Late Notice May Insure Responsibility for Pre-Tender Defense Costs

Texas requires automobile liability insurers and general liability insurers to include language in their policies establishing a “prejudice” requirement before late notice can be used as a defense. For instance, most general liability policies provide that:

With regard to Bodily Injury and Property Damage Liability, unless we are prejudiced by the insured’s or your failure to comply with the requirement, any provision of this Coverage Part requiring you or any insured to give notice of “occurrence”, claim or “suit”, or forward demands, notices, summonses or legal papers in connection with a claim or “suit” will not bar coverage under this Coverage part.

Accordingly, even though an insured fails to give the insurer timely notice of an occurrence, a potential claim, or even a lawsuit, the insurer may still owe indemnity, unless it can establish some prejudice from the delay. Prejudice may occur if there has been an opportunity to settle, an inability to control the defense, loss of evidence or witnesses, or some other change in circumstance that materially and detrimentally impacts the case.

In other instances, too, the Texas Supreme Court has indicated that it may impose a materiality requirement on any claim for breach of a policy condition. In cases involving late notice and late forwarding of suit papers, most courts have been reticent to find prejudice. The one notable exception is when a default has already been taken against the insured—in which case prejudice may be established as a matter of law.

Even if indemnity is still owed, late notice may impact the insurer’s obligation for defense costs. Texas courts seem willing to recognize that notice by the insured is a prerequisite to imposition of the defense obligation. Therefore, if the insured hires counsel, and mounts its own defense for a year before notifying the insurer, the insurer may still owe indemnity for a judgment but likely does not owe reimbursement for the defense costs incurred by the insured prior to notice.

Pre-tender defense costs were at issue in Nagel v. Kentucky Central Ins. Co. 894 S.W.2d 19 (Tex. App.—Austin 1984, writ denied). In that case, the insureds argued that they were entitled to recover pre-tender defense costs under the doctrine of quantum meruit. Quantum meruit is an equitable theory of recovery based on an implied contractual agreement. The insureds argued that they had provided a service to the insurer by providing a defense that the insurer would otherwise be obligated to provide, and therefore ought to be reimbursed. The court rejected this argument, finding instead that, because the policy specifically addressed the insurer’s defense obligations and the conditions precedent to that obligation, there could be no claim for quantum meruit. It also noted that the policy specifically required that the insured not, except at its own cost, voluntarily make any payments or assume any obligations.

Similarly, in E&L Shipping Co. Inc. v. Hanover Ins. Co., 962 S.W.2d 272 (Tex. App.—Beaumont 1998, no writ), the court applied the voluntary payments clause to reject a claim for pre-tender defense costs. In E&L Shipping, the insureds entirely failed to notify the insurer or to forward suit papers during the pendency of the underlying suit. The court acknowledged the general argument that prejudice must exist to assert a condition precedent, but did not reach it. Instead, the court concluded that, because defense was never tendered, there was never a defense obligation. The court also held, in the alternative, that the prohibition against voluntary payments would preclude coverage.

Courts from other states appear to agree that a failure to provide notice obviates the requirement to pay pre-notice expenses. See, e.g., Towne Realty, Inc. v. Zurich Ins. Co., 548 N.W.2d 64 (Wisc. 1996) (finding tender of defense was condition precedent to a duty to defend); Jamestown Builders, Inc. v. General Star Indem. Co., 77 Cal. App. 4th 341 (Cal. App. 1999) (holding that voluntary payments clause relieves insurer of a duty to reimburse pre-notice defense costs).

While the cases addressing pre-tender defense costs are reasonably straightforward, the issues can become complicated when another party, such as the plaintiff or another insurer, provides notice of the suit, although the insured does not. Texas cases addressing a general duty to provide notice of suit and to forward suit papers shed some light on this topic. In those cases, courts have generally recognized that an insurer should not have a duty to undertake defense until and unless the insured itself requests it. Therefore, notice from a plaintiff should not be sufficient to trigger a defense obligation. Notice from another insurer is somewhat more complicated. Texas does recognize that insurers who provide concurrent coverage have equitable subrogation rights. Arguably, however, the equitable subrogation right is still derivative of the
insured’s own rights, and the insured’s own failure to provide notice is a defense to coverage.

Finally, the same case law and policy provisions that control pre-notice defense costs should also apply to the supplementary payments provisions. Most liability policies include provisions for reimbursing the insured certain expenses, or loss of income, incurred to assist in the defense—at the request of the insurer.

Based upon the reasoning of the cases addressing pre-tender defense costs, an insured seeking to recover supplementary payments should not be entitled to do so if the alleged expense outlay or loss of income was incurred prior to providing notice and tendering defense to the insurer.

Insureds who fail to give timely notice may also face other obstacles. Not only does the policy’s voluntary payments clause probably prohibit coverage for any settlement that is reached before notice is provided, in addition, the insured may face arguments of failure to mitigate, if it does not fully and adequately defend itself.

Therefore, if there is any potential coverage, the prudent insured should provide notice to the insurer as soon as possible, and should tender suit papers to the insurer immediately upon receipt.

Bradley is a partner in the Dallas office of Thompson, Coe, Cousins & Irons, L.L.P. She is a member of the Insurance Litigation and Coverage Section and leads the firm’s coverage practice. She has represented agents in disputes with policyholders and insurers and routinely represents insurers in evaluating and litigating coverage issues under general and professional liability policies, commercial auto and trucking policies, commercial property policies and homeowners policies.

Topics Lawsuits Carriers Texas Claims