Insurance carriers can breathe a little easier. The Eleventh Circuit recently ruled, in EmbroidMe.com, Inc. v. Travelers Property & Casualty Co. of America, that an insurer did not have to pay attorneys’ fees incurred by its insured before the insured notified it of the litigation.
In EmbroidMe, EmbroidMe.com was sued by JCW Software LLC (“JCW”) for improper distribution of a software program in violation of a 2007 settlement agreement. Before the lawsuit, EmbroidMe.com purchased a commercial general liability insurance policy with Travelers. EmbroidMe.com and Travelers agreed that the under the terms of the policy, Travelers would provide defense and indemnity. The problem was, however, that EmbroidMe.com never notified Travelers of JCW’s lawsuit. Fourteen months and almost $406,000 in legal fees later, EmbroidMe.com finally notified Travelers of the litigation. Travelers agreed to defend the lawsuit going forward but refused to reimburse EmbroidMe.com for pre-tender legal fees.
Thereafter, JCW filed a second lawsuit and the U.S. District Court for the Southern District of Florida dismissed JCW’s first action. Both lawsuits eventually settled at mediation, with Travelers having paid all post-tender legal fees through settlement. In the U.S. District Court, EmbroidMe.com sued Travelers for breach of contract for denying its duty to pay pre-tender fees. EmbroidMe.com argued that Travelers’ denial of pre-tender fees came 39 days after EmbroidMe.com’s notice, which is beyond the 30-day requirement under the Florida Claims Administration Statute (“CAS”).
Travelers, on the other hand, argued that it was not required to reimburse EmbroidMe.com for pre-tender fees incurred without its knowledge or permission. The policy at issue was straight-forward. It provided that “no 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 our consent.” Relying on the terms of the policy, Travelers argued, “the policy provisions excluding it from any responsibility to pay legal fees incurred by the insured without its prior approval constituted an exclusion, not a defense to coverage of a claim.” The U.S. District Court agreed with Travelers.
On appeal, the critical question facing the Eleventh Circuit was whether Travelers’ post-30-day denial fell under the purview of a coverage defense (CAS would apply) or coverage exclusion (CAS would not apply). In answering this question, the Eleventh Circuit found unequivocal the policy’s “voluntary payments” provision that precluded an insured from recovering legal fees that it had incurred without the insurer’s consent. Moreover, the court opined, common sense should alert an insured that it could not expect its insurer to pay for fees unilaterally incurred.
In rejecting EmbroidMe.com’s position that the voluntary payments provision was tantamount to a coverage defense, the court differentiated between an insurer’s duty to defend and its duty to indemnify. A complaint’s allegations trigger a duty to defend and the potential that the insurance policy may cover the claims. By contrast, an insurer’s duty to indemnify arises only after completing all fact finding and it is determined that the subject conduct or occurrence is covered by the policy.
In its arguments to the appellate court, EmbroidMe.com conflated the insurer’s duties to indemnify and to defend. The CAS requires the insurer to notify the insured of any defenses to its duty to indemnify but imposes no requirement about notifying of defenses to its duty to defend.
To reach its conclusion, the Eleventh Circuit relied on a Florida Supreme Court case and its progeny which stood for the proposition that an illogical result would follow if a CAS violation extended coverage to claims expressly excluded in the policy. The Court explained that CAS is usually applied to indemnity questions, not defense, and the one exception involved an insurer found liable to pay fees that the insured had paid for six months before notification. The court distinguished the exception case, Beville, by opining that there, the insurer asserted a reservation of its right to deny coverage based on untimely notice and failed to obtain mutually agreeable counsel. By contrast, here, Travelers made no reservation of its right to deny coverage and did not breach the CAS.
Insurance companies can use EmbroidMe to exclude pre-tender coverage under policy language that requires consent. If you have any questions please contact one of CSK’s Construction Group Team Leaders.
 EmbroidMe.com, Inc. v. Travelers Prop. Cas. Co. of Am., 845 F. 3d 1099 (11th Cir. 2017).
 Id. at 1102.
 Id. at 1103.
 Id. at 1104.
Id. at 1105; Fla. Stat. § 627.426 (2016).
 Id. at 1106.
 Id. (emphasis added).
 Id. at 1104.
 Id. at 1115.
 Id. at 1106.
 Id. at 1107.
 Id.at 1110.
 AIU Ins. Co. v. Block Marina Inv., Inc., 544 So. 2d 998 (Fla. 1989).
 Id.at 1111.
 Nationwide Mutual Fire Ins. Co. v. Beville, 825 So. 2d 999 (Fla. 4th DCA 2002).
 Id. at 1113-15.
 Id.at 1116.