When coverage is at issue, the interplay between a policy’s language and an insurer’s duties under the Claims Administration Statute, Florida Statute Section 627.426, becomes a key factor in claims handling for insurers. In EmbroidMe.com, Inc. v. Travelers Property Casualty Company of America, 845 F.3d 1099 (11^th Cir. 2017), the Eleventh Circuit recently discussed the roles – and timing – of reservations of rights letters as they pertain to coverage defenses and policy exclusions.

The Facts

In EmbroidMe.com, an insured was sued for copyright infringement.  Although EmbroidMe had insurance that provided coverage for this type of claim, it did not immediately report the claim to its insurance company. Instead, EmbroidMe retained its own attorney and litigated the case for over eighteen months. EmbroidMe finally notified its insurer of the litigation, and tendered the claim for defense and indemnification, after incurring attorneys’ fees and costs in excess of $400,000.

The insurer sent a reservation of rights letter to EmbroidMe forty-two days after it received notice of the claim. The letter stated that the insurer would provide a defense in the lawsuit, but made clear that it would not reimburse the insured for the attorney’s fees and costs it incurred before providing notice of the claim. The insurer ultimately settled the case on behalf of EmbroidMe, while reiterating its position that it would not reimburse EmbroidMe for the pre-tender fees and costs.

EmbroidMe later sued the insurer for breach of contract, seeking reimbursement of the pre-tender attorney’s fees and costs totaling over $400,000. In seeking summary judgment, the insurer relied on its policy language, which stated 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.” (emphasis added). Further, the policy provided that the insurer will pay “[a]ll reasonable expenses incurred by the insured at our request to assist us in the investigation or defense of the claim or ‘suit’ . . . .” (emphasis added).

EmbroidMe contended that the insurer was estopped from relying on the policy’s clear language, because the insurer’s reservation of rights letter was untimely pursuant to Florida’s Claims Administration Statute, Fla. Stat. § 627.426. That statute provides that a liability insurer shall not be permitted to deny coverage based on a particular coverage defense unless “[w]ithin 30 days after the liability insurer knew or should have known of the coverage defense, written notice of reservation of rights to assert a coverage defense is given to the named insured . . . .” Fla. Stat. § 627.426(2)(a). 

In this case, the insurer did not send a reservation of rights letter until forty-two days after it received notice of the claim. EmbroidMe therefore argued that the insurer was estopped from denying payment of the pre-tender fees and costs. 

As noted above, the notification requirement of the Claims Administration Statute applies only to a “coverage defense,” which is a defense to coverage that would otherwise exist. Under Florida law, this statute had already been interpreted to not apply to policy exclusions. See AIU Ins. Co. v. Block Marina Inv., Inc., 544 So. 2d 998 (Fla. 1989). So, for example, an insurer’s failure to raise the intentional acts exclusion in a timely reservation of rights letter would not preclude the insurer from relying on that exclusion to deny coverage. 

The Eleventh Circuit found that “the policy provision here precluding reimbursement for litigation expenses incurred by an insured without the prior consent of the insurer falls within the exclusion category, not the coverage defense classification.” Accordingly, the Claims Administration Statute was inapplicable and the insurer’s failure to issue a reservation of rights letter within thirty days could not create coverage where none otherwise existed. 

Not a Coverage Defense

The ultimate takeaway from this case is that policy language stating that “no insured will . . . incur any expense . . . without our consent” should be interpreted as an exclusion, and not a coverage defense. As a comparison, classic examples of coverage defenses—which may be waived if rights are not reserved within thirty days after the liability insurer knew or should have known of the coverage defense —include late notice and lack of cooperation.

As a matter of best practices, insurers should send all reservation of rights letters—even those only citing potential policy exclusions—to insureds within thirty days of claim notice. By doing so, insureds cannot use the Claims Administration Statute as leverage in arguing that a potential defense may have been waived.