The Superior Court of Delaware recently held that a D&O insurer failed to timely respond to it insured’s reimbursement requests and must therefore provide reimbursement for prior legal defense costs and advance future defense costs within sixty days of receipt of invoices. HLTH Corp. v. Axis Reinsurance Co., et al., No. 07C-09-102, 2009 WL 756306 ( Del. Sup. Ct. Mar. 23, 2009).

On July 31, 2008, the court ordered the D&O insurer, along with several other insurance companies, to pay for defense costs in connection with a federal criminal action against the insured. The insured subsequently forwarded copies of invoices for November and December 2008 for legal fees to the D&O insurer for reimbursement. The D&O insurer did not immediately provide reimbursement, however, arguing that the controlling D&O policy only provides for reimbursement of reasonable fees and that insurer should be allowed sufficient time to review the defense invoices in order to evaluation their reasonableness.

The D&O insurer based its argument on the Delaware Supreme Court’s decision in Kaung v. Cole National Corporation, No. Civ A 163-N, 2004 WL 1921249 (Del. Ch.), aff’d in part, overruled in part, 884 A.2d 500 (Del. 2005). In Kaung, the court held that a plaintiff seeking advancement of attorneys’ fees and litigation expenses pursuant to an indemnity agreement with the defendant was not entitled to advancement because his requests were unreasonable. The lower court had rejected plaintiff’s argument that an inquiry about the reasonableness of the fees was inappropriate at the advancement stage and held that that “all contracts for advancement and indemnification are subject to an implied reasonableness term . . . even if the indemnification agreement does not expressly condition advancement on the reasonableness of the request.” Id. at *4. The Delaware Supreme Court later affirmed this part of the lower court’s decision.

In the instant case, however, the court found that the insurer’s delay in responding to the legal invoices until February 2009 resulted in a waiver of its right to a hearing to determine the reasonableness of the reimbursement requests and, therefore, the insurer was required to reimburse the invoices in full.

For a copy of the decision, please click here.