When does receipt of a pre-suit claim notice letter trigger an insurance carrier’s obligation to provide a defense and/or indemnity? In Sanders v. Phoenix Insurance Co., the First Circuit provided some guidance to this question, holding that a pre-suit notice letter would not trigger a carrier’s obligations unless a non-response would impact the policyholder’s ability to contest liability during a following proceeding.

The Underlying Dispute

Sanders arises from a “tragic tale of unrequited love.” Ms. Anderson hired an attorney to represent her in a divorce proceeding from Mr. Sanders, her husband. During the course of that representation, Ms. Anderson and her attorney began an affair. Ms. Anderson suffered from depression and anxiety. When the affair cooled, Ms. Anderson wrote a suicide note and drank herself to death.

Mr. Sanders became the executor of Ms. Anderson’s estate (“Claimant”) and sent a demand letter to Ms. Anderson’s attorney (“Insured”). As the affair occurred partially at the attorney’s home, the attorney placed his homeowner’s carrier, Phoenix Insurance Co. (“Insurer”) on notice of the claim. Insurer denied coverage, arguing that Ms. Anderson’s death was not a covered “occurrence” and that the policy’s professional services exclusion barred coverage.

Insured alerted Insurer that he intended to mediate the claim and invited Insurer to participate. Insurer declined. Insured argued Claimant asserted claims for negligent infliction of emotional distress against him, but Insurer continued to decline coverage. Insured settled his personal liability for $500,000 and assigned his rights against Insurer to Claimant in exchange for a non-recourse agreement which precluded any collection from Insured.

The Coverage Lawsuit

Claimant, as assignee of Insured, filed suit against Insurer for allegedly engaging in unfair settlement practices. Claimant argued that Insurer breached its duty to defend Insured when it failed to respond to the pre-suit demand letter sent to Insured. Insured’s policy contained the following language:

If a claim is made or a suit is brought against any insured for damages because of bodily injury or property damage caused by an occurrence to which this coverage applies, even if the claim or suit is false, we will:

. . . .

b. provide a defense at our expense of counsel of our choice, even if the suit is groundless, false or fraudulent. We may investigate and settle any claim or suit that we decide is appropriate.

Insurer argued that the plain language of the policy obligated it only to investigate a claim and that no duty to defend would be triggered until a lawsuit was filed.

When Does the Duty to Defend Commence?

The First Circuit noted that the cited policy language did not contain an obligation to defend an insured prior to a suit being filed. However, the court also noted that the “no pre-suit obligation” rule was not ironclad, as some types of claims were sufficiently analogous to an actual lawsuit so as to trigger a carrier’s obligation to defend. In this regard, the court looked at claims and notice letters sent by the Environmental Protection Agency for CERCLA liability.

The First Circuit distinguished Claimant’s pre-suit demand from an EPA claim notice, stating that the defense of the policyholder would be substantially compromised if there was no response to an EPA notice letter. Specifically, the EPA could proceed unilaterally with an administrative action against a policyholder, which decision would then impact any later judicial review. Also, failure to respond to an EPA notice letter could subject a policyholder to monetary penalties regardless of the outcome of any subsequent litigation. As such, receipt of a notice letter from EPA would force a policyholder (and concomitantly its carrier) to respond.

Claimant argued that failure to respond to a pre-suit demand letter also placed a non-responding party/policyholder at risk, as failure to respond to such a letter could expose the non-responding party to additional damages, attorney’s fees and costs of suit under state law. The First Circuit held that a pre-suit demand letter was not fairly analogous to an EPA notice of claim because the policyholder’s ability to contest liability would be compromised by the latter. The types of additional damages identified by Claimant for non-response to a pre-suit demand, however, would come only after the policyholder was given the opportunity to defend; i.e. after the carrier’s duty to defend had been triggered.

Claimant also argued that, duty to defend issues aside, the indemnification obligations of the policy were triggered by the mediation settlement with Insured. The First Circuit also rejected this argument, stating that the policy contained no such language. Further, the First Circuit noted that a mediation was be an informal, voluntary proceeding. Thus, Insured’s decision to participate in mediation was simply a strategic decision, as opposed to something compelled by operation of law.

Conclusions and Thoughts

Sanders draws a reasonably bright distinction between those “claims” which trigger the obligations of a carrier and those which do not. If the “claim” is such that a non-response could impact the recipient’s liability, the “claim” may trigger a defense obligation. Most pre-suit claims or demands simply do not fall into this category, even though a failure to respond may impact some other aspect of litigation. However, if federal or state law more substantially penalizes a failure to respond, then a different result may follow. Thus, when a carrier assesses whether and how to respond to notice of a pre-suit claim or demand, the carrier may want to, and should under First Circuit case law, consider the consequences of a non-response on the subsequent assessment of a policyholder’s liability.