Had Union Troops Not Been Permitted To Defend Union Territory Against General Lee’s Invasion, The Outcome Of The Battle At Gettysburg Would Have Been Different.
There are three certainties in life, as the saying goes: death, taxes and that your insurance carrier will deny coverage for pre-tender defense costs. The practice of denying coverage for pre-tender defense costs is now standard operating procedure for insurers, despite the fact that it is often contrary to policy language and case law. The response to such a denial is often that the insurance policy does provide coverage for pre-tender defense costs, but it is unlikely that an insurance carrier will reverse itself on this kind of wrongful denial without the presentation of proper legal analysis refuting their wrong.
When a policyholder is sued, insurance carriers insist that they are tendered a copy of that lawsuit. While it is advantageous to have a system in place so that a copy of the claim is provided to the insurance carrier as soon as possible, that does not always happen in practice for a number of legitimate reasons. Among other things, the broker may advise against providing notice; the policyholder may not be aware that the claim is potentially covered; and, the policy may be unclear as to what exactly constitutes a claim for which notice should be provided. Regardless of the reasons, pre-tender defense costs can be financially significant, even if the “pre-tender” period is relatively brief.
The root of the problem is that insurance carriers have been successful at convincing many – brokers, some courts and even a few policyholders – that pre-tender defense costs are not covered. Their argument is typically that pre-tender defense costs are not covered, because the insurer’s duty to defend is not triggered until the insurer receives notice of the potentially covered claim. See, e.g., Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267 (Ind. 2009) (applying Indiana law).
More-and-more courts, however, recognize that an insurer’s duty to defend is triggered when a claim is brought against the policyholder with allegations that are potentially within the scope of coverage. Thus, an insurer’s duty to defend pre-exists any obligation by the policyholder. These courts hold that the insurer must establish prejudice resulting from the timing of any purported “late” notice to deny coverage for pre-tender costs. See, e.g., Episcopal Church in S.C. v. Church Ins. Co. of Vt., No. 2:13-cv-02475-PMD, 2014 WL 5302955, at *9-10 (D.S.C. Sept. 22, 2014) (South Carolina law); CH Props., Inc. v. First Am. Title Ins. Co., No. 13-1354(FAB), 2014 WL 4417772, at *9-10 (D.P.R. Sept. 9, 2014) (Puerto Rican law); Baker’s Express, LLC v. Arrowpoint Capital Corp., No. ELH-10-2508, 2012 WL 43702565, at *8 (D. Md. Sept. 20, 2012) (Maryland law); Smith & Nephew, Inc. v. Federal Ins. Co., No. 02-2455B, 2005 WL 3434819, at *2 (W.D. Tenn. Dec. 12, 2005) (Tennessee law); Liberty Mut. Ins. Co. v. Black & Decker Corp., 383 F. Supp. 2d 200, 204-05 (D. Mass. 2004) (requiring prejudice for insurer to disclaim coverage for pre-tender defense costs is “simply more analytically coherent” in state where late notice is only a defense to coverage if insurer prejudiced); Nat’l Sur. Corp. v. Immunex Corp., 297 P.3d 688, 695-96 (Wash. 2013) (Washington law); Nationwide Mut. Fire Ins. Co. v. Beville, 825 So. 2d 999, 1004 (Fla. 4th DCA. 2002). It is critical to identify the potentially applicable states’ law, determine whether any of those states’ laws have taken a pro-policyholder position and then conduct a choice-of-law analysis to determine whether a pro-policyholder state’s law might apply.
A finding of coverage for pre-tender defense costs should be even more universal with so-called “duty-to-advance” policies. While general liability policies and other business-related policies commonly contain a duty to defend, many employment-practices liability, professional (E&O) liability, fiduciary liability and D&O liability policies contain a duty-to-advance (or duty-to-pay) defense costs obligation. In contrast to duty-to-defend policies, under duty-to-advance policies, it is the policyholder (not the insurer) that has the contractual obligation to defend an underlying claim, and that duty begins on day one.
Insurance carriers justify their denials of coverage for pre-tender defense costs under duty-to-advance policies, because, they contend, their policyholders did not “obtain consent” to incur the pre-tender defense costs. Put another way, insurers contend that the policyholder must obtain consent from them to defend an underlying lawsuit. While there is scant case law analyzing coverage for pre-tender defense costs under duty-to-advance policies, the insurers’ argument is logically flawed and should be rejected for a number of reasons.
First, under a duty-to-advance policy, the policyholder is contractually obligated to defend the underlying action from day one. Indeed, the policy will state so in unequivocal terms: “The Insurer does not assume any duty to defend. The Insureds shall defend and contest any Claim made against them.” See, e.g., AIG Employment Practices Liability policy form 67547 (4/97). Thus, both the insurer and the policyholder understand that the policyholder is contractually required to defend any claim against it from day one. Accordingly, the policyholder is under no requirement to obtain consent to defend the underlying claim. For this very reason, courts have reasoned that insurers should not be able to deny coverage for pre-tender defense costs under duty-to-advance policies absent prejudice. See Pacific Ins. Co., Ltd. v. Eaton Vance Mgmt., 260 F. Supp. 2d 334, 344 (D. Mass. 2003) rev’d on other grounds, 369 F.3d 584 (1st Cir. 2004). In Eaton, the court reasoned that, while some states have held that “it is unfair to force the insurer, who might have made different choices, to pay for the defense prior to notification of a claim” where the insurer had a duty to defend, that “concern . . . is not present where the policy specifically absolves the insurer of any duty to defend.” Thus, “[t]here is nothing unfair about requiring [the insurer] to pay for the Pre-Tender Costs where [the insurer] would have consented had it been asked.” This reasoning is reinforced by the common policy requirement that the insurer’s consent “shall not be unreasonably withheld.”
Second, many duty-to-advance policies provide that, for certain types of claims (e.g., class actions, discrimination claims, securities claims, etc.), the policyholder must retain pre-authorized defense counsel, i.e., panel counsel, to defend the claim. Panel-counsel firms are law firms that the insurer has pre-authorized. Incredibly, insurers even deny coverage for pre-tender defense costs when a policyholder selects pre-authorized panel counsel to defend the underlying action. A policyholder’s selection of a law firm that has been pre-authorized by the insurer is the very essence of consent. There should be no need to obtain additional consent from the insurer.
Third, an insurer’s denial of pre-tender defense costs based on a purported “lack of consent” is a logical fallacy. Here’s how notice of a standard claim usually occurs in practice:
- policyholder provides notice of the claim along with the identity of defense counsel, if known;
- the insurance carrier quickly acknowledges receipt of notice, but does not provide a substantive response at this time;
- the insurance carrier often sends the claim on to outside coverage counsel, months pass – sometimes 3 or 4 or more;
- the insurance carrier eventually provides the policyholder with a substantive coverage letter, often drafted by counsel, either acknowledging or denying coverage for defense costs; and
- if the identity of the defense counsel is known (and coverage is being acknowledged), the insurer will acknowledge the policyholder’s retention of that defense counsel and identify panel counsel rates (which are already known to panel counsel) if applicable.
Based on the insurers’ “lack of consent” argument, coverage for defense costs should not begin until that written acknowledgment is provided – after all, the policy states that the policyholder “shall not incur any Defense Costs without the prior written consent of the Insurer.” Taken literally, the insurer’s position means that the policyholder cannot defend itself for months after it has been sued, because it has not received written consent from its insurer to incur those defense costs.
The only way to reconcile this logical fallacy in the insurers’ argument is to address late notice under applicable late notice standards. While insurers assert that coverage for pre-tender defense costs is an issue of consent (or lack thereof), in reality, the issue is one of timely notice. Under a proper logical analysis of this issue it is the insurance carriers’ burden to demonstrate prejudice resulting from any purported late notice. Without that prejudice, which rarely if ever exists in this context, an insurance carrier may not deny coverage for pre-tender defense costs under a duty-to-advance policy.
Despite the fact that a growing number of states are finding coverage for pre-tender defense costs, and that the insurance carrier arguments do not support the denial of pre-tender defense costs, insurance carriers continue to push a narrative that pre-tender defense costs are categorically uncovered. Policyholders should be aware that pre-tender defense costs are recoverable and should not accept at face value any message to the contrary.
Miller Friel, PLLC is a specialized insurance coverage law firm whose sole purpose is to help corporate clients maximize their insurance coverage. Our Focus of exclusively representing policyholders, combined with our extensive Experience in the area of insurance law, leads to greater efficiency, lower costs and better Results. Further discussion and analysis of insurance coverage issues impacting policyholders can be found in our Miller Friel Insurance Coverage Blog and our 7 Tips for Maximizing Coverage series. For additional information about this post, please email or call Miles Karson (KarsonM@MillerFriel.com, 202-760-3165).