Recovery of Pre-Tender Defense Fees When Notice Is Late

Recovery of Pre-Tender Defense Fees When Notice Is Late

By David A. Gauntlett[*]

Introduction

Many intellectual property lawyers routinely litigate copyright lawsuits and immediately provide notice to a Commercial General Liability (“CGL”) insurer. Thereby, they secure defense fees for “Personal and Advertising Injury – offense (g)” “infringement of copyright, trade dress or slogan in your ‘advertisement,’” which broadly defines the term “advertisement.” But what if the covered claim is inchoate such as fact allegations that evidence trade dress claims not labeled as such?[2]

Lawsuits that are typically excluded for trademark or patent infringement[3] often incorporate fact allegations that might implicate coverage under “offence (f)” “use of another’s advertising idea in your ‘advertisement’” palming off/unfair competition claims. Or they may implicate coverage under “offense (d)” “publication . . . that disparages a person’s or organization’s goods, products or services” by  addressing negative comparative marketing attacks.[4]

Is it too late to seek defense fees before late notice to an insurer? Not necessarily. These opportunities may only come to light in forums such as New York, Maryland, South Carolina, and Washington. There, state law allows circumvention of the “voluntary payments” provision in CGL policies where there is no prejudice to the insurer by making the coverage trigger filing of a lawsuit against the insured—not notice of it to the insurer.[5]

Pertinent CGL Policy Language[6]

1. Duties in the Event of . . . Claim, Loss, [or] Suit . . .

a. You must see to it that we are notified as soon as practicable, based upon when a responsible insured has received notice from your agent, servant or employee, of:

(1) an occurrence . . . or other circumstance or offense which may result in a claim, suit, . . . or loss[.]

b. If a claim is made or suit . . . is brought against any insured, you must:

. . .

(2) notify us as soon as practicable, based upon when a responsible insured has received notice from your agent, servant or employee.

32. Voluntary Payments

Other than first aid or emergency cleanup costs, no insured shall, except at its own cost:

a. voluntarily make a payment, assume any obligation, or incur any expense for damages [or] loss [.]

“Voluntary Payments” May Bar a Defense

Typically, a “voluntary payments” provision in a CGL policy will bar recovery of pre-tender fees even where an insurer declines to defend based on grounds other than late notice.[7] In many states, the failure to provide timely notice will void otherwise viable insurance coverage.[8] But other states take a policyholder-friendly view requiring the insurer to demonstrate prejudice due to the late notice.[9] Other states may take positions between those two extremes.[10]

Some States Like New York May Have Preferable Law

Where an insurer agrees to defend after receipt of late notice, law outside of California may be more favorable. In states which both follow a notice-prejudice rule and designate the filing of a complaint as the trigger of an insurer’s duty to defend, the “voluntary payments” provision cannot void pre-tender fee recovery, even against a “late to the party” defending insurer.[11]

The prejudice standard is not met where the insured is entitled to independent counsel and it settled the case promptly with no payment for liability, even if distribution rights are impacted by an insured’s post-settlement changes in distribution and product branding.[12] There can be no prejudice if the result is exactly the same—the insured retaining counsel of its own choice—as it would have been had the insured provided immediate notice where a case settles with no payment.

Conclusion

Policyholders would be wise to consider what law applies to potential coverage disputes. Many are surprised to learn that New York is among these states that make the filing of a complaint, not notice, the trigger to coverage obligations. Combined with its strict stance on waiver of defenses not asserted in an initial ROR,[13] the state has become more policyholder-friendly than many realize.

 
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[*] 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. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[2] David A. Gauntlett, Searching for a Unicorn: Unearthing Buried Trade Dress Claims, https://www.gauntlettlaw.com/news/searching-for-a-unicorn-unearthing-buried-trade-dress-claims (June 23, 2022).

[3] ISO CGL Policy Form CG 00 01 04 13 (excluding coverage for “’[p]ersonal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights.”)

[4] David A. Gauntlett, When Insurance Coverage Arises for Implicit As Well As Direct Disparagement, https://www.gauntlettlaw.com/news/when-insurance-coverage-arises-for-implicit-as-well-as-direct-disparagement (Nov. 4.2021).

[5] Consol. Edison Co. of N.Y. v. Lexington Ins. Co., Case No.14 C IV. 6547 (CM) (JLC), 2015 S.D.N.Y. LEXIS 101339 *26–28 (S.D.N.Y. July 30, 2015) (“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 . . . .”) (emphasis added).

[6] Many policies contain substantially similar language. The quoted provisions below are taken from Navigators’ Form NAV NP3 + Cyber (07/16) CGL coverage.

[7] Burgett, Inc. v. Am. Zurich Ins. Co., 875 F. Supp. 2d 1125 (E.D. Cal. 2012), as corrected (Aug. 24, 2012) (“[U]nder California law, the duty to Defendant does not arise until tender, and thus, Defendant is not required to pay pre-tender expenses[.]”); but see John DiMugno & Paul E.B . Glad, California Insurance Law Handbook, §59.13, p. 1668 (2000) (citing Select Ins. Co. v. Superior Court, 226 Cal. App. 3d 631, 637 (1990) (“[The issue is] whether the denial of coverage demonstrates that the insurer would not have acted any differently had it received timely notice.”)).

[8] See, e.g., Allstate Ins. Co. v. Walker, 254 Ga. App. 315, 316 (2002) (“An unexcused significant delay in notifying an insurer about an incident or lawsuit, however, may be unreasonable as a matter of law.”)

[9] See, e.g. Cisneros v. UNUM Life Ins. Co. of America, 134 F.3d 939, 944 (9th Cir. (Cal.) 1998) (“California's ‘notice-prejudice’ rule prevents an insurance company from avoiding liability on the basis of untimely notice . . . unless the company proves it has been substantially prejudiced by the delay.”)

[10] See, e.g., Country Mut. Ins. Co. v. Livorsi Marine, Inc., 222 Ill. 2d 303, 316–17 (2006) (Ruling that Illinois law ultimately judges based on a reasonableness standard and “even if there is no prejudice to the insurer, a policyholder still must give reasonable notice according to the terms of the insurance policy.”); Compare Frankenmuth Mut. Ins. Co. v. Hockey Cup, LLC, 2019 U.S. Dist. LEXIS 160278, *12 (N.D. Ill. Sept. 20, 2019) (applying New York law) (concluding strict adherence to notice requirement was necessary because policy was issued and delivered in Illinois) with N.Y. Ins. Law § 3420(a)(5) (instituting a notice-prejudice standard for policies issued or delivered in New York).

[11] Griffin v. Allstate Ins. Co., 108 Wash. App. 133, 139–141 (2001) (“Allstate urges . . . that the majority of states disallow recovery of pre-tender defense costs . . . but . . . in Washington the rule is otherwise. . . . [A]n insurer’s duty to defend arises upon the filing of a covered complaint, and the duty is not excused against late notice unless the insurer is prejudiced. . . . [In Washington,] ‘the insurer is not relieved of its duty to defend unless it can prove that the late notice resulted in actual and substantial prejudice.’”) (emphasis added) (quoting Unigard Ins. Co. v. Leven, 97 Wash. App. 417, 427 (1999)). Indeed, one New York case recognized that “voluntary payments” provisions cannot be interpreted according to their literal terms. Smart Style Indus. v. Penn. Gen. Ins. Co., 930 F. Supp. 159, 164 (S.D.N.Y. 1996) (“[A] ‘voluntary payments’ clause cannot literally be read as prohibiting an insured from incurring any expense without the explicit prior approval of the insurer. Rather, the clause must be construed according to the reasonable expectations of the insured.”)

[12] Id. at 141 (“Even if Allstate's policy required tender as a condition precedent to the duty to defend (which it does not), a showing of actual and substantial prejudice is required before an insured's breach will release an insurer from its duty under the policy—including the duty to defend.”)

[13] Nat'l Specialty Ins. Co. v. Vida Café Inc., No. 10 CV 899 (HB), 2011 U.S. Dist. LEXIS 25209, *7 (S.D.N.Y. Mar. 11, 2011) (“It is settled that under § 3420(d), ‘[a] notice of disclaimer must promptly apprise the claimant with a high degree of specificity of the ground or grounds on which the disclaimer is predicated, and an insurer's justification for denying coverage is strictly limited to the ground stated in the notice of disclaimer.’ Adames, 55 A.D.3d at 515 (citing Gen. Accident Ins. Group v. Cirucci, 46 N.Y.2d 862, 864, 387 N.E.2d 223, 414 N.Y.S.2d 512 (1979)). Thus, ‘an insurer waives any ground for denying coverage that is not specifically asserted in its notice of disclaimer, even if that ground would otherwise have merit.’ Id. See also Wraight, 234 A.D.2d at 918.”)