Insurer Must Advance Defense Costs as Incurred and Cannot Enforce Policy’s Defense Arrangement Consent Provision

Applying California Law, the United States District Court for the Southern District of California has held that an insurer must pay defense costs contemporaneously, even where the policy’s advancement provision merely requires payment “prior to final disposition of a claim,” because the insured became legally liable for defense costs as they were incurred.  Renovate Am., Inc. v. Lloyd’s Syndicate 1458, 2019 WL 6716735 (S.D. Cal. Dec. 10, 2019).  The court further held that the insured was excused from obtaining the insurer’s prior written consent regarding defense arrangements given the insurer’s seven-month delay in responding to the insured’s initial notice.

An insured government loan administrator was sued in two actions for alleged elder abuse and other harms based on its administration of a government loan program.  The loan administrator sought coverage from its professional liability insurer for the two suits in April and May of 2018, respectively.  After the insurer failed to respond, the loan administrator retained defense counsel and paid for its own defense.  The insurer first responded in November 2018, raising issues with defense counsel’s rates.  After the insurer failed to reimburse defense costs that the insured had incurred, the insured filed suit.

The insurer filed a motion to dismiss, arguing that the loan administrator’s claims were premature because the policy required the insurer to reimburse defense costs at some point “prior to final disposition of the Claim,” and neither underlying action had yet been the subject of a final disposition.  In denying the motion to dismiss, the court rejected that argument based on policy language providing coverage for acts for which the insured becomes “legally liable.”  The court held that the insurer must pay legal expenses as they are incurred “because an insured becomes legally obligated to pay legal expenses as soon as the services are rendered.”  The court also concluded that the insurer’s seven-month delay in responding to the insured’s tender was unreasonable and precluded it from denying coverage based on the loan administrator’s failure to obtain the insurer’s prior written consent to retain defense counsel and incur defense costs.