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The Eleventh Circuit ruled that an insurer has no obligation to reimburse the policyholder for pre-tender defense costs, holding that the insurer was not estopped from denying payment based on its failure to comply with a state statute relating to notice of coverage defenses.  EmbroidMe.com, Inc. v. Travelers Prop. Cas. Co. of Am., 2017 WL 74694  (11^th Cir. Jan. 9, 2017).

EmbroidMe, a promotional products franchise, was sued for copyright infringement.  It retained defense counsel without notifying Travelers, its liability insurer.  Nearly eighteen months after a complaint was filed, EmbroidMe tendered the claim to Travelers.  At that point, EmbroidMe had paid more than $400,000 in attorneys’ fees.  Travelers agreed to defend under a reservation of rights, but refused to reimburse EmbroidMe for pre-tender defense costs.  In ensuing litigation, EmbroidMe alleged breach of contract based on Travelers’ refusal to pay the pre-tender defense costs.  EmbroidMe acknowledged that the policy expressly required consent from Travelers before incurring costs, but argued that Travelers was estopped from denying payment based on its failure to comply with Florida’s Claims Administration Statute (“CAS”), Fla. Stat. §627.426 (1983), which requires a liability insurer to notify its insured within 30 days of any defense it intends to assert in support of a coverage denial.  EmbroidMe argued that Travelers was estopped from denying payment for defense costs because it did not notify EmbroidMe of its refusal to pay until 42 days after tender.  A Florida district court disagreed and ruled in Travelers’ favor.  The Eleventh Circuit affirmed.

Addressing this matter of first impression, the Eleventh Circuit reasoned that Travelers’ refusal to reimburse expenses to which it had not consented did not constitute a coverage defense and therefore, the CAS did not apply.  The court explained that Travelers’ denial was based on an exclusion, because the policy expressly excluded expenses incurred without insurer consent.  This distinction between a coverage defense and an exclusion is significant, because the CAS applies to coverage defenses but not exclusions.  The court stated:  “the CAS cannot resurrect coverage that has been explicitly excluded and because the provision here constitutes such an exclusion . . . EmbroidMe is not entitled to reimbursement of legal expenses that it incurred without the permission of Travelers.”