March 21, 2013 Articles

Pre-Tender Costs Should Be Recoverable Absent Prejudice

Fairness and efficiency demand a more careful allocation of harm.

By George M. Plews and Ryan T. Leagre – March 21, 2013

On the second day of contracts, every first-year law student confronts the remedy problem. When a contract is breached, what is the proper consequence?

This begins a deeper understanding of contractual relationships. Unless the breach destroys the essence of the agreement, breaches typically are addressed via damages. Damages allow scaling the burden on the breaching party to the actual harm caused. Any other result is unfair and inefficient. It misallocates resources, overtaxing the breaching party and providing a windfall to the other party of relief beyond actual injury.

Yet courts sometimes miss this point deciding whether a policyholder can recover costs incurred prior to “tender” of a claim to its insurer. Application of a “prejudice” test—requiring an insurer to show it has actually been damaged by the delay—would limit an insurer to damage it has actually sustained. But a number of courts have completely barred pre-tender costs, eschewing prejudice analysis. E.g.Travelers Ins. Co. v. Maplehurst Farms, 953 N.E.2d 1153, 1160–61 (Ind. Ct. App. 2011), transfer denied, 967 N.E.2d 1032 (Ind. 2012).E.g., Travelers Ins. Co. v. Maplehurst Farms, 953 N.E.2d 1153, 1160–61 (Ind. Ct. App. 2011),trans denied, 967 N.E.2d 1032 (Ind. 2012). Fortunately, this is not a majority view. Most courts have applied prejudice analysis. E.g., Roberts Oil Co. v. Transamerica Ins. Co., 833 P.2d 222, 231 (N.M. 1992).

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