A federal court in Virginia held that absent a “coercive directive to compensate,” an insured is not “legally obligated to pay.” Elec. Motor & Contracting Co., Inc. v. Travelers Indem. Co. of Am., 2017 WL 385043 (E.D. Va. Jan. 27, 2017).

An electric generator repair contractor sought a declaratory judgment that its insurer was obligated to reimburse it under a CGL policy for costs of repairing a generator that was allegedly damaged by the poor workmanship of the insured’s subcontractor. The insured discovered the poor workmanship when the generator was returned to the insured for inspection and repair. Upon inspection, the insured discovered the poor workmanship and, knowing the generator was needed immediately onboard a vessel, promptly repaired the generator. The insured sought coverage and argued that it was “legally obligated” to pay damages (in the form of repair costs) due to a contractual warranty included in the contract governing the repair of the generators. The insurer filed a motion to dismiss in ensuing coverage litigation, which the court granted.

The court held that the insurer was not legally obligated to pay damages. It held that the requirement that an insured be legally obligated to pay exists when there are (1) facts sufficient to show a claim for monetary compensation or remediation and (2) facts sufficient to show that the insured was legally obligated to pay such a claim. The court reasoned that a contractual duty to incur repair costs is insufficient to meet the requirement absent “some claim, order, or adjudication, which directed [the insured] to pay the [r]epair [c]osts as compensation or remediation for a loss or injury,” and that there was none.