FOLLOW AN INSURANCE POLICY’S PROVISIONS ON TENDERING A DEFENSE AND INDEMNIFICATION CLAIM OR BE PREPARED TO FOOT THE LEGAL BILLS

Words in an insurance policy actually mean something and ignoring them can have real consequences for an insured. That’s the direct message the Eleventh Circuit recently sent when it decided EmbroidMe.com, Inc. v. Travelers Property Casualty Company of America, No. 14-10616, 2017 U.S. App. LEXIS 368 (11th Cir. Jan. 9, 2017). In that case, it held that a commercial general liability policyholder was not entitled to pre-tender litigation costs of more than $400,000 because it hired counsel on its own and then failed to notify Travelers of the litigation for more than 18 months.

In April 2010, EmbroidMe was sued in federal district court in Florida for copyright infringement. EmbroidMe had a commercial general liability policy through Travelers that provided both a defense and indemnification for such a claim but EmbroidMe chose not to notify Travelers of the suit or seek a defense. Instead, it retained a law firm on its own and, as noted previously, litigated the case for over 18 months, incurring fees of over $400,000. The policy contained an exclusionary provision that stated: “no insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”

EmbroidMe finally tendered the matter to Travelers in October 2011. In a letter dated November 21, 2011, Travelers agreed to defend the case going forward and reserved its rights to ultimately challenge its duty to indemnify. It refused however, to reimburse the legal fees EmbroidMe had already paid, based on clear language in the policy. It also cited its right to choose counsel but it eventually agreed to retain the same firm that had been handling the case, although at a reduced rate from that paid by EmbroidMe. The plaintiff in the underlying lawsuit eventually filed a second suit after Travelers agree to take up the defense and it continued to defend both lawsuits. Ultimately, the claims made in both lawsuits were settled.

After the underlying suits were settled, EmbroidMe again tried to convince Travelers to pay the pre-tender costs, which it refused to do, and EmbroidMe filed a breach of contract action in Florida state court, which Travelers removed to federal court.

EmbroidMe contended that under Florida’s Claims Administration Statute (“CAS”), Travelers’ coverage defense was untimely because it was made 39 days after tender, nine days more than permitted under the statute. (There was some dispute about whether the reservation of rights letter was dated 39 or 42 days after tender). Among other things, the CAS estops an insurer from denying coverage unless it gives “written notice of reservation of rights to assert a coverage defense” to the insured “[w]ithin 30 days after the liability insurer knew or should have known of the coverage defense” and further requires an insurer disclaim coverage or provide its policyholder a defense within 60 days. Travelers contended that its refusal to reimburse the costs incurred without prior approval was not a coverage defense but instead was based on a policy exclusion not subject to the CAS. It filed a motion for summary judgment, citing case law from the Florida Supreme Court that had held that the CAS and its time limits applied only to coverage defenses, not policy exclusions, and the district court agreed.

Because the policy precluded the policyholder from “voluntarily assuming any obligation or incurring any expense without Travelers’ consent,” the appeals court held that Travelers’s refusal to pay for pre-tender defense costs was based on a policy exclusion, not a coverage defense and therefore the CAS’s 30-day requirement to communicate coverage did not apply. Specifically, the court stated “[a]ccording to Florida law, the assertion of a coverage defense comes within the CAS and its corresponding time limits, but a defense that a policy provision excludes coverage is not subject to the CAS’s deadlines or even to its requirement that notice be given.” It continued “because Travelers relied on an exclusion, not a coverage defense, its failure to notify EmbroidMe within the time period set out in the statute did not estop Travelers from relying on that ground in refusing to pay these unapproved expenses.”

The decision is both a cautionary tale for insureds and a reminder to insurers that courts routinely uphold clear policy exclusions.  In other words, if you want to take advantage of the policy you’re paying for, follow the provisions, especially the policy’s tender requirements.

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