Perhaps No Time if a Responsive Pleading Is Due

By Robert A. Crook, Esq.

As those working in the legal field know, the old adage that “timing is everything” has special importance when evaluating insurance claims made by first-party insureds.  Of course, claims representatives and attorneys find themselves in a particularly difficult predicament where they are tasked with timely assessing thousands of claims and demands for defense.

Recently, the United States District Court for the Northern District California took up the question as to how much delay in assessing a demand by an insured for indemnity and defense against a third-party claim is too much of a delay.  Travelers Insurance Company of Connecticut v. Centex Homes, 11-CV-03638SC (N.D. Cal., October 8, 2015) found a “bright-line” rule that an insurer’s duty to defend a tendered lawsuit commences immediately upon the date the insured’s responsive pleading is due.

In other words, any delay beyond the deadline to file an Answer, Demurrer, or Motion to Strike constitutes a breach of the insurer’s defense duty, including instances where the insured delayed in making the tender.  An important consequence of the breach is that the insurer loses its right to control the insured’s defense, including the ability to appoint Cumis counsel.  The right is lost even if the insurer immediately thereafter reimburses all of the insured’s defense costs and agrees to defend.  (The court was persuaded by the California Court of Appeal’s decision in J.R. Marketing, LLC v. Hartford Cas. Ins. Co., 216 Cal.App.4th 1444 (2013), which found that when “the insurer breaches its duty to defend the insured, the insurer loses all rights to control the defense, including, necessarily, the right to control financial decisions such as the rate paid to independent counsel or the cost-effectiveness of any particular defense tactic or approach.”)

Fortunately, the Travelers Insurance Company of Connecticut decision has not been adopted by the Ninth Circuit Court of Appeal, so it’s holding is only binding upon the parties to the litigation. However, the rationale for the decision is based upon current appellate authority.  Thus, the decision is important in that it is likely a harbinger of how demands for indemnity and defense will be evaluated in the future;  tardy insurers will have to pay the insured’s selected counsel who may charge significantly higher rates than defense counsel selected by the insurer.