As insurance practitioners understand, promptly providing notice of claims or lawsuits to the insurance carriers as soon as possible is typically the key first step towards recovering costs covered by the insurance policy on behalf of the insured. One area where insureds sometimes fail to provide their insurers with timely notice involves long-term environmental claims initiated against the current or former property owners for decades-old contamination. There are a number of reasons for this circumstance.
For example, insureds are oftentimes pressed by environmental regulatory agencies to clean up contaminated property as quickly as possible. Insureds therefore may focus their attention on investigating the extent of the cleanup, incurring significant environmental defense costs, and inadvertently forget to provide notice to the insurers in the meantime. In addition, insureds may not determine that they have applicable insurance coverage until many years after the environmental claim has commenced, as individuals, officers, or insurance agents may have passed away or dispersed, or the policyholder predecessor entity many have dissolved. As a result, these insureds do not have readily available copies of historical insurance policies and may have to engage historic insurance archaeologists to discover the applicable policies, all of which takes time.
Despite these challenges, many jurisdictions hold that pre-tender defense costs are not recoverable even for long-term environmental claims. It is therefore important for insureds to timely provide notice of a potential environmental claim to the insurers immediately, even if the environmental cleanup may take years, if not decades, to complete.
The rule in most jurisdictions is that pre-tender costs, including environmental defense costs, cannot be recovered by the insured, regardless of whether the insurer was prejudiced from late notice. When an insured is late in providing notice of a claim and the insurer responds by denying all coverage, courts in most jurisdictions consider whether the late notice resulted in prejudice to the insurer when determining the insurer’s post-notice obligations. However, regardless of the relevance that prejudice plays in the context of post-notice obligations, most courts have ruled that an insured is not entitled to recover pre-tender costs, including environmental defense costs, on the basis that an insurer’s duty under the policy does not arise unless and until the insurer has knowledge of the claim.
For example, in Indiana, the leading case with respect to the reimbursement of pre-tender environmental defense costs is Dreaded, Inc. v. St. Paul Guardian Insurance Company, 904 N.E.2d 1267, 1273 (Ind. 2009). In that case, Dreaded, Inc. received a letter from the Indiana Department of Environmental Management (IDEM) demanding that it investigate possible soil contamination at a former business site. Id. at 1269. In response, Dreaded hired counsel and environmental consultants to investigate the contamination and defend against the IDEM claim. Over three years later, Dreaded notified its insurer, St. Paul Guardian Insurance Company, of the IDEM claim and requested that St. Paul reimburse it for past defense costs incurred during the pre-notice period. St. Paul agreed to defend Dreaded from that point forward but refused to reimburse Dreaded for defense costs incurred prior to that point. The trial court granted St. Paul’s motion for summary judgment concluding in part that “[a] policyholder has a duty to tender claims in order to trigger an insurer’s duty to defend under a general liability policy; [a] showing of prejudice is not required in the present case[.]” Id. at 1269.
The Indiana Court of Appeals reversed concluding, in part, that “Dreaded’s delay in notifying St. Paul of the IDEM claim was unreasonable . . . [and] that prejudice must be shown by St. Paul . . . as a result of the delayed notice.’” On transfer to the Indiana Supreme Court, Dreaded urged the court to employ a prejudice analysis, i.e., “Dreaded is entitled to recover its pre-notice defense costs unless St. Paul can prove that it was prejudiced by Dreaded’s late notice.” Id. at 1270. However, the Indiana Supreme Court refused to adopt this approach determining that St. Paul had no obligation to reimburse Dreaded for pre-tender defense costs because notice was provided late. Id. at 1272-73. Specifically, the Dreaded Court held that “as to claims seeking recoupment of an insured’s pre-notice defense costs predicated on an alleged breach of an insurer’s duty to defend, the insurer’s duty to defend did not arise and prejudice is an irrelevant consideration.” Id. at 1268. The Indiana Supreme Court’s holding rests on the notion that “an insurer cannot defend a claim of which it has no knowledge. The function of a notice requirement is to supply basic information to permit an insurer to defend a claim. The insurer’s duty to defend simply does not arise until it receives the foundational information designated in the notice requirement.” Id. at 1273.
Courts applying Indiana law and interpreting Dreaded have held that a policyholder simply “cannot recover costs or expenditures that it incurred prior to giving [its insurer] notice of the underlying environmental claim.” See, e.g., Travelers Insurance Company v. Maplehurst Farms, Inc., 953 N.E.2d 1153, 1160 (Ind. Ct. App. 2011).
Likewise, the U.S. District Court for the District of Oregon clarified whether an insured may recover pre-tender defense costs under Oregon law in Century Indem. Co. v. Marine Group, LLC, No. No. 3:08–cv–1375–AC, 2015 WL 810987 (D. Or. Feb. 25, 2015). In that case, Marine sought to recover costs it incurred in defending an environmental claim related to the remediation of the Portland Harbor Superfund Site prior to tendering such claim to its insurers. Id. at *1, 6. Marine’s insurers argued that they are not responsible for costs incurred by Marine prior to such tender. Id. at *6. Like the policyholder in the Dreaded case, Marine attempted to escape the strict application of the pre-tender rule by arguing that the insurers are unable to establish that they suffered any prejudice as a result of the seven-month delay in tendering the defense to the insurers. Id. at *7. However, the court indicated that prejudice is only a factor when the insurer is seeking to avoid all coverage because the policyholder failed to timely provide notice. Id. at *7-8. The court went on to state that such prejudice analysis is “irrelevant to an insurer’s obligation to pay defense costs incurred before tender because there is no coverage for pre-tender defense costs to begin with.” Id. at *8. The court explained that this is because “policy coverage, including the duty to defend, is not triggered until notice is given and until coverage is triggered, defense costs are not covered.” Id. at *7. Therefore, the court ruled that “pre-tender defense costs are simply not recoverable” under Oregon law. Id. at * 6.
For similar reasons, courts from other jurisdictions have also held that pre-tender environmental defense costs are not recoverable because the insurer’s duty to defend has not been triggered. See, e.g., Domtar, Inc. v. Niagara Fire Ins. Co., 563 N.W.2d 724, 739 (Minn. 1997) (finding that the insured could not recover its pre-tender defense costs incurred in connection with an environmental cleanup claim); Chemical Leaman Tank Lines, Inc. v. Aetna Cas. and Sur. Co., 817 F.Supp. 1136, 1161 (D.N.J. 1993) (holding that the insurer was “not responsible for reimbursing [the insured] for defense costs incurred” pre-tender for an environmental claim).
It is important to note that not all jurisdictions follow the bright-lined rule described above. Courts in Maryland, for example, have taken the minority approach and found that an insured’s failure to provide timely notice will only excuse the insurer from liability for pre-tender defense costs if the insurer can show that it was prejudiced by the delayed tender. In Sherwood Brands v. Hartford Accident & Indemnity Company, the Maryland Court of Appeals held that an insurer is obligated to pay for an insured’s pre-notice defense costs when:
(1) the insurer breaches its duty to defend after receiving delayed notice of suit, (2) the insured’s delay in giving notice is unintentional and in good faith, (3) the insurer is not prejudiced by the delay, and (4) the fees and costs are reasonable and would have been incurred by the insurer had timely notice been given.
698 A.2d 1078, 1082 (Md. Ct. App. 1997).
The court further indicated that an insurer undertaking its duty to defend after a delay in notice or tender likely is not prejudiced because “[h]ad notice been given earlier, the insurer would have undertaken the defense at the earlier time and therefore would have incurred all, part, or perhaps even more of the expenses incurred by the insured.” Id. at 1086. So,
The relevant question as to pre-notice expenses . . . is whether the insurer has been prejudiced . . . was it reasonable, under the circumstances, for the insured to have incurred the expense; was the expense reasonable; did the expense materially exceed that which the insurer would likely have incurred in any event had the notice been given earlier?
Id. at 1086.
The court then indicated that, by statute in Maryland, an insured’s failure to timely provide notice to the insurer will absolve the insurer of its duty to defend only where the failure results in actual prejudice to the insurer. Id. at 1082-83. The court thus stated: “Courts that espouse the view that the duty to defend does not arise until notice is given are, of course, prone to conclude that an insurer is not liable for costs and fees incurred by an insured prior to such notice.” Id. at 1085.
Similarly, the U.S. District Court for the District of Massachusetts in Myers v. The Travelers Indem. Co. adopted the minority position and determined that “pre-tender defense costs are recoverable absent a showing of prejudice.” No. C.A. No. 11–40157–TSH, 2014 WL 1330841, at *9 (D. Mass. Mar. 27, 2014) (involving insurance coverage issues associated with an environmental cleanup claim initiated by the Massachusetts Department of Environmental Protection against the insured).
Most jurisdictions exclude the recovery of pre-tender costs, including environmental defense costs, even where the delay in notice of a claim does not meaningfully prejudice the insurer. As such, there are a few key considerations that policyholders should keep in mind to improve their chances of getting reimbursed for their environmental defense costs. Policyholders should locate their insurance policies and tender notice to their insurers pursuant to the policies as soon as possible, even if coverage for an environmental claim is uncertain. That way, the insurers have a more difficult time avoiding reimbursement of pre-tender environmental defense costs. However, when providing timely notice is not practicable due to the various challenges associated with long-term environmental contamination claims, policyholders should carefully consider what state laws could apply to their potential coverage dispute and select the best forum to pursue. As described herein, policyholders may greatly increase their likelihood of recovering pre-tender environmental defense costs in jurisdictions implementing a prejudice-based analysis for coverage of these costs.
