March 12, 2019 Construction 101

The Tender Letter – How to Make Sure that You Properly Trigger Coverage

Alex Chazen, Esq.

The tender letter is the most important, although often overlooked, task of any lawyer that works in the construction industry.  This is typically your client’s first communication about a new claim with their insurance company and can often be the difference between an easy transition into coverage for your client, a lengthy battle with an insurance company, or, at worst, a denial of coverage.  This article will look at the five W’s (Who, What, Where, When, and Why – although slightly out of order) of the tender letter.

1. Why Is the Tender Letter So Important?

The simplest explanation is that your tender letter could mean the difference between your client paying thousands of dollars in legal fees and costs out of their own pocket versus an insurance carrier paying those dollars pursuant to an insurance policy that your client probably purchased (and paid premiums on) for this exact scenario. 

2. Where Do I Begin?

Understanding what information you need to include in your tender letter begins with an understanding of what triggers defense coverage.  Although the law shifts from state to state, most jurisdictions agree that the duty to defend is much broader than the duty to indemnify.  For purposes of illustrating the differences across jurisdictions, this article will limit itself to California, Texas, and Florida.  However, knowing exactly what the coverage triggers are in your state are crucial to crafting a good tender of defense on behalf of your client.

In California, an insurer owes a broad duty to defend against claims that create a potential for indemnity under the insurance policy. Hartford Cas. Ins. Co. v. Swift Distrib., Inc. 59 Cal.4th 277 (2014).  In order to obtain coverage, the insured must prove the mere existence of a potential for coverage, while to deny coverage, the insurer must establish the absence of any such potential. Id.  An insurer may properly refuse to defend only where undisputed facts conclusively show liability would be excluded under the policy. See Nat’l Auto. & Cas. Ins. Co. v. Stewart 223 Cal.App.3d 452, 463 (1990); Wausau Underwriters Ins. Co. v. Unigard Sec. Ins. Co. 68 Cal.App.4th 1030, 1035 (1998). 

Texas’ standard differs slightly in that courts apply the “eight corners” rule to make a determination of whether a duty to defend exists. Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex. 2008).  Essentially, in most circumstances, the court will only look at two documents to determine whether coverage exists – the insurance policy and the pleading that allegedly gives rise to coverage.  King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002).  Facts that are learned before the lawsuit is filed, statements of the insured, and even the actual veracity of the pleadings do not affect the duty to defend in Texas.  See Trinity Universal Ins. Co. v. Cowan, 945 S.W.2d 819, 829 (Tex. 1997); Nokia, 268 S.W.3d at 491.  Similar to California, in Texas, the insured has the burden to prove that a claim is potentially covered, while an insurer can refuse to provide a defense only when the facts as alleged fall outside of the coverage grant or when an exclusion applies that negates any potential for coverage.  Nat’l Union Fire Ins. Co. v. Merchants Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997) (quoting Heyden Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)).

Florida also purports to follow the “eight corners rule”.  Colony Ins. Co. v. Barnes, 410 F. Supp. 2d 1137 (M.D. Fla. 2005).  Courts in Florida have even stated that, although indemnity coverage determinations can be colored by facts that are outside the allegations of the lawsuit, the carrier’s determination of the duty to defend cannot rely on any information other than what is alleged in the pleading.  State Farm Fire & Cas. Co. v. CTC Dev. Corp., 720 So. 2d 1072 n. 3 (Fla. 1998).  Much like Texas, carriers in Florida must provide a defense to their insured even if the facts alleged are untrue or the legal theories alleged are unsound because, in determining if there is a duty to defend, only the allegations of the complaint factor into the analysis. Grissom v. Commercial Union Ins. Co., 610 So. 2d 1299 (Fla. 1st DCA 1992).  The insurer’s duty to defend the insured, once invoked, continues throughout the case until the claims giving rise to coverage are eliminated from the suit.  Baron Oil Co. v. Nationwide Mut. Fire Ins. Co., 470 So. 2d 810 (Fla. 1st DCA 1985).

3. When Do I Write My Initial Tender?

Tender as early as possible.  In all three of the jurisdictions explored above, the duty to defend is triggered upon tender.  Haskel v. Superior Court 33 Cal. App. 4th 963, 974 (1995); Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 768 (5th Cir. 1999); EmbroidMe.com, Inc. v. Travelers Prop. Cas. Co. of Am., 845 F.3d 1099 (11th Cir. 2017).  What this means is that every dollar your client spends defending a case prior to the date of their initial tender will not be recouped from an insurance company if and when the duty to defend is triggered.

4. To Whom Do I Tender?

When tendering the defense of your client, determining who to tender to requires some background information about the underlying project and the scope of work of your client.  At a baseline, you will want to work with your client to determine which of their primary policies to tender to and which to only put on notice of the lawsuit.  These are the policies actually purchased by your client (most often a Commercial General Liability policy).

  If your client retained subcontractors, and required those subcontractors to name your client as an additional insured, you will also want to tender to the carriers of those subcontractors for defense as an additional insured.  One of the first things to discuss with your client when they notify you of a lawsuit is who else was involved, what types of contracts did they sign, and who might have an obligation to defend and/or indemnify them for this lawsuit.  If you represent general contractors, make a habit to maintain an insurance history for the subcontractors that they use most often so that you are prepared to tender to their carriers immediately upon a new filing. 

Remember that, in tendering, you are trying to obtain as much coverage as possible for your client, so you want to cast as broad of a net as possible.  Especially when tendering to subcontractor carriers, you should not be afraid of declinations – this will help you determine what the overall coverage picture looks like going forward, as well as guide your client to possibly amend their practices regarding verification of their subcontractors’ insurance coverage.  As discussed above, the date of your tender matters, so if there is a potential for coverage, send a letter.

5. What Should My Tender Letter Look Like?

Taking everything discussed above into account, your tender letter should be somewhat customized to your particular situation.  If you are in an “eight corners” state, you should provide the initial pleading and some analysis for the carrier about how you believe coverage may be triggered.  If you are in a state where carriers can take a more holistic look at the facts, provide the carrier with everything that you think they need to understand that a possibility for coverage exists (e.g., contracts, change orders, payment records, defect lists, repair proposals, etc.). 

At the end of the day, the most important aspect of your letter is that it provides notice to the carriers which might be providing coverage to your client of the new claim and does so as early in the process as possible.

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Alex Chazen, Esq.

Kahana & Feld LLP, Orange County, California