Duty to Defend Does not Arise Until Defense is Tendered by the Insured
November 19, 2012
The insured brought an action against its insurer, alleging that the insurer had a duty to defend it. Following a grant of the insured's motion for partial summary judgment, the insured moved for fees it incurred prior to tendering defense of the underlying suit to the insurer. This case is Burgett, Inc. v. American Zurich Insurance Company, 2012 WL 3233939.
This matter arises out of Burgett's motion for partial summary judgment for payment of attorneys' fees that it incurred prior to November 23, 2010, the date that Burgett tendered to American Zurich the defense of an underlying action brought against Burgett by Persis International.
In a prior decision, the court held that the insurer breached its duty to defend Burgett in the underlying lawsuit. The court also awarded reasonable attorneys' fees for breach of the duty to defend. Since that order, American Zurich has paid Burgett for some of its expenses incurred defending the underlying action, but the insurer has refused to pay any fees Burgett incurred prior to tendering defense of the underlying action to American Zurich. Burgett then filed this motion asking the court to order American Zurich to pay for those fees incurred defending the Persis action prior to tendering defense of that action to the insurer. So, the sole issue before the court is: under California law, is an insurer who previously breached its duty to defend required to pay fees incurred by the insured prior to tendering defense of the underlying action?
The central argument put forth by Burgett is that, because American Zurich originally declined to defend the Persis action, and Burgett had to seek a court order to invoke the duty to defend, the date that Burgett tendered defense is irrelevant. The insured asserted that the duty to defend is broader and requires an insurer that has breached its duty to defend to pay all fees incurred by the insured, both pre- and post-tender. Burgett claimed that in addition to American Zurich's undisputed duty to defend post-tender, there is an additional implied-in-law duty that requires the insurer to reimburse Burgett for its defense expenses incurred prior to the date of tender.
American Zurich argued that California case law has long held that no duty to defend can arise before the insured tenders the defense of third party lawsuits to the insurer. The insurer said that the tender of defense is a condition precedent to the insured's right to be indemnified. Thus, whatever a carrier might do after tender cannot create a duty to reimburse fees incurred prior to tender, since no duty exists until tender.
The United States District Court for the Eastern District of California decided that the insured is only entitled to those fees it would have incurred had the insurer initially accepted defense of the Persis action, and so, Burgett's motion is denied. The court noted that while Burgett asks the court to impose an implied-in-law obligation upon the insurer to reimburse fees incurred prior to tender, American Zurich has directed the court to a significant body of California case law containing express language stating that there is no duty to defend until the insured tenders defense of the underlying action. Specifically, under California law, it is well understood that an insurer's duty to defend does not arise until defense is tendered by the insured and the known facts point to a potential for liability under the insurance policy.
As for Burgett's arguments, the court said that the insured cited no California law reinforcing its position and this underscored the tenuous nature of its argument. Burgett could not argue that there is some unstated, yet implied, duty upon insurers to pay fees that it would not have had to pay had it originally accepted tender.
The insured's motion was denied in its entirety.
Editor's Note: The U.S. District Court, following clear California law, holds that an insurer is not obligated to reimburse the insured for expenses incurred prior to tendering defense to the insurer. While an insurer is undoubtedly liable for the consequences flowing directly from a breach of its duty to defend, it is not liable for costs incurred before it did anything wrong and was unaware that there was even a claim to defend.