By Cassidy E. Chivers and Anne O'Niell, Several conditions in standard commercial general liability "occurrence" policies regulate the parties' duties and obligations in response to a claim or suit. The conditions state, for example, that the insured must provide notice of an "occurrence" as soon as practicable, and that the insured must provide immediate notice of suits. The insured also must cooperate in the investigation, defense and settlement of suits. Nonetheless, in about two thirds of the states, an insurer cannot assert as a coverage defense the insured's failure to comply with these conditions unless the insurer is able to show that it was substantially and materially prejudiced by the insured's violation. Two other conditions, however, are sometimes interpreted in favor of the insurer without a showing of prejudice. One of these is the "voluntary payments" clause, which provides that, "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." The voluntary payments clause allows the insurer to exercise its right to control the investigation, defense and settlement of claims. This clause is often invoked when an insured incurs attorneys' fees and other legal expenses before it tenders defense of a suit to its insurer. Another condition often interpreted in favor of the insurer without a showing of prejudice is the "no action" clause, which provides that no third party may sue the insurer for damages unless there has been an agreed settlement or a final judgment against the insured obtained after an actual trial. (In more recent policy forms, the requirement for an "actual trial" has been replaced by "final judgment," recognizing that policies now define a "suit" to include arbitration proceedings.) See, Hamilton v. Maryland Casualty Ins. Co., 27 Cal. 4th 718 (2002). Unlike the notice and general cooperation conditions, the "voluntary payments" or "no action" conditions are more strictly enforced with no required showing of prejudice, though this is not so in all states. California recognizes distinctions between the late notice, voluntary payments and no action conditions. In California, insurers are not required to show that they were prejudiced by an insured's unauthorized, or voluntary, payments, including fees and costs incurred prior to tender. Instead, the burden is placed on the insured to show that its unauthorized payments were required by "extraordinary circumstances." California courts routinely enforce voluntary payments clauses, as long as the insurer properly assumes a required defense from the time of tender. The insured's burden of proving extraordinary circumstances is not an easy one. The kinds of "extraordinary circumstances" that would require an insurer to pay pretender fees and costs would include cases where an insurer breached its duty to defend; where a successor insured was not aware of the identity of the insurer before an answer had to be file; where payment was necessary for reasons genuinely beyond the insured's control; or, where the insured faced a situation requiring an immediate response to protect is legal interests. An insured's ignorance or misunderstanding of its rights under its CGL policy is not sufficient to require coverage of pretender fees or costs. Jamestown Builders, Inc. v. General Star Indem. Co. (1999) 77 Cal.App.4th 341, 346-348 (1999). The voluntary payments condition, at least in California, can also be applied to settlements negotiated without an insurer's authorization after a case has been tendered. Low v. Golden Eagle, 110 Cal.App. 1532, 1544 (Cal.App. 2003), rev. denied, a case with rather unusual and complicated facts, reaffirmed California's strict interpretation of the voluntary payments condition. There, even though the insurer engaged in a 20-month investigation of the insured's tender and never actually assumed the defense, the court relied on the voluntary payments condition to find that the insurer was not obligated to indemnify the insured for a settlement that was negotiated without its knowledge or consent. California courts also have applied the reasoning employed to interpret voluntary payments clauses to contests between insurers and insureds in equitable contribution disputes. In Truck Ins. Exchange v. Unigard Ins. Co., 79 Cal.App.4th 966, 979 (2000), the plaintiff settled five construction defect claims against its insured and then sued other insurers for contribution. One of those co-insurers was never notified of these suits and did not learn of them until the contribution claim was filed. The court found that this insurer was not required to contribute because it had not enjoyed the right to participate in the defense or settlement. The plaintiff insurer was not allowed to pull the co-insurer into the fray after the settlement. In the states that require a showing of actual prejudice to enforce a voluntary payments defense, insurers can meet this burden by showing that the insured's failure to make a timely tender of the defense or the insured's assumption of unauthorized liability caused the insurer to lose its contractual right to control the defense and settlement of the proceeding against the insured. Washington, Illinois and Massachusetts are examples of states in which an insurer must show that it was actually prejudiced by an insured's voluntary payments. In Westchester Fire Insurance Co. v. G. Heileman Brewing Company, Inc., 747 N.E. 2d 955 (Ill. App. 2001), the insurer showed actual prejudice where its insured had been conducting its own defense of a suit for more than a year before it purchased its initial policy, and then failed to notify the insurer of the suit until almost two and a half years after the complaint was filed. In Atlas Tack Corp. v. Liberty Mut. Ins. Co., 721 N.E.2d 8, 12 (Mass.App. 1999), a Massachusetts court enforced a voluntary payments provision where an insured that owned a large industrial site had entered into a consent judgment to clean up its industrial waste lagoon without notice to its insurer. Some time later, a much more expansive cleanup suit was filed against the insured, related to pollution from the same lagoon. The court found that the earlier consent judgment had violated the voluntary payments clause, so that the insurer was relieved of all liability under the policy, including the obligation to defend or indemnify the second proceeding. See, Griffin v. Allstate Ins. Co., 29 P.3d 777, 783 (Wash.App. 2001).