Eleventh Circuit: Insurer Was Not Required to Pay Pre-Tender Defense Fees

The U.S. Court of Appeals for the Eleventh Circuit has ruled that a Florida claims handling statute did not preclude an insurer from declining to pay pre-tender defense fees and costs incurred by its insured prior to tendering its claim to the insurer.

The Case

After EmbroidMe.com, Inc., was sued in federal district court for alleged copyright infringement, it did not notify its insurer of the claim or request a defense, but instead, retained a law firm and litigated the case on its own for over 18 months. It amassed legal bills exceeding $400,000 before finally notifying its insurer of the litigation and tendering the claim both for indemnification and defense purposes.

Upon receiving the notification, the insurer agreed that the policy potentially provided indemnification for the claim and it agreed to defend EmbroidMe going forward.

The insurer refused, however, to reimburse EmbroidMe for the legal bills it had incurred during the period of time EmbroidMe had chosen to handle the litigation on its own.

Even though the policy made clear that the insurer was not obligated to pay any of these expenses, given that EmbroidMe had not obtained the insurer’s consent to generate them, EmbroidMe nonetheless insisted that it was entitled to reimbursement. It argued that Florida’s claims administration statute (the “CAS”) required the insurer to notify the insured of the specific basis for a denial within 30 days of becoming aware of its existence.  EmbroidMe contended that the insurer had refused to pay pre-tender legal expenses 39 days after speaking with EmbroidMe’s general counsel about the claim. It argued that because the insurer’s notification was made after the 30-day statutory deadline had elapsed (albeit by only a few days), it had to pay the pre-tender legal expenses that it never had authorized.

EmbroidMe sued and the U.S. District Court for the Southern District of Florida rejected EmbroidMe’s argument. The district court granted summary judgment in favor of the insurer, reasoning that the insurance contract expressly excluded expenses incurred by an insured absent the insurer’s agreement to pay those expenses, and that this constituted an exclusion from coverage, not a defense to coverage otherwise provided by the policy. Therefore, the district court decided, the CAS did not apply.

EmbroidMe appealed to the Eleventh Circuit.

The Eleventh Circuit’s Decision

The Eleventh Circuit, applying Florida law, affirmed.

In its decision, it agreed with the district court that the insurer was not required to comply with the CAS when asserting its refusal to reimburse EmbroidMe for pre-tender defense fees the company had chosen to incur. The Eleventh Circuit reasoned that the insurer had relied on an exclusion, not on a coverage defense, in its refusal to pay EmbroidMe’s pre-tender legal expenses. Therefore, the CAS did not control.

EmbroidMe’s contrary position tended to conflate the concepts of an insurer’s duty to defend and its duty to timely convey a coverage defense, the Eleventh Circuit concluded.

The case is EmbroidMe.com, Inc. v. Travelers Property Cas. Co. of America, 845 F.3d 1099 (11th Cir. 2017).