Insurer Delays May Lead to Default Judgment

By David A. Gauntlett*

Introduction

After notifying the insurer of a lawsuit, many policyholders might assume there is no more to be done until the insurer accepts or denies its defense obligation. This sentiment is even reinforced by the “Voluntary Payments” provision[1] found in most policies that states the insurer will not reimburse defense expenses incurred without the insurer’s permission. The average policyholder cannot be expected to know that courts have recognized the limited scope of those provisions’ application.[2] With that in mind, it is hardly surprising that insurer delays could result in a default judgment.

Insurer’s Late Response Causes Default Judgment

In The Law Office of Michael P. Carestia, LLC v. Biberk Insurance Services, Inc et al,[3] the plaintiff law firm was sued by a former client after failure to pay a court fee resulted in dismissal of the client’s personal injury suit. Biberk, the firm’s professional liability insurer, acknowledged the suit against its insured on March 20, 2024. Service was not properly effected upon the insured until 35 days later on April 24, 2024. Despite multiple attempts to communicate, the insured was unable to garner any substantive coverage response, much less a defense, from Biberk. Having no defense, default judgment was entered against the insured on September 10, 2024 in the amount of $2,643,337.63. Biberk belatedly denied any potential coverage on November 18, 2024—243 days after tender.

The insured then sued Biberk for Negligence, asserting that “Biberk had a duty to Carestia Law to file a responsive pleading, issue a reservation of rights letter, and/or issue a denial of claim.”[4] Biberk responded by filing a Motion to Dismiss, but that motion only asserts a technical deficiency rather than claiming Biberk is without blame. Specifically, Biberk claims the Negligence cause of action is not appropriate under Georgia law:

Mere failure to perform a contract does not constitute a tort, and a plaintiff in a breach of contract case has a tort claim only where, in addition to breaching the contract, the defendant also breaches an independent duty imposed by law.[5]

To date, Biberk has not asserted any substantive defenses that assert it has no liability and has only claimed the insured sought recovery under the wrong legal theory.

Failure to Provide Timely Responses Evidences Bad Faith

Insurers have a duty to promptly investigate and process claims.[6] For example, under Section 2695.7 of Cal. Code of Regulations,[7] insurers have 40 days to accept or deny a claim in whole or in part. If more time is required to determine whether a claim should be accepted and/or denied, the insurer must, within that same 40-day window, provide written notice of the need for additional time.[8] The insurer is further required to follow-up every 30 days with an update as to what information it is still seeking prior to making its determination.

Georgia law does not have an analogous statute setting a specific deadline to respond for third-party claims. Under Ga. Code Ann. § 33-6-34, however, insurers are forbidden from “[f]ailing to adopt and implement procedures for the prompt investigation and settlement of claims” and “[w]hen requested by the insured in writing, failing to affirm or deny coverage of claims within a reasonable time after having completed its investigation related to such claim or claims.” Given Georgia’s requirement that insurers render a coverage decision within 60 days for first-party claims,[9] it is reasonable to conclude that Biberk’s 243-day delay could be deemed a breach of the covenant of good faith and fair dealing.

Early Tender Is Best to Counter Insurer Delays

While Biberk’s 243-day delay is an outlier, insurers often take a month or longer to provide a definitive coverage position for third-party claims. If the policyholder wants to minimize paying its own defense expenses, early tender must be prioritized. Defense counsel often waits to retain insurance coverage counsel to assess available coverage options under a client’s policies until the underlying action is resolved. Their singular focus on resolving the underlying action (aided by Mediators who once they learn of an insurer denial of a defense do not think of bringing them to the table again) can be problematic.

Defense counsel’s focus on securing a prompt resolution of the underlying action with their Client’s resources at stake to avoid greater defense fee and indemnity exposure (while an appropriate concern) is best coordinated with revisitation of the opportunity to clarify the existing claims that evidence a potential for coverage. Clarifications developed after an insurer’s denial of a defense would enhance the prospects for achieving a global settlement in many disputes where viable paths to securing a defense exist.

Furthermore, failure to advise clients to timely tender a claim exposes defense counsel to malpractice liability.[10] In Nichols v. Keller,[11] 15 Cal. App. 4th 1672 (1993), one court rejected a worker’s compensation attorney’s argument that it had no duty to advise its client that the client possessed a valid third-party claim arising from an accident. The statute of limitations barred recovery. A prompt demand for relief would have created a right to recovery which was lost in that claim. The court concluded that, at minimum, the plaintiff should have been advised to consult another attorney re its rights against third parties.[12]

Promptly consulting with coverage counsel, who would have advised immediate tender, could have avoided this unfortunate outcome. Coverage counsel could also have assessed whether the situation fell within the very narrow category of exceptions to the “immediate tender” rule (e.g., potential for increased premiums outweighs likely assistance from the insurer).

Conclusion

Insurers routinely fail to meet their legal obligations to respond to claims. In extreme cases, as in Carestia, this can lead to default judgments for millions of dollars. Even ignoring such outliers, immediately notifying the insurer of any claim (or even potential claim) is always the best practice. As recognized in Town of Massena v. Healthcare Underwriters Mut. Ins. Co.,[13] liability policies also serve as “litigation insurance.” Early tender serves to secure insurer funding as soon as possible to avoid sinking your own money into the defense and subsequently jumping through the hoops necessary for reimbursement. It also ensures minimal disputes related to a policy’s “Voluntary Payments” provision.

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] See David A. Gauntlett, Narrowly Construing “Voluntary Payments” Provisions as a Limitation on Coverage, https://www.gauntlettlaw.com/blogs/narrowly-construing-voluntary-payments-provisions-as-a-limitation-on-coverage (June 5, 2025).

[2] Smart Style Indus. v. Pa. Gen. Ins. Co., 930 F. Supp. 159, 163 (S.D.N.Y. 1996) (acknowledging that “a ‘voluntary payments’ clause cannot literally be read as prohibiting an insured from incurring any expense without the explicit prior approval of the insurer” because some actions must be undertaken without delay).

[3] The Law Office of Michael P. Carestia, LLC v. Biberk Insurance Services, Inc et al, Case No. 1:25CV00196 (filed Jan. 16, 2025 in U.S.D.C. N.D. Ga.).

[4] Id. (Complaint, ¶ 57).

[5] Id. (Motion to Dismiss, p. 2/18)

[6] Estate of Parker v. AIG Life Ins., 317 F. Supp. 2d 1167, 1171 (C.D. Cal. 2004) (“California Insurance Code § 790.03, subdivision (h)(3), has codified the duty to investigate, requiring insurers ‘to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies.’”)

[7] California Code of Regulations, Title 10, Chapter 5, Subchapter 7.5, Section 2695.7(b) (“Upon receiving proof of claim, every insurer . . . shall immediately, but in no event more than forty (40) calendar days later, accept or deny the claim, in whole or in part . . . .”)

[8] Cal. Code of Reg., Sec. 2695.7(c)(1).

[9] Ga. R&R 120-2-52-.03(3).

[10] David A. Gauntlett, Insurance Coverage of Intellectual Property Assets, 2d ed., § 5.05[3][b] “IP Counsel May Be Attacked for Failing to Assist a Client in Securing Policy Benefits” (2023).

[11] Nichols v. Keller, 15 Cal. App. 4th 1672 (1993).

[12] Id. at 1685.

[13] Town of Massena v. Healthcare Underwriters Mut. Ins. Co., 834 N.Y.S.2d 736, 739 (2007).