Insurer's Duty to Defend is Not Triggered Until Insured Tenders its Defense
In a matter of first impression under Texas law, the federal district court for the Northern District of Texas was faced with the issue of whether an insurer owes a duty to pay pre-tender defense costs where the insurer has knowledge of the claims against its insured prior to the tender. U.S. District Judge McBryde granted defendant National Union Fire Insurance Company of Pittsburgh, Pennsylvania’s (“National Union”) motion for summary judgment, L’Atrium on the Creek I, L.P. v. National Union Fire Ins. Co. of Pittsburgh, PA., 326 F.Supp.2d 787 (N.D. Tex. 2004).
National Union issued a commercial general lines policy to the insured, the owner of an apartment complex. A resident of the apartment complex was sexually assaulted by a security guard employed by the insured and subsequently filed suit. The insured hired its own counsel who filed an answer on the insured’s behalf. The insured did not tender its defense to National Union. The insured continued to defend itself even after having received a $750,000 settlement demand.
Almost a year and a half later, the plaintiff’s counsel sent two letters to National Union notifying it of the suit and a pending mediation. Because the insured had not provided notice of the lawsuit or requested a defense from National Union, National Union declined to participate in the mediation.
A year later, the insured finally tendered its defense to National Union. National Union responded that it would defend and indemnify the insured subject to a reservation of rights. National Union also advised the insured that it would reimburse reasonable defense costs incurred from the date of tender but declined to reimburse the insured for its pre-tender defense costs. National Union timely paid the insured’s post-tender defense costs and ultimately settled the lawsuit on behalf of the insured.
The insured then brought suit against National Union for breach of contract and violations of art 21.21 of the Texas Insurance Code and the Texas Deceptive Trade Practices Act arising from the denial of payment for the pre-tender defense costs.
The insured argued that National Union was obligated to pay the pre-tender defense costs from the date it had notice of the lawsuit by way of the correspondence from the plaintiff’s counsel. National Union did not dispute its knowledge of the lawsuit but argued that the insured never tendered its defense or gave any indication that it desired a defense from National Union.
In granting summary judgment to National Union, the Court first cited to established precedent under Texas law that an insurer’s duty to defend is only triggered by service of process upon its insured and its relay to the insurer. The Court noted that the purpose of a notice of suit provision is to notify the insurer that the insured has been served with process and that the insurer is expected to defend. The court concluded that it is the insured’s duty to notify the insurer of the suit against it.
Addressing the insured’s contention that notice to the insurer can come from any source, the Court held that it is the action by the insured in sending the suit papers to the insurer that triggers the insurer’s obligation to tender a defense and answer the suit. The Court noted that National Union was entitled to rely on the fact that the insured was represented by counsel and could have demanded a defense if it wanted National Union to be involved. An insurer should not have to guess whether an insured desires a defense.
This case confirms that an insured owes a duty to specifically notify the insurer of a lawsuit and request a defense. An insurer’s duty to defend is not triggered until this happens, even if the insurer has notice of a lawsuit filed against the insured.
Editor’s Note: Thompson Coe represented National Union.