Defending Insurance Company Not Liable for Legal Expenses Its Insured Incurred Before Notifying Insurer

An insurer is not required to pay the legal fees its insured had incurred before notifying the insurer of the litigation, according to the Eleventh Circuit’s decision in EmbroidMe.com, Inc. v. Travelers Property Casualty Co. of America, 2017 WL 74694 (Jan. 9, 2017).  Applying Florida law, the court affirmed the district court’s grant of summary judgment to the insurer.

The insured embroidering company was sued for copyright infringement but chose not to notify its liability insurer, Travelers, of the lawsuit. Instead, the insured defended the litigation on its own, incurring legal fees exceeding $400,000.  When the embroidering company finally notified Travelers of the litigation and tendered a claim for indemnification and defense, Travelers agreed to defend the lawsuit moving forward and that the insurance policy would potentially provide indemnification of the claim, but it refused to reimburse the insured for the legal fees already incurred.

Travelers argued that it was not required to reimburse the insured for fees incurred without its permission or even its knowledge, because the insurance policy clearly excluded coverage for such expenses. The insured argued, however, for application of the Florida Claims Administration Statute (“CAS”), which requires an insurer who seeks to deny coverage based on a particular coverage defense to notify the insured of its reliance on that defense within 30 days of becoming aware of its existence.  Here, the insurer had told the insured that it refused to pay pre-tender legal expenses 39 days after discussing the matter with the insured.

Because the Florida Supreme Court has made clear that the CAS applies only to coverage defenses, not to coverage exclusions, whether the CAS would estop Travelers from asserting its refusal after 30 days had elapsed depended on whether its refusal was based on a coverage exclusion or on a defense to coverage. In answering that question, the Eleventh Circuit noted that the clear terms of the policy precluded an insured from recovering legal fees that it had incurred without the insurer’s consent.

The court went on, however, to describe the differences between an insurer’s duty to defend and its duty to indemnify. It explained that when an insurer offers to defend but reserves the right to contest coverage, the insured has the option of rejecting the insurer’s offer to defend while still retaining the right to seek indemnification.  This reservation of the right to contest coverage by the insurer must be communicated within 30 days of becoming aware of a coverage defense.  The court looked to the terms of the insurance policy to determine that refusing to pay pre-tender legal fees was not a defense of coverage.  By arguing that Travelers was subject to the CAS, the insured conflated the insurer’s duties to indemnify and to defend.  While the duty to indemnify was the focus of cases examining the CAS, the duty to defend is forward-looking and uses a different standard than does the CAS.  The CAS requires the insurer to notify the insured of any defenses to its duty to indemnify but imposes no requirement about notifying of defenses to its duty to defend.

In coming to this conclusion, the court looked to the seminal Florida Supreme Court case of AIU Insurance Co. v. Block Marina Investment, Inc., 544 So. 2d 998 (Fla. 1989), which had observed the absurdity of a ruling that would provide coverage to the insured for something the policy had expressly excluded.  And, the estoppel principles underlying the CAS did not fit the facts here.  The CAS acts to put the insured on notice of the insurer’s ambivalence about coverage, not to encourage the insurer to pay already incurred expenses.

The court found distinguishable the Florida Fourth DCA case of Nationwide Mutual Fire Insurance Co. v. Beville, 825 So. 2d 999 (Fla. 4th DCA 2002), where the insurer was liable to pay the legal expenses the insured had paid for six months before the insured notified the insurer of the litigation because the insurer asserted a reservation of its right to deny coverage based on untimely notice and failed to obtain mutually agreeable counsel, thereby violating the CAS.  Having breached the CAS, the insurer was required to pay pre-notification legal expenses.  Here, in contrast, Travelers made no reservation of its right to deny coverage and did not breach the CAS.  Accordingly, it was not required to pay the insured’s pre-tender legal expenses.

Judge Jordan wrote a concurring opinion, asserting that the majority’s decision was contrary to Beville, which, he said, held indistinguishably that the insured’s failure to provide proper notice of the claim constituted a “coverage defense” under the CAS and that the insurer was required to pay for the insured’s pre-notice expenses because it did not comply with the CAS.  Judge Jordan would have resolved the case on the alternative rationale that the language of the policy constituted a policy exclusion for any voluntary payments by the insured, which made the CAS inapplicable and ended the analysis.

Posted by Keith Emanuel.

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