The Eleventh Circuit recently affirmed summary judgment in favor of an insurer on the issue of pre-tender defense costs in EmbroidMe.com, Inc. v. Travelers Property & Casualty Company of America, 845 F.3d 1099 (11th Cir. 2017). Applying Florida law, the court denied the insured’s breach of contract suit for over $400,000 in fees incurred before the insured notified its insurer.

The insured was sued in 2010 in a copyright infringement lawsuit. Although it had a liability policy through Travelers, the insured did not tender the claim upon receipt of the lawsuit. Instead, the insured hired its own counsel and litigated the case on its own in federal court for over 18 months. The insured eventually tendered the claim to Travelers, which agreed to defend the insured subject to a reservation of rights. Travelers refused, however, to reimburse the insured for the legal bills it had incurred during the time the insured handled the litigation on its own.

Shortly after the copyright infringement claim was settled, the insured filed a breach of contract lawsuit against Travelers seeking reimbursement of the pre-tender defense costs. The insured argued Travelers was estopped from denying coverage based on Florida’s claims administration statute, Fla. Stat. § 627.426. This statute provides that insurers have 30 days to give written notice of “coverage defenses” to their insureds. Travelers argued that even though it waited 39 days to raise the pre-tender issue, the statute was inapplicable.

The district court and the Eleventh Circuit agreed with Travelers. It noted the policy language which provided “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.” The Eleventh Circuit reasoned “the clear language of the policy – if not common sense- would alert even the most unsophisticated insured to the reality that, if sued, it could not expect its insurer to reimburse it for attorney’s fees it unilaterally incurred unless the insured had first obtained Travelers’ permission to incur those expenses.”

The Eleventh Circuit also rejected the insured’s statutory argument. It relied on prior Florida cases which made a distinction between waivable coverage defenses and provisions that constitute exclusions from coverage. Based on the definitive policy language, the court determined “[t]he policy provision here precluding reimbursement for litigation expenses incurred by an insured without the prior consent of the insurer falls within the exclusion category, not the coverage defense classification.”

There are various reasons why an insured may wish to delay reporting a claim to its insurer However, the insured assumes the risk of incurring significant non-covered defense costs prior to the time the insurer is placed on notice. This especially is true where a policy contains specific language prohibiting reimbursement for pre-tender defense costs.