Death, Taxes And Pre-Tender Defense Costs

There are three certainties in life, as the saying goes: death, taxes and that your insurance carrier will deny coverage for pre-tender defense costs. The practice of denying coverage for pre-tender defense costs is now standard operating procedure for insurers, despite the fact that it is often contrary to policy language and case law. The response to such a denial is often that the insurance policy does provide coverage for pre-tender defense costs, but it is unlikely that an insurance carrier will reverse itself on this kind of wrongful denial without the presentation of proper legal analysis refuting their wrong.

When a policyholder is sued, insurance carriers insist that they are tendered a copy of that lawsuit. While it is advantageous to have a system in place so that a copy of the claim is provided to the insurance carrier as soon as possible, for a number of reasons, that does not always happen. Among other things, the broker may advise against providing notice; the policyholder may not be aware that the claim is potentially covered; and, the policy may be unclear as to what exactly constitutes a claim for which notice should be provided. Regardless of the reasons, pre-tender defense costs can be financially significant, even if the "pre-tender" period is relatively brief.

The root of the problem is that insurance carriers have been successful at convincing many - brokers, some courts and even a few policyholders - that pre-tender defense costs are not covered. Their argument is typically that pre-tender defense costs are not covered, because the insurer's duty to defend is not triggered until the insurer receives notice of the potentially covered claim. See, e.g., Dreaded, Inc. v. St. Paul Guardian Ins. Co., 904 N.E.2d 1267 (Ind. 2009) (applying Indiana law).

More-and-more courts, however, recognize that an insurer's duty to defend is triggered when a claim is brought against the policyholder with allegations that are potentially within the scope of coverage. Thus, an insurer's duty to defend pre-exists any obligation by the policyholder. These courts hold that the insurer must establish prejudice resulting from the timing of any purported "late" notice to deny coverage for pre-tender costs. See, e.g., Episcopal Church in S.C. v. Church Ins. Co. of Vt., No. 2:13-cv-02475-PMD, 2014 WL 5302955, at *9-10 (D.S.C. Sept. 22, 2014) (South Carolina law); CH Props., Inc. v. First Am. Title Ins. Co., No. 13-1354(FAB), 2014 WL 4417772, at...