It is not uncommon, particularly in the commercial lines setting, for an insurer to receive notice of a lawsuit after the insured has incurred some defense
It is not uncommon, particularly in the commercial lines setting, for an insurer to receive notice of a lawsuit after the insured has incurred some defense costs. In certain instances, these pre-tender defense costs can be quite significant. Are these pre-tender expenditures covered?
Most commercial general liability policies contain language similar to the following:
SECTION II – CONDITIONS
* * *
Duties After Loss.
In case of an accident or occurrence, the insured will perform the following duties that apply. You will help us by seeing that these duties are performed:
* * *
The insured will not, except at the insured’s own cost, voluntarily make payment, assume any obligation or incur any expense other than for first aid to others at the time of the bodily injury.
While the “voluntary payment” provision cited above does not appear, on its face, to provide coverage for pre-tender defense costs, this issue has not been substantively litigated in Connecticut. However, in Interface Foreign Systems, Inc. v. Aetna Cas. & Surety Co., 261 Conn. 601 (2002), the Connecticut Supreme Court, applying Georgia substantive law, held that the defendant insurers were not obligated to reimburse their insured for expenses incurred prior to tendering the defense of the lawsuit to the insurers. Id. at 602. In Interface, the insured defended a copyright infringement action against itself, never tendering the lawsuit to its insurers. Id. at 604. After a settlement in the underlying matter, the insured contacted its insurers and sought reimbursement for its defense costs. Id. The insurers denied the insured’s claim for reimbursement.
The Connecticut Supreme Court, applying Georgia law, sided with the insurers and held that because the insured failed to forward the lawsuit papers to its insurers, the insurers were not obligated to reimburse the insured for those legal expenses. Id. at 616. The Court noted that until an insured complies with the conditions requiring it to forward legal papers related to the lawsuit and provide written notice of the lawsuit, an insurer’s duty to defend the lawsuit is not triggered. Id. at 618-19. Therefore, an insured is precluded from recovering pre-tender defense costs until such compliance is made. Id. at 619.
The Connecticut Supreme Court further noted, “[o]ur conclusion is buttressed by language in the insurance policies that provides that an insured shall assist in the conduct of any lawsuits only ‘at the [insurer’s] request’ and that the insured shall not voluntarily make any payment or incur any expense…except at [the insured’s] own cost.” Id. at 619. The court further noted that the plaintiff, “by defending the action without the consent of the defendant, clearly acted in contravention of the policy provision by failing to obtain the defendant’s consent before incurring expenses. Allowing the plaintiff to recover defense costs under these circumstances would render these provisions a nullity.” Id.
Indeed, the Connecticut Supreme Court’s holding appears to be supported by numerous courts in other jurisdictions. See Faust v. Travelers, 55 F.3d 471 (9th Cir. 1995) (affirming the trial court’s granting of summary judgment in favor of the defendant carrier in an action seeking reimbursement for pre-tender defense costs); American Mutual Liberty Ins. Co. v. Beatrice Companies, 924 F.Supp. 861, 874 (N.D. Ill. 1996) (granting the defendant carrier’s motion for summary judgment holding that the carrier was not liable for pre-notice defense costs); Elan Pharm. Research Corp. v. Employers Ins., 144 F. 3d 1372 (11th Cir. 1998)(holding that insurer’s obligations do not include expenses incurred before tender of defense); Managed Health Care Sys. v. St. Paul Fire and Marine Ins. Co., No 98-10831, 2001 U.S. Dist. LEXIS 18302 (D. Mass. Sept. 28, 2001)(finding that a carrier is not liable for pre-notice defense costs under Massachusetts law); Legacy Ptnrs., Inc. v. Travelers Ins. Co., 83 Fed. Appx. 183 (9th Cir. 2003); (holding carrier not liable for pre-tender defense costs); Wm. C. Vick Construction Co. v. Pennsylvania Nat’l Mut. Cas. Ins. Co., 52 F. Supp. 2d 569 (E.D.N.C. 1999) (holding that carriers are not liable for pre notice legal expenses – in the absence of contractual language requesting payment of pre-tender defense costs); and Comstat Corp. v. St. Paul Mercury Ins. Co., No. 97-2236, 1998 U.S. Dist. LEXIS 2916 (D.Minn. Mar. 6, 1998) (noting general rule that an insurer has no duty to pay pre-tender defense costs).
It is important to note, however, that not all jurisdictions agree with the line of authority cited above. A substantial number of courts have rejected a bright line rule that precludes recovery of pre-tender defense costs. See Arch Ins. Co. v. Scottsdale Ins. Co., No. 09-0602 2010 U.S.Dist. LEXIS 115256 (W.D. Wa. Oct. 27, 2010) (holding that insurer failed to identify facts showing tender of defense was late or that it was prejudiced in any way as a result of the late tender); Griffin v. Allstate Ins. Co., 108 Wa. Ct. App. 133 (2001) (holding that an insurer that breaches its duty to defend against a covered claim must indemnify the insured for pre-tender defense costs unless the insurer was actually and substantially prejudiced by the late tender); and Fiorito v. Superior Court of San Diego County, 226 Cal. App. 3d 433 (1990) (holding that recover of pre-tender expenses should not be denied in all cases as a matter of law and it depends upon contractual interpretation and particular facts of a given case).
Given the Connecticut Supreme Court’s analysis in the Interface case and the weight of authority in other jurisdictions, insurers who are faced with this issue in Connecticut should strongly consider asserting a “pre-tender” defense. With no direct appellate authority in this area, however, the issue is far from settled. In light of this uncertainty, it is possible that a Connecticut court could require an insurer to establish prejudice prior to relieving it of any duty to reimburse its insured for pre-tender defense costs.