Florida Court Holds Insurer Not Estopped From Denying Pre-Tender Costs

In its recent decision in Embroidme.Com, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 7715 (S.D. Fla. Jan. 23, 2014), the United States District Court for the Southern District of Florida had occasion to consider an insurer’s obligation to reimburse its insured for pre-tender defense costs under Florida law, and whether its disclaimer of such costs is governed by Florida Claims Administration Statute, Fla. Stat. § 627.426(2).

Travelers insured Embroidme.com under a general liability policy with web site injury protection.  Embroidme.com was named as a defendant in an underlying copyright infringement lawsuit in April 2010.  On June 28, 2010, Embroidme.com retained counsel to defend it in the lawsuit.  Embroidme.com, however, did not tender the matter to Travelers until October 2011.  Travelers subsequently agreed to provide its insured with a defense, but disclaimed any coverage obligation with respect to Embroidme.com’s pre-tender defense costs.  Embroidme.com challenged Travelers’ disclaimer of coverage on the basis that the policy did not expressly bar coverage for pre-tender costs and that Travelers’ disclaimer of coverage for such amounts was untimely and thus in violation of Florida Claims Administration Statute, § 627.426(2).

Florida Claims Administration Statute, § 627.426(2) states, in relevant part, that an insurer is estopped from denying coverage unless “(a) Within 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured by registered or certified mail sent to the last known address of the insured or by hand delivery.”  The statute also discusses the insurer’s obligation to disclaim coverage or provide an insured with a defense within sixty (60) days of filing of suit.  For the purpose of the statute, a “coverage defense” is defined as “a defense to coverage that otherwise exists.”

In considering the statute, the court found that Traveler’s coverage correspondence to Embroidme.com was late under the statute: its initial reservation of rights letter was issued forty-two (42) days after Embroidme.com’s initial tender, and Travelers did not actually retain counsel until another ninety-one (91) days later.  Thus, reasoned the court, if coverage for pre-tender defense costs could be considered a “coverage defense” for the purpose of the statute, then Travelers’ failure to issue its letters in a timely fashion would result in an estoppel of its right with respect to this defense.

The court nevertheless concluded that the pre-tender defense issue was not a “coverage defense,” but instead a policy condition.  In particular, the policy precluded the insured from “voluntarily assuming any obligation or incurring any expense without Travelers' consent.”  Thus, reasoned the court, “under the plain language of the Policy there is no coverage for the defense costs incurred without Travelers' knowledge and not at Travelers' request.”  This was not a “coverage defense,” but instead a precondition to coverage not subject to statutory estoppel under § 627.426(2).  As such, the court held in Travelers’ favor, concluding that its denial of coverage for pre-tender defense costs was appropriate and that Travelers’ delay in issuing coverage correspondence did not result in statutory estoppel.