I have been meaning for some time to write about Judge Kenneth Marra’s decision in Embroidme.com, Inc. v. Travelers Prop. Cas. Co. of Am., 2014 U.S. Dist. LEXIS 7715 (S.D. Fla. Jan. 23, 2014). Let me start by saying that Judge Marra is a great judge. But this decision is terribly flawed. It is now on appeal to the Eleventh Circuit Court of Appeals, and I believe it will be reversed.
The facts are simple enough. The policyholder inexplicably failed to timely advise its insurer of a copyright infringement lawsuit filed against it. The policyholder retained defense counsel and paid its counsel for a year and a half before it woke up and provided notice to Travelers, its general liability insurer. Travelers agreed to defend the company, but refused to pay “pre-tender defense costs” (i.e., defense costs that were incurred prior Travelers receiving notice of the lawsuit). Travelers relied on the “voluntary payments” clause in its policy, which stated that “[n]o insured will, except at that insured’s own cost, voluntarily make a payment, assume any obligation, or incur any expense, other than for first aid, without our consent.”
But Travelers made a misstep, too. It failed to respond to the late tender within 30 days, as is required by the Florida Claims Administration Statute, Fla. Stat. § 627.426.
Judge Marra held that the pre-tender defense costs were not recoverable, regardless of whether Travelers was prejudiced by the late notice (a point that is not even addressed in the opinion), and regardless of whether Travelers complied with 627.426.
The decision is directly contrary to the Fourth District Court of Appeal’s decision in Nationwide Mutual Fire Insurance. Co. v. Beville, 825 So. 2d 999 (Fla. 4th DCA 2002), as well as established caselaw in Florida that requires prejudice to an insurer before coverage is forfeited by a policyholder’s failure to give timely notice. See, e.g., Bankers Ins. Co. v. Macias, 475 So.2d 1216 (Fla. 1985). The reasoning behind the notice-prejudice rule is that late notice is a condition to coverage, and the failure to comply with a policy condition cannot result in a forfeiture unless the violation prejudices the insurer’s rights.
The “voluntary payments” clause has similarly been held to be a policy condition. See Mid-Continent Cas. Co. v. Basdeo, No. 11-12938, 2012 WL 2094376 (11th Cir. June 12, 2012) (per curiam); Rolyn Cos., Inc. v. R & J Sales of Texas, Inc., No. 09-16348, 2011 WL 320421 (11th Cir. Feb. 2, 2011) (per curiam). In fact, the cooperation and consent conditions are considered conditions subsequent to a claim, whereas the notice condition is a condition precedent. What this means is that in Florida a policyholder is held to a lower standard of proof when an insurer disclaims coverage obligations on the basis of a policyholder’s failure to cooperate or obtain the carrier’s consent. In the notice context, prejudice is presumed and the policyholder must overcome this presumption. In the consent/cooperation context, the insurer must prove it was prejudiced.
Not only does the decision conflict with Beville, but by failing to address the question of prejudice, the Embroidme.com decision also conflicts with the Eleventh Circuit’s decision in Rolyn Cos., which specifically held that a voluntary payments defense was a cooperation defense that required the insurer to demonstrate material prejudice.
In addition to failing to address the prejudice issue, Judge Marra also held that Travelers’ violation of the Claims Administration Statute was irrelevant. The justification for this part of the decision was Judge Marra’s determination that the insurer did not invoke the “voluntary payments” clause as a coverage defense, but rather coverage never existed in the first place. On this point, the decision directly conflicts with Beville and Basdeo.
In Basdeo, the policyholder never notified the insurer of a lawsuit against it. The insurer found out about the lawsuit independently, and asked the policyholder for information. The policyholder never responded. A default judgment was entered against the policyholder. When the insurer learned of the default judgment, it disclaimed coverage obligations based on the violation of the cooperation clause. But the insurer disclaimed more than 30 days after it learned of the default. Therefore, the defense was waived due to the violation of the Claims Administration Statute, and the insurer had to pay the default judgment.
If an insurer that violates the Claims Administration Statute has to pay a default judgment on a case for which it received no notice and had no opportunity to defend, then how could an insurer that is also in violation of the Claims Administration Statute be excused from paying defense costs incurred without its consent? If you are waiting for me to answer the question I am sorry to disappoint you. There is no way to explain this decision.
Insurance companies increasingly have tried to argue that all of their coverage defenses are “fundamental” to coverage being available in the first place. They have tried to put more coverage defenses directly in the insuring agreement of their policies, to try to argue that they are not really coverage defenses but determine whether coverage exists in the first place. But if it looks like a coverage defense, and walks like a coverage defense, and quacks like a coverage defense …
The insurer strategy also reminds me of an old Jerry Seinfeld stand-up routine. He asks if the only thing that survives a plane crash is the black box then why don’t they make the whole plane out of the black box? Well the insurance industry apparently thinks the insuring agreement is their black box, and if they can just squeeze every coverage defense in there they can evade the Florida Claims Administration Statute (and similar statutes in other states, such as New York’s 3420 statute). But it is just this type of unhanded behavoir that led to the enactment of the Florida Claims Administration Statute in the first place, and judges must not let the insurance industry attempt an end-run around consumer protection legislation by rearranging words in their insurance policies. Hopefully the Eleventh Circuit will reverse this decision and reaffirm the decades of Florida caselaw on this subject.
I will provide an update when the Eleventh Circuit renders a decision.