Under California Law, Absent Extraordinary Circumstances, Insurers Have No Obligation To Pay For Pre-Tender Fees And Costs Under Duty To Defend Or Reimbursement Policies

Disputes between policyholders and insurance carriers often arise in the context of an insured's payments made before providing notice of a claim to its carrier. However, California courts routinely hold that, absent special circumstances discussed in more detail below, when the policy at issue includes a standard "no-voluntary-payment" clause, such "pre-tender fees and costs" are not covered by the policy.

California courts have long held that no-voluntary-payment provisions are enforceable and preclude coverage in the context of pre-tender defense fees and costs incurred in connection with a duty to defend policy. See, e.g. Insua v. Scottsdale Ins. Co., 104 Cal. App. 4th 737, 745 (2002) (holding that no-voluntary-payment provision precluded recovery of pre-tender defense costs); Jamestown Builders, Inc. v. General Star Indemnity Co., 77 Cal. App. 4th 341, 345-50 (1999) (holding that no-voluntary-payment provision precluded recovery of pre-tender expenses). Moreover, no-voluntary-payment provisions are enforced without regard to whether or not the insurer is prejudiced by the insured's delayed notice of the underlying matter. See, e.g. Jamestown Builders, Inc., 77 Cal. App. 4th at 349-50; Low v. Golden Eagle Ins. Co., 110 Cal. App. 4th 1532, 1544 (2003) (explaining that, unlike a notice provision or cooperation clause, no-voluntary-payment provisions are enforceable without a showing of prejudice).

The application of no-voluntary-payment provisions in reimbursement policies without a duty to defend was somewhat of an open issue under California law before 2013, and insureds would often argue that the existing precedent only applied to situations where the carrier had a duty to defend. This issue, however, was addressed by the Central District of California in National Bank of California v. Progressive Casualty Insurance Company, where the court explicitly rejected the insured's argument that "[t]he logic underlying the exclusion of pre-tender fees is inapplicable where . . . [the insurer] owes no duty to defend and . . . never undertakes [the insured's] defense." 938 F. Supp. 2d 919, 939 (C.D. Cal. 2013). According to the National Bank of California court, the proper inquiry was not whether the policy at issue created a duty to defend on the part of the insurer, but rather whether the insured agreed through the acceptance of the policy not to voluntarily make payments in connection with a claim without the insurer's consent. Id...