we must affirm the judgment in
favor of the insurer.


                            I.
  Arbor builds single-family homes in central Indiana.
In 2005, Arbor contracted with Willmez Plumbing Inc.
(“Willmez”) for plumbing services in connection with
the construction of new homes. The contract required
Willmez to obtain insurance:
    Contractor [Willmez] shall take out, carry, and main-
    tain the following insurance to protect Contractor
    and Owner [Arbor] . . .
       (b) Comprehensive General Liability insurance
       to protect against bodily injury and property
       damage in an amount of not less than $1,000,000
       per Occurrence;
       ....
       (d) Umbrella Liability Insurance in an amount
       of not less than $1,000,000.
R. 80, at 9. The contract also required that the insurance
policies name Arbor as an additional insured. Any sub-
contractors hired by Willmez were bound to the same
contract terms as Willmez.
  In 2006, Arbor issued three purchase orders to Willmez
to serve as Arbor’s plumbing subcontractor for the con-
struction of a new home. The plumbing work included
underslab plumbing, plumbing rough-in, and plumbing
finish work on the house. Willmez, in turn, subcontracted
No. 12-2274                                           3

the work to Oscar Alarcon, d/b/a A & M Plumbing Com-
pany. Plumbing work began on the home in December
2006 and was ostensibly completed in February 2007.
Homebuyers Kurt and Joy Lorch closed on their purchase
of the house on March 8, 2007 and moved in shortly
thereafter.
  The Lorches soon noticed a foul odor emanating from
the lower part of the house. The smell grew worse over
time and the Lorches began to feel ill. Unfortunately,
A & M Plumbing had failed to connect the home’s
plumbing to the main sewer line, and raw sewage was
being discharged into the crawl space of the home. The
Lorches complained to Arbor, and on April 1, 2007, Arbor
confirmed that the plumbing had not been properly
installed. At Arbor’s request, Willmez connected the
main sewer line. On April 2, Arbor engaged ACT En-
vironmental Services, Inc. (“ACT”) to assess the damage.
ACT tested the home and developed a plan to remove
the sewage and decontaminate the home. Arbor then
hired a number of contractors to fulfill ACT’s recom-
mendations. The required clean-up was comprehensive
and costly. The crawl space was excavated to a
depth of twelve inches and then restored with clean
materials. Everything from the furniture and insulation
to the ductwork required decontamination because of
the extensive spread of dangerous bacteria and mold
from the discharge of raw sewage into the home. In the
end, Arbor paid more than $65,000 for cleaning, repairs
and follow-up testing for the home.
  Not surprisingly, the Lorches, who had purchased a
brand new home, were unwilling to accept a brand new
4                                            No. 12-2274

home that had been filled with sewage and then
cleaned. On April 18, 2007, they sent a letter to Arbor
demanding, among other things, that Arbor buy the
home from them and build them a new home. In April
and May 2007, Arbor and Willmez discussed possible
resolutions of the Lorches’ claims. Arbor told Willmez
to place its insurer, West Bend, on notice of the
Lorches’ claims. On May 4, 2007, Arbor also sent a letter
to Willmez memorializing the parties’ understanding of
a settlement with the Lorches, and Willmez’s responsi-
bilities. In that letter, Arbor requested that Willmez
or West Bend contact Arbor immediately if Willmez or
the insurer needed any additional information re-
garding the settlement. Willmez later told Arbor that
it forwarded this letter to West Bend.
  Hearing nothing from West Bend, Arbor assumed the
insurer had no objections to the settlement. On June 6,
2007, Arbor signed a settlement agreement with the
Lorches that provided the homebuyers with a complete
remedy. Among other things, Arbor agreed to buy the
tainted home from the Lorches, build another new
home for them (using a different plumbing contractor),
pay for all of the closing costs and moving expenses
related to the new home, and compensate the Lorches
for any increase in their mortgage rate on the purchase
of the second home.
  Arbor then filed suit against Willmez in state court,
alleging negligence, breach of contract, breach of the
settlement agreement, slander of title, and constructive
fraud. On October 12, 2007, Arbor’s lawyer sent a copy
No. 12-2274                                                5

of the complaint to West Bend, noting that Arbor was an
additional insured on the relevant insurance policies
and asking West Bend to discuss the resolution of the
dispute. West Bend denied any liability under the insur-
ance policies in the state court proceedings, and ulti-
mately filed a declaratory judgment suit in federal
court against both Willmez and Arbor.1 In federal court,
West Bend sought a declaration that it had no duty
under the insurance policies to defend and indemnify
Arbor against the Lorches’ claims and the settlement
agreement. West Bend was not aware of any problem
with the Lorches’ home until May 4, 2007, and did not
learn of Willmez’s agreement to cover a large part of the
damages until October 2007, when it received a copy of
Arbor’s lawsuit against Willmez. The insurer was not
aware of the terms of the settlement with the Lorches
until April 2008.
  West Bend denied coverage for Arbor under a number
of different theories. Initially, West Bend insisted that
Arbor was not an “additional insured” under the poli-
cies. West Bend later acknowledged that this position
was factually incorrect and conceded that Arbor should
have been treated as an additional insured under its
policies with Willmez. West Bend also denied cov-


1
  West Bend sought declarations related to Willmez that are
not part of this appeal. Willmez failed to appear and defend
against West Bend’s declaratory judgment action, and
West Bend ultimately obtained a default judgment against
Willmez. We will address only the claim that relates to Arbor
because only that claim is on appeal.
6                                                 No. 12-2274

erage under three provisions of the insurance contracts:
the fungi and bacteria exclusion, the voluntary payment
provision, and the completed-operations provision. The
district court granted summary judgment to West Bend,
finding that the insurer was relieved of any duty to
defend or indemnify Arbor under the fungi and bacteria
exclusion as well as the voluntary payments provision.
Arbor appeals.


                              II.
  On appeal, Arbor contends that a provision excluding
coverage for damages caused by fungi and mold in a
commercial general liability policy issued to a plumber
renders the coverage illusory. Arbor also maintains
that coverage may not be denied under the voluntary
payments provision because West Bend denied for years
that Arbor was an additional insured, and thus West
Bend would not have participated in settlement discus-
sions even if it had been given the opportunity to do so.
Finally, Arbor argues that the completed-operations
exclusion should not apply where the plumbing work
was never “completed” as promised.
  A district court sitting in diversity must apply the
choice of law principles of the forum state (in this case
Indiana) to determine which state’s substantive law
governs the proceeding. Tanner v. Jupiter Realty Corp., 433
F.3d 913, 915 (7th Cir. 2006); French v. Beatrice Foods Co.,
854 F.2d 964, 966 (7th Cir. 1988) (citing Klaxon Co. v. Stentor
Electric Mfg. Co., 313 U.S. 487, 496 (1941)). The parties
agree that the insurance contract for the Indiana con-
No. 12-2274                                              7

struction project at issue in this diversity action is gov-
erned by Indiana law. See Dunn v. Meridian Mutual Ins.
Co., 836 N.E.2d 249, 251 (Ind. 2005) (an insurance policy
is governed by the law of the principal location of
the insured risk during the term of the policy). We review
the district court’s grant of summary judgment de novo.
Norman-Nunnery v. Madison Area Technical Coll., 625
F.3d 422, 428 (7th Cir. 2010).
  We begin (and end) our analysis with the voluntary
payments provision of the insurance contract. The con-
tract assigns several duties to the insured in the event of
an occurrence that may result in a claim. For example,
the insured must notify West Bend as soon as practicable
of any occurrence, and provide details of the incident.
The insured must also tell West Bend of any claims or
lawsuits brought against the insured, and cooperate
with the insurer in the investigation or settlement of
any claim. Most important for our purposes is the volun-
tary payments provision that comes at the conclusion
of the list of obligations for the insured:
   No insured will, except at that insured’s own cost,
   voluntarily make a payment, assume any obligation,
   or incur any expense, other than for first aid, without
   our consent.
R. 53-2, at 13. The purpose of this reasonable and
prudent provision is obvious. West Bend must have the
opportunity to protect itself and its insured by investi-
gating any incident that may lead to a claim under the
policy, and by participating in any resulting litigation or
8                                                    No. 12-2274

settlement discussions. 2 Any insured that settles a claim
without West Bend’s knowledge or consent does so at
the insured’s own expense under the express language
of this provision. Dreaded, Inc. v. St. Paul Guardian Ins. Co.,
904 N.E.2d 1267, 1271 (Ind. 2009) (a voluntary pay-
ment provision that clearly prohibits the assumption of
financial obligation must be given its plain and ordinary
meaning). See also Travelers Ins. Co. v. Maplehurst Farms,
Inc., 953 N.E.2d 1153, 1161 (Ind. Ct. App. 2011) (when
an insured enters into a settlement agreement without
the insurer’s consent in violation of a voluntary pay-
ment provision, that obligation cannot be recovered
from the insurer).
  Yet neither Arbor nor Willmez obtained West Bend’s
consent before settling. Instead, Arbor relied on Willmez
to place the insurer on notice and then construed the
insurer’s subsequent silence as a lack of objection to the
settlement with the Lorches. Arbor now can produce
no evidence that West Bend consented to Willmez’s
settlement with Arbor or Arbor’s settlement with the


2
   Voluntary payment provisions in insurance contracts also
guard against the problem of moral hazard. See Amerisure
Ins. Co. v. National Sur. Corp., 695 F.3d 632, 635 (7th Cir. 2012)
(describing a moral hazard as a situation where the party
taking the risk will not bear the costs of its behavior); Metavante
Corp. v. Emigrant Sav. Bank, 619 F.3d 748, 773 (7th Cir. 2010)
(describing moral hazard as the tendency to take additional
risks or run up extra costs when another party is financially
liable). There is no evidence in this case that Arbor unilaterally
ran up settlement costs.
No. 12-2274                                                   9

Lorches. West Bend has produced uncontroverted evi-
dence that it knew nothing of the damage to the home
until after Willmez and Arbor agreed on their respective
liabilities to each other and to the Lorches. And West
Bend knew nothing of the terms of the settlement agree-
ment signed with the Lorches until after Arbor’s law-
suit against Willmez was underway. There is no evi-
dence that West Bend “consented” to any settlement as
required by the voluntary payments provision. 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. Travelers Ins., 953 N.E.2d at 1161.
  Arbor contends that West Bend may not rely on the
voluntary payments provision to bar coverage because
West Bend refused to recognize Arbor as an “additional
insured” from October 2007 through August 2010. Arbor
argues that notice to West Bend would have been futile
because West Bend refused to treat it as an insured.3


3
  Arbor did not raise this futility argument in the district
court and it is therefore waived. Umezurike v. Holder, 610 F.3d
997, 1003 (7th Cir. 2010). In any case, Arbor has failed to cite
any case indicating that futility may negate a voluntary pay-
                                                 (continued...)
10                                              No. 12-2274

Moreover, Arbor maintains, West Bend suffered no
prejudice by Arbor’s late notice because West Bend
would not have participated in settlement negotiations
even if it had received the requisite notice sooner.
   There are a number of flaws with Arbor’s arguments
under the facts and under Indiana law. First, the “volun-
tary payments” provision is not a notice provision, per
se, but a consent provision. That is, under the clear lan-
guage of the provision, the insurer must consent to a
payment, obligation or expense before the insurer is
liable for that amount. West Bend produced admissible
evidence that it did not consent to (1) the settlement
between Arbor and Willmez memorialized in the May 3,
2007 letter from Arbor to Willmez; or (2) the June 6, 2007
settlement between Arbor and the Lorches. Arbor has
produced no evidence that West Bend consented to
either settlement, and so there are no disputed issues of
fact regarding West Bend’s lack of consent. Second, as a
matter of Indiana law, prejudice (or the lack thereof) is
irrelevant in the enforcement of a voluntary payment
provision. Travelers Ins., 953 N.E.2d at 1161 (prejudice
is irrelevant when an insured enters into a settlement
agreement without the insurer’s consent in violation of
a voluntary payments provision).
  Finally, Arbor’s reliance on Tri-Etch, Inc. v. Cincinnati
Ins. Co., 909 N.E.2d 997 (Ind. 2009), is misplaced. Tri-Etch


3
  (...continued)
ment provision, and we see no reason to recognize an
exception to the express language of the contract. We will
therefore not address this argument further.
No. 12-2274                                            11

addressed the role of prejudice when the insured gives
late notice to the insurer. The court first confirmed that
late notice by the insured gives rise to a rebuttable pre-
sumption of prejudice to the insurer. 909 N.E.2d at 1005.
But the court concluded that an insurer’s denial of cover-
age on other grounds does not, as a matter of law, rebut
the presumption of prejudice from late notice:
    There is no reason why an insurer should be
    required to forego a notice requirement simply
    because it has other valid defenses to coverage. If
    there is no prejudice to the insurer from lack of
    notice, the absence of prejudice does not arise from
    the insurer’s taking the position that it also has
    other valid defenses to coverage. Rather, it arises
    from the insurer’s taking no action with respect to
    the claim because of its other defenses. Even if an
    insurer consistently denies coverage, timely notice
    gives the insurer an opportunity to investigate
    while evidence is fresh, evaluate the claim, and par-
    ticipate in early settlement. The fact that an
    insurer asserts other coverage defenses does not
    render these opportunities meaningless. It is a fact
    issue whether the other defenses would have
    caused the insurer, if given timely notice, to do
    nothing with respect to the claim.
Tri-Etch, 909 N.E.2d at 1005.
  According to Arbor, because West Bend denied that
Arbor was an additional insured, there remains a
disputed question of fact regarding whether West Bend
would have behaved differently—whether it would
12                                            No. 12-2274

have done nothing—if Arbor (or Willmez) had given
notice to West Bend in time for the insurer to take part
in settlement negotiations. But as we noted above, this is
not a notice case. The voluntary payment provision
relieves West Bend of the obligation to pay not because
the insured provided late notice but because West Bend
did not consent to any voluntary payments or obliga-
tions assumed by Arbor or Willmez. If anything, Tri-etch
demonstrates that West Bend did not lose the oppor-
tunity to assert its rights under the voluntary payments
provision simply because it denied for a time that Arbor
was an additional insured. Although Arbor’s quick and
decisive aid to the Lorches was laudable, the failure
of Arbor (or Willmez) to obtain West Bend’s consent to
the settlement relieves the insurer of any obligation to
pay for the damages caused by the plumber’s negligence.
                                               A FFIRMED.




                          1-8-13
