Today I am listening to music as I write my article regarding an insurer’s obligation to pay pretender defense costs in Maryland. I first listened to the Platters’ version of “The Great Pretender” with lyrics of “my need is such that I pretend too much”. After that, I listened to the great Elvis Presley’s “Love Me Tender” which spoke of tendering as making his life complete. And to bring it to this century, I listened to Usher’s “Tender Love” where he crooned about how he was longing for tender love. All of this made me think that there should be a song created for the unique obligations that Maryland imposes on insurers for pretender defense costs.
Maryland’s highest court in Sherwood Brands, Inc. v. Hartford Accident & Indemnity Co., 347 Md. 32 (1997) held that liability insurers, who have a duty to provide a defense, have a general duty to pay pretender defense costs, provided that the costs are “reasonable” and the insurer has not been “prejudiced” by the late tender. The contours of reasonableness and prejudice are, as the court noted, somewhat circumstantial. As noted by the Court: “The relevant question as to pre-notice expenses, to be tested against the covenant not to incur unconsented to expenses, is whether the insurer has been prejudiced within the meaning of [§19-110]: was it reasonable, under the circumstances, for the insured to have incurred the expense; was the expense reasonable; did the expense materially exceed that which the insurer would likely have incurred in any event had the notice been given earlier”.
Based upon this case, insurers should consider a three-step analysis to determine whether pretender fees are payable under a Maryland insurance policy. First, an insurer should determine whether there are certain pretender defense charges that would not be covered by the policy. Most policies do not provide blanket coverage for all attorney’s fees and expenses incurred by an insured. For example, attorney’s fees relating to coverage issues would not generally be considered defense costs. Additionally, affirmative claims, such as counterclaims, would generally not be covered as such costs do not relate to the defense of a claim.
Second, even if an insurer decides to provide a defense, an insurer should determine whether it has been prejudiced by the late tender. In reviewing this prejudice issue, insurers should consider the hourly rate charged the insured’s counsel and panel counsel; if there is a great difference in the hourly rate charges a claim of prejudice can be made. In addition, the insurer should review charges to see whether the charges of the insured’s counsel are in line with the billing guidelines of the insurer. For example, if the insured’s counsel charges fees for research data base charges, administrative tasks, and hand deliveries that would not be paid for under most billing guidelines, then an insurer might be able to make a claim of prejudice.
Third, all pretender charges should be reviewed to determine whether they are reasonable under the circumstances. In making this analysis, an insurer should consider the rules regarding attorney’s fees specific to the locality. For example, Maryland Rule 2-701, while not specifically dealing with attorney’s fees in insurance disputes, contains a list of factors which a court should consider in determining whether fees are reasonable. These factors include: (A) the time and labor required; (B) the novelty and difficulty of the questions; (C) the skill required to perform the legal service properly; (D) whether acceptance of the case precluded other employment by the attorney; (E) the customary fee for similar legal services; (F) whether the fee is fixed or contingent; (G) any time limitations imposed by the client or the circumstances; (H) the amount involved and the results obtained; (I) the experience, reputation, and ability of the attorneys; (J) the undesirability of the case; (K) the nature and length of the professional relationship with the client; and (L) awards in similar cases.
So insurers and insurance professionals should understand that, even in Maryland, the obligation to pay pretender defense cost is not automatic and is not unlimited. To paraphrase “the Great Pretender”, where there is a feeling of “make believe” about the fees being claimed or where charges “seem to be what [they are] not”, then an insurer must consider whether to deny, in whole or in part, the claim for pretender defense costs.