Like many of you, reservation of rights letters have a prominent place in my work.  I draft a lot of them.  And I read a lot drafted by others. 

There is one issue that I frequently see overlooked in these letters.  The insurer agrees to defend its insured under a reservation of rights and pay the insured’s counsel’s defense costs.  However, in agreeing to defend, the letters often fail to state that the payment of defense costs is limited to those incurred subsequent to the insured’s notice of claim.  In other words, the letters do not disclaim coverage for pre-tender defense costs.

Consider the case of a relatively short delay in placing the insurer on notice, say three months.  That may not be tardy enough to disclaim a defense based on late notice, as prejudice – required in most states -- cannot be satisfied.  However, in the great majority of states that have addressed the issue, an insurer need not prove that it was prejudiced, by late notice, to disclaim coverage for pre-tender defense costs.  The general rationale adopted by courts is that an insurer is not obligated to defend a case that it is unaware of.

Based on my count, of the 30 states that have addressed the issue [in some way], an insurer need not prove that it was prejudiced, to disclaim coverage for pre-tender defense costs in, 22 states.  Eight states require prejudice.

This can be no small issue.  Even in the case of a relatively short delay in placing the insurer on notice, the defense costs may be significant.  After all, defense costs are incurred in peaks and valleys.  And the start of the case -- where the defense counsel is figuring it all out and filing a response (possibly a motion to dismiss) -- is one of those times when the defense meter is ticking at a good clip. 

While the issue may not be applicable in every late notice--duty to defend case, it has plenty of relevance.  Pre-tender defense costs is number 9 on my “50 Item Reservation of Rights” checklist!    

At issue in Nucor Steel v. HDI Global Ins. Co., No. 21-1904 (E.D. La. June 1, 2022) was an insurer’s desire to disclaim coverage for pre-tender defense costs, and the insured’s argument that the insurer, having not reserved the right to do so, waived it.

While the court sided with the insurer – and found no waiver, despite the omission in the reservation of rights letter -- the case makes the point that addressing pre-tender defense costs is an issue well-worth being addressed by an insurer when agreeing to defend an insured following a delayed tender.