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Pre-Tender Defense Costs: To Pay or Not to Pay?
Frequently, insureds fail to provide timely notice and tender of defense to their general liability insurers. This can occur for a variety of reasons. First, an insured may not know that a policy covers the claims in the suit against it or, in the case of a company covered by multiple policies over numerous years, that a policy even exists. Second, an insured may knowingly choose to forego notice on the belief that the claim is frivolous, can be easily defended, or that notice will result in higher renewal premiums. Third, an insured that is named as an additional insured under an employer's or subcontractor's policy or is covered by policies issued by multiple insurers may deliberately choose to have only certain insurers represent its interests. When an insured later learns of the existence of a policy, finds the claims cannot be easily defeated, or discovers that it may be held liable, it often turns to its insurers after incurring substantial pre-tender defense costs. Regardless of the reasons for delayed notice, the repercussions for both the insured and the insurer can be significant. The issue is compounded because courts are split as to how pre-tender costs are treated, providing a spectrum of results.
At one end of the spectrum, some jurisdictions ' including Minnesota, Hawaii, and Louisiana ' have adopted a bright-line rule: An insurer is not responsible for pre-tender defense costs even if the insurer was not prejudiced by the delayed notice. For instance, in Gully & Associates, Inc. v. Wausau Insurance Cos., 536 So. 2d 816 (La. App. 1 Cir. 1988), the court was faced with the question of whether a liability insurer was obligated to reimburse an insured for defense costs incurred prior to the insurer's receipt of notice. Holding that an insurer's duty to defend does not arise until notice of the litigation has been provided, the court reasoned that an insurer is not liable for pre-tender defense costs and need not show prejudice unless it is attempting to use late notification as a basis for denying all coverage (including both defense and indemnity). But see, Rovira v. LaGoDa, Inc, 551 So. 2d 790, 794 (La. App. 5 Cir. 1990) (improperly citing Gully).
Jurisdictions retaining this traditional approach of denying pre-tender defense costs have reasoned that construing a policy with a notice provision or voluntary payments provision to require reimbursement of pre-tender defense costs would render the contractual terms necessary to trigger an insurer's performance meaningless. Therefore, the obligation to defend should not include expenses incurred before notification, because the breach of a condition precedent relieves an insurer of its obligation to pay those costs incurred prior to notice.
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