The Forgotten Disclaimer: Pre-Tender Defense Costs

Whether it is a straightforward personal lines claim or a complicated commercial lines claim, it is not uncommon for an insurer to receive the notice of an underlying lawsuit after the policyholder has incurred defense costs to address the matter.

While insurers typically identify “late notice” as a defense to coverage in these cases, insurers seem reluctant to assert a viable “pre-tender” defense. Insurers should maintain that they have no obligation for “pre-tender” costs (i.e. those costs incurred before the policyholder actually tenders the claim to the insurer or, depending on the jurisdiction, when the insurer becomes aware of the underlying action).

The primary rationale for the “pre-tender” defense comes from the “voluntary payments” provision contained in most liability policies. While the language of such a provision may vary, the insured is generally prohibited from assuming any obligation or incurring an expense without the consent of the insurer. All jurisdictions have not approached the “pre-tender” issue in a similar manner.

Courts in many states have taken a firm stand that pre-tender costs are not covered. See e.g., Faust v. The Travelers, 55 F.3d 471 (9th Cir. 1995) (applying California law); Westchester Fire Ins. Co. v. G. Heilemen Brewing Co., 747 N.E.2d 955 (Ill. App. Ct. 2001); and Lafarge Corp. v. Hartford Cas. Ins. Co., 61 F.3d 389 (5th Cir. 1995)(applying Texas law), overruled on other grounds, Texas Property and Casualty Ins. Guaranty Association v. Southwest Aggregates, 982 S.W.2d 600 (Tex. Ct. App. 1988). However, there are other states that lack case law on point or have case law that would indicate a strong likelihood that such costs may be covered. See e.g., Weaver Bros. v. Chappel, 684 P.2d 123 (Alaska 1984).

Many insurers take the position that the “pre-tender” defense is subsumed into the “late notice” defense. While there is support for such an approach, it lacks specificity and fails to account for the “voluntary payments” clause. Thus, support for the denial of pre-tender costs comes in two forms: (1) notice of the underlying lawsuit was late and any costs incurred prior to notice should not be covered because the initial notice to the insurer triggers the insurer’s obligations and insurers are not responsible for cost incurred prior to such a trigger; and (2) payment of “pre-tender” costs is violative of the “voluntary payments” provision.

Of note, many jurisdictions require the insurer to prove prejudice in order to succeed with a “pre-tender” defense. See e.g., Griffin v. Allstate Ins. Co., 29 P.3d 777 (Wash. Ct. App. 2001). However, most opinions addressing the prejudice requirement do so in the context of the late notice defense. It is unclear as to whether the same jurisdictions would require prejudice for a “pre-tender” defense that relies upon a “voluntary payments” provision for support.

Nonetheless, insurers should not forget, nor be hesitant, to research and vigorously pursue a “pre-tender” defense where appropriate.

Editor’s Note: The Tip of the Month is a new feature to claimsguides.com. Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess. His practice is focused on litigation and arbitration of insurance coverage and reinsurance matters throughout the country, including general coverage, bad faith, asbestos, life and health, professional liability and environmental cases. Questions and responses to this article are welcome at aboris@mail.tsmp.com.