Failure to Ask for Defense Eliminates Coverage Until Insured Asks

No Right to Pre-Tender Defense Costs

Jun 20, 2022

BACKGROUND

The facts, as alleged in the complaint, are as follows: HDI issued a commercial general liability policy (“the HDI Policy” or “the Policy”) to DES, providing coverage between November 1, 2016 and November 1, 2017. Nucor was an additional insured under the HDI Policy.

On May 10, 2018, Bob Dale Comeaux II (“Comeaux”), a DES employee, filed a civil action (“the Comeaux litigation”) in the 23rd Judicial District Court for the Parish of St. James, alleging that he was exposed to hydrogen sulfide gas at Nucor’s plant facility on May 15, 2017. Comeaux named as defendants Nucor and DES.

On May 10, 2019, one year after Comeaux filed suit, attorneys representing Nucor tendered Nucor’s defense and indemnification to DES. On January 21, 2020, HDI sent correspondence to Nucor’s counsel, agreeing to defend Nucor, but reserving rights as to indemnity. On July 2, 2021, Comeaux’s claims as to all defendants were settled through payment by HDI and the insurer for a third defendant. On August 4, 2021, HDI offered to reimburse Nucor’s post-tender defense costs, totaling $37,067.47. Nucor rejected HDI’s offer, and requested that HDI reimburse all of Nucor’s defense costs, including those costs incurred pre-tender, totaling $135, 950.75.

Plaintiffs submit that they have two avenues supporting recovery of Nucor’s pre-tender defense costs. First, Nucor is named as an additional insured under the HDI Policy, and plaintiffs submit that HDI is obligated to reimburse its insured’s pre-and post-tender defense costs. Second, plaintiffs argue that HDI must reimburse DES for its voluntary settlement of Nucor’s pre- and post-tender defense costs because the HDI Policy’s contractual liability provision covers DES’s obligation to indemnify Nucor pursuant to the ICA.

LAW AND ANALYSIS

HDI recognizes that it is required to pay Nucor’s post-tender defense costs because Nucor is an additional insured under the HDI Policy. HDI argued that it is not required to pay Nucor’s pre-tender defense costs.

HDI submits that its position is supported by Gully & Associates, Inc. v. Wausau Insurance Cos., 536 So.2d 816 (La. Ct. App. 1 Cir. 1988). In Gully, the Louisiana Court of Appeals for the First Circuit held that, because “the insurer’s duty to provide a defense does not arise until the insurer receives notice of the litigation . . . . [the insurer] is not responsible for the legal fees and costs incurred prior to the notification date.”

The language of the HDI Policy repeatedly indicates that the insured must notify HDI regarding legal actions or occurrences that may give rise to liability. Additionally, the HDI Policy states that “[n]o 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 [HDI’s] consent.”

The court noted that it was the insured’s prerogative to retain the attorney of their choice before notifying the insurer of the action, “but under the clear terms of the policy they had to exercise that prerogative at their own cost.”

Contractual Liability Coverage

Nucor’s Defense Costs

Whereas an insurer’s duty to defend does not arise until the insurer receives notice or tender, the same principle does not apply to indemnitors, such as DES. The general rule is that an indemnitee is not required to provide notice, let alone tender a defense, to the indemnitor under an indemnification contract, unless the contract itself requires notification or tender of defense.

While Nucor is not entitled to reimbursement of pre-tender defense costs by virtue of being an additional insured under the HDI Policy, there remains the issue of whether DES is entitled to recover its payment of Nucor’s pre- and post-tender defense costs from HDI, pursuant to the contractual liability provision of the HDI policy.

HDI does not dispute that the ICA is an “insured contract” within the meaning of the contractual liability provision. However, HDI disputes that the contractual liability provision requires HDI to reimburse DES for its settlement of Nucor’s defense costs in the Comeaux action. In support, HDI noted that the contractual liability provision states, in relevant part, that the Policy extends to “reasonable attorneys’ fees and necessary litigation expenses incurred by or for a party other than an insured.” HDI submits that, because Nucor is an insured under the policy, its attorney’s fees and costs in the Comeaux litigation are expressly exempted from contractual liability coverage.

Under the express language of the contractual liability provision, HDI is not required to reimburse DES for Nucor’s pre- or post-tender defense costs in the Comeaux litigation.

Because the Court concurred with HDI’s interpretation of the Policy, the Court also concluded that HDI’s conduct was not wrongful or unjustified.

While Nucor is entitled to recover fees from DES pursuant to the ICA, Nucor is not entitled to recover prosecution fees from HDI pursuant to the Policy. Nor is DES entitled to seek reimbursement from HDI, pursuant to the Policy, for DES’s settlement payment of Nucor’s prosecution fees.

DES’s claims-as to DES’s reimbursement of Nucor’s pre-tender defense costs arising in the Comeaux action, Nucor’s litigation costs in pursuing coverage under the ICA and the HDI Policy, and penalties pursuant to La. R.S. 22:1892 and 22:1793-are dismissed with prejudice.

ZALMA OPINION

If an insured wishes to recover from a liability insurance policy it is essential that they give notice to the insurer of a need for a defense. In this case the insured and the additional insured waited before asking for a defense. They were entitled to, and actually received the defense asked for, from the moment the insured asked for defense. They have no right for the costs they incurred for defense before giving notice to the insurer. The lesson: “Don’t sit on your rights. Ask for a defense immediately upon receiving notice that a claim will be or has been filed in a court.”

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com

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