The tables may be turning. Insurers often seek to avoid their coverage obligations by invoking time limitations in their policies for providing claim notifications. On the other hand, these same insurers routinely take their sweet time in responding to claims, contending that they need time to “investigate” even before making a decision whether or not to provide a defense to a lawsuit, which in most cases simply requires the insurer to review the allegations in the complaint to determine whether there is a potential for coverage under their policies. Once they decide to provide a defense (which in some cases can be weeks if not months after the insured has had to retain its own defense counsel to respond to a suit), insurers claim they have the right to control the insured’s defense, including the selection of defense counsel, and will force the insured to accept new defense counsel that are not up to speed on the case. Not so fast, according to a recent decision from the United States District Court for the Northern District of California.
In Travelers Indemnity Co. of Connecticut v. Centex Homes Real Estate Corp., Case No. 11-CV-03638-SC (N.D. Cal., Oct. 7, 2015), the court was asked to decide “whether an insurer loses its right to control the defense of its insured if it fails to provide the insured with a defense immediately after its duty to defend is triggered….” The court answered in the affirmative, even though the insurance company later accepted the insured’s tender, offered to provide a defense and reimbursed the insured for legal expenses incurred before the insurer’s acceptance of the insured’s tender. The court reversed its prior order in the same case, because it determined that its prior decision was inconsistent with the California Court of Appeal’s decision in J.R. Marketing, L.L.C. v. Hartford Casualty Ins. Co. (2013) 216 Cal.App.4th 1444 — a decision that was affirmed in part by the California Supreme Court in Hartford Casualty Ins. Co. v. J.R. Marketing (2015) 61 Cal.4th 988.
The Travelers v. Centex case arose from two underlying construction defect lawsuits filed against the insured in California. The insured tendered these cases to Travelers, and in each case “some time elapsed between . . . tender and Traveler’s decision to provide a defense subject to a reservation of rights.” In the meantime, the insured retained its own counsel to defend the underlying actions. When Travelers agreed to defend, it insisted on appointing its own defense counsel and taking control of the litigation. In response, the insured argued that Travelers no longer had the right to control the defense because it waited too long.
Travelers filed a coverage action in which it sought, among other things, a declaration that it had the right to control the defense of the underlying cases. After a series of motions, the District Court initially ruled that Travelers could not lose its right to control the defense based on delay alone. Instead, the insured had to prove “waiver, forfeiture or estoppel” on the part of the insurance company. After the Court of Appeal issued its decision in J.R. Marketing v. Hartford, the insured sought leave to file motions for reconsideration, which were granted, but the court stayed the case pending the California Supreme Court’s review of the J.R. Marketing decision.
In J.R. Marketing, the insurance company refused to defend and indemnify the insured in an underlying lawsuit. The insured hired its own counsel to defend and then brought a coverage action against the insurer. The insurance company then changed its position and agreed to defend, but it demanded that its own counsel represent the insured instead of the insured’s chosen counsel. The Court of Appeal held that where the insurance company breaches its duty to defend, it loses all rights to control the defense. 216 Cal.App.4th at 1457. The California Supreme Court affirmed. 61 Cal.4th at 1002.
Unlike the situation in J.R. Marketing, the insurance company in the Centex case, Travelers, never denied coverage; it simply delayed responding to the policyholder’s tender. The court noted that neither party was able to find a case “clearly delineating the point at which an insurer’s delay amounts to a breach of its duty to defend.” The court determined that where the complaints were tendered to Travelers before the insured’s responsive pleadings were due, the insurance company’s duty to defend was not triggered until that time, but in each of the two underlying cases, Travelers did not accept the insured’s tender until after the responsive pleading deadline. In one case, the delay was as little as 13 days and in the other case, Travelers did not accept coverage until 67 days after its duty to defend was triggered.¹ In both cases, the court recognized that there was a time period where Travelers had a duty to defend but did not provide a defense, and the insured had to employ its own defense counsel.
Travelers argued that it did not breach its duty to defend, as it had the right to investigate before accepting the insured’s tender and because it reimbursed the insured for defense expenses incurred before it accepted coverage. The court rejected these arguments, stating that “[a] failure to provide counsel or to guarantee the payment of legal fees immediately after an insurer’s duty to defend has been triggered constitutes a breach of the duty to defend, even if the insurer later reimburses the insured.”
Accordingly, the court found that Travelers breached its duty to defend and, as a result, it lost its right to control the insured’s defense.
The ruling in this case, if widely adopted, will greatly benefit policyholders seeking a defense against underlying litigation. Insurance companies will now be required to act expediently in analyzing coverage and responding to claims. Insurers no longer will be permitted to delay responding while their insureds are forced to retain their own defense counsel, and later require their insureds to accept new and different counsel weeks or even months into the defense of a matter. If insurers do not act promptly, they will lose their right to control the insured’s defense, which means they will have to accept the insured’s choice of defense counsel and will no longer get to control litigation strategy or decide whether or not to settle a case.
- Overall, it took Travelers 131 and 135 days, respectively, to respond to the policyholder’s tender.