Assuring Pre-Tender Fees Are Recoverable by Providing Proper Notice to Insurers

A Failure to Provide Notice Even Where it Does Not Preclude the Right to Any Defense May Limit a Client to Recovery Of Only Post-Notice Attorneys’ Fees. 

There are 3 significant issues posed by late notice of a claim for an insured or its counsel to an insurer.

First, will late notice forfeit the insured’s right to obtain any benefits under its policy for either defense or indemnity?

Second, will prejudice be a burden of the insurer or insured in those jurisdictions that follow a prejudice rule.  In jurisdictions where notice is a condition precedent has time passed so that no benefits are available or are only pre-tender fees precluded.

Third, where pre-tender fees are barred in the majority of jurisdictions, including Alabama, Connecticut, Georgia, Michigan, Minnesota, Pennsylvania, Texas and Utah, as well as California and New York, it is critical to provide notice as soon as possible.

Cases Reach Different Results On Pre-Tender Fee Recovery Depending On The Applicable Policy Language

A recent case reveals why delay in notice can result in the forfeiture of all pre-notice fees recovery. In Intact Ins. Co. v. Comptoir Des Indes, Inc et. al. Cook County Circuit Court, Chancery Division Case No. 2019 CH 1308, the Chancery Court determined that a three-year statute of limitation under applicable Québec law, Civil Code of Québec S.Q 1991 c. 64 art. 2925 barred potential coverage under the First Halo Action filed in federal court on October 20, 2014.  Notice of  the First Halo Action was not sent until February 8, 2018 ( 3 years and 4 months after the First Halo Action was filed.) 

 As the Chancery Court reasoned: 

The Intact Policy’s notice provision was a condition precedent to coverage under Illinois law which required notice as soon as [they] become aware of it” pursuant to Whalen v.  Kmart Corp. 166 Ill. App. 3rd 339, 343  (1st Dist.  1988)  where the court determined that there were ”no exceptions or causes within the Policy negating  Defendant's duty to notify Plaintiff of the First Halo Action because of the defendant's  “reasonable belief" that a claim may not be covered under the Policy.  . . . Defendant's knowingly and unreasonably failed in its duty to timely notify the Plaintiff  “as soon as it becomes aware" of the First Halo Action . . . [Thus] . . . Defendants forfeited all rights to coverage under the Policy." (p.7) It was no excuse that “Defendants reasonably relied on the advice of their prior counsel an insurance broker that there was no potential for coverage under the First Halo Action (p.6).

 Under the Logic of A Decision Refusing to Award Them, Pre- Tender Fees Are Recoverable

In Abrams,[1] the court analyzed a D&O Policy, finding that no pre-tender fees recovery where available. The Policy imposes a temporal notice duty which provided that: “Prior written consent” was required to obtain reimbursement of “Defense Expenses.” Further, notice was a “condition precedent to the Insurer’s obligation to pay.” [2] A different result would attend under an “claims made and reported” Policy. Pursuant to the distinct provision in an E & O policy, notice is provided for “Any Claim that is first made against the Insured during the Policy Period and reported to the Underwriter either during the policy period or in any event within 90 days after the end of the policy, pursuant to CONDITION (B) of this policy” the policy promised to pay defense expenses. “’Defense Expenses’ means reasonable legal fees and expenses incurred in the investigation, adjustment, defense or appeal of a Claim; provided that the Defense Expenses shall not include remuneration, salaries, overhead, fees are benefit expenses of any insured.” There is no temporal limitation in the definition of “Defense Expenses” as in Abrams.

Absent is any language that describes notice as a “condition precedent” to the “insurer's obligations to pay.” The rational of Abrams have would no application to bar pre-tender fee recovery. Notably in an analogous case, the decision distinguished by Abrams, where “no voluntary payment” provision was included, pre-tender fees were recoverable as that court explained:

In New York, an insurer's duty to defend is triggered by the filing of a complaint containing allegations that could possibly bring the action within the scope of coverage provided by the insurance policy. . . Therefore, this case falls under the default rule, which is that the duty to defend is triggered by the filing of the complaint containing allegations of arguably fall within the scope of the Policy. [3]

California Law Requires Proof of Prejudice to Enforce A Pre-Tender Fee Provision

Settled California law precludes pretender fees from being subject from reimbursement according to insurers due to the application of the “no voluntary payments” provision. Not so. “It has long been a fundamental rule of law that an insurer has a duty to defend an insured if it becomes aware of, or if the third party lawsuit pleads, facts giving rise to the potential for coverage under the insuring agreement.”[4].

Ironshore’s Prompt tender of the defense is not the only pathway to secure fee reimbursement Waller includes a critical alternative proficiency in its use of the word “or.” In context, “or” must be understood as expressing the concept of “either or.” This alternative scenario allows pursuit of either pathway to secure defense benefits. An E&O policy that does not restrict its defense duties only to the period after it has been asked to defend, although notice or “tender” of a defense is commonly discussed under the language of other policy forms. The policy language controls, not general propositions.

The predicate term “or” as used in in Waller clarifies that in addition to a tender, facts evidencing potential for coverage where, as here, the insurer denies the defense on grounds other than late notice entitles the insured to the full reimbursement it would have secured had notice been provided earlier. Other cases concede that a denying carrier having abandoned its insured cannot insist on the enforcement of the “voluntary payments” provision. So understood, there is no impediment under applicable case law to a policyholders request for full fee reimbursement. Waller's citation to Gray focuses on the trigger of the insurer's duty to defend premised on an initial review of the fact allegations of the third party suit as the court explained. “Since the instant action presented the potentiality of a judgment based upon nonintentional conduct, and since liability for such conduct would fall within the indemnification coverage, the duty to defend became manifest at the outset.”[5] A thoughtful California decision explained that the duty to indemnify is governed by the party's contract provisions “not principles laid down in general insurance contracts.”[6]

Where an insurer promised to pay all “Loss” which includes reasonable “defense expenses” they should also meet the test to be “incurred in good faith” “where they are incurred in good faith and in the exercise of reasonable discretion.”[7]. This is doubly the case where“[t]he Underwriter will pay on behalf of the Insured any Loss which the Insured is legally obligated to pay as a result of any Claim that is first made against the Insured during the Policy Period and reported to the Underwriter either during the Policy Period…” Specially where there is no policy provision that limits the obligation to pay “defense expenses,” which are within the defined term “Loss,” only when those expenses are incurred after a formal tender of the defense.

Any limitation of pre-tender fee recovery, such a policy language that served an analogous role to the “voluntary payments” provision (even if it existed) cannot bar recovery of pre-tender expenses.[8] Cases typically on by Insurers are distinguishable because in each case the insurer promptly agreed to defend its insured upon receipt of notice, rather than declining to do so, not only because of alleged late notice, but on other grounds as well.[9] 

CONCLUSION

The safest course is to advise clients in writing, to always investigate the potential for coverage whenever damages are sought against them, whether by way of complaint or counterclaim.  If a client seeks advice or the prospects for a favorable recovery against its insurer, the client should be promptly referred to coverage counsel.  Such counsel’s expertise may be required to analyze, in light of applicable choice of law rules, which forum is best to address late notice issues. 

In either event, a client’s exercise of business judgment to not pursue such a claim would not be chargeable to intellectual property counsel unless the defense counsel had an opportunity to persuade the insured not to abandon coverage benefits and did not seek to associate coverage counsel to have the insured revisit that issue in light of advice pertinent to the risks and opportunities where coverage was available.

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[1] Abrams v. RSUI indemnity Co. 272 Supp. 3d 636, 640-641 (S.D.N.Y. 2017).

[2] Abrams id. at 641

[3] Consolidated Edison Co. of N. Y. v. Lexington Ins. Co. Case No.14 C IV. 6547 (CM) (J LC), 2015, S.D.N.Y. LEXIS 101339 *26-28 (S.D.N.Y. July 30, 2015)

[4] Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 19 (1995) (Emphasis added.)

[5] Gray v. Zurich Ins. Co., 65 Cal. 2d 263, 276 (1966)

[6] City of Watsonville v. Corrigan 149 Cal. App. 4th 1542, 1549 (2007).

[7] City of Watsonville Id. at 1549

[8] Gribaldo, Jacobs, Jones & Associates v. Verischerunges 3 Ca. 3d 434, 449 (1970) (“In other words, it is only when the insured has requested and been denied a defense by the insurer that the insured may ignore the policy's provisions forbidding the incurring of defense costs without the insurer's prior consent, and under compulsion of the refusal, undertakes its own defense at the insurer's expense.”)

[9] Faust v. The Travelers, 55 F. 3d 471, 472-473 (9th Cir. 1995) (“Travelers does not-and did not-argue that it had no duty to perform because of Faust's tardy tender. In fact, Travelers accepted Faust's tender of the defense in the second Adizes action.”); Truck Insurance Exchange v. Unigard Ins. Co. 79 Cal App 4th 966, 981 (2000) addressed a distinct issue of equitable indemnity rights Truck sought to enforce against co-insurers who were not apprised to their exposure for contribution to Truck until after the underlying action was resolved. (“Unigard did not turn down any defense, nor did it disclaim coverage responsibilities.”)