Pigs Fly: Insurers Win on Pre-Tender Issue in Indiana
There was a time back in the 1980’s when Indiana was viewed as a relatively conservative jurisdiction as far as insurance law went. During this era, there was also a general view that the duty to defend did not arise until such time as a claim was presented to an insurance company to defend. Since then, however, Indiana has become a notoriously difficult jurisdiction for insurers and courts around the country have warmed to the idea that insureds can recover “pre-tender” defense costs unless their delay in giving notice caused prejudice to the insurer.
Now, in an astonishing turn of events, the Indiana Supreme Court has turned the clock back and has adopted a sensible analysis of an insurance policy that clearly distinguishes between the prejudice rules that most jurisdictions have adopted in the context of an insured’s failure to give timely notice of an accident or suit, and the requirement of tender as being a pre-condition to the duty to defend in the first instance.
The insured in Dreaded, Inc. v. St. Paul Guardian Ins. Co., had received cleanup demands from the Indiana Department of Environmental Management in November of 2000 and again in August 2003 but failed to alert its CGL carriers to these claims until March 2004. St. Paul thereafter agreed to provide a defense under a reservation of rights but declined to reimburse its insured for costs incurred prior to March 2004. The trial court entered summary judgment for St. Paul, declaring that even if a showing of prejudice was required, a delay of three and a half years in tendering the underlying claims was unreasonable as a matter of law and gave rise to a presumption of prejudice.
In December 2007, the Indiana Court of Appeals reversed, declaring that although the insured’s delay was unreasonable, the insured had raised sufficient facts to rebut any presumption that St. Paul had been prejudiced by its delay. The court took note of the fact that St. Paul did nothing after receiving notice to alter the manner in which the case was being defended and retained the same attorneys and environmental consultants. Further, the court was persuaded by evidence presented by the insured that its defense up to that point had been reasonable and appropriate. As a result, the Appeals Court held that the trial court should not have granted summary judgment to St. Paul.
On April 29, 2009, however, the Indiana Supreme Court held that although the “presumption of prejudice” rule applied with respect to an insured’s failure to give notice of an accident, in this case what was at issue was the insurer’s duty to defend. The court ruled that an insurer cannot defend a claim of which it has no knowledge and that, “The insurer’s duty to defend simply does not arise until it receives the foundational information designated in the notice requirement. Until an insurer receives such enabling information, it cannot be held accountable for breaching this duty.” As a result, the Supreme Court ruled that the insurers were not liable for reimbursing Dreaded for its pre-tender costs.
It should be admitted that some of the confusion that courts have engendered in this area arose in part from the advocacy of insurance coverage lawyers who relied on case precedents involving the voluntary payment prohibition and other breaches of the cooperation clause as a basis for arguing that insurers had no duty to reimburse for costs incurred prior to the date of tender. See, e.g. Truck Ins. Exch. v. Unigard Ins. Co., 79 Cal. App. 4th 966, 976 (4th Dept. 2000).
This new opinion from the Indiana Supreme Court should remind us, however, that the stronger argument in such cases is that the requirement of tender is a condition precedent to any defense obligation arising as a matter of contract and that, as no defense obligation can exist prior to a lawsuit being tendered for defense, an insurer should have no obligation to reimburse pre-tender defense costs.
