Etchell v. Royal Ins. Co

In Etchell v. Royal Ins. Co. (N.D. Cal. 1996) 165 F.R.D. 523, the magistrate concluded that section 554 was not intended to apply where a carrier is trying to use a no-voluntary-payment clause in the insurance policy to avoid paying for only those defense costs that were incurred before the tender was made. (Id. at p. 551.) In that case, the insureds did not tender their defense to their insurer until 11 months after they were served with a complaint. (Id. at p. 529.) The insurer initially denied both defense and liability under the policy without specifying any grounds therefore. (Id. at p. 552.) After a second tender, the insurer denied coverage under substantive provisions of the policy, but still made no reference to the late tender. (Id. at p. 553.) The first time the insurer suggested coverage was not available for pre-tender expenses under a no-voluntary-payments provision of the policy was five years later, in opposition to the insureds' motion for reimbursement of $ 227,409.67 in fees and costs incurred in defending against the underlying litigation. (Id. at pp. 544, 547, 550, 553.) The magistrate in Etchell rejected the insured's argument under section 554 that the insurer had waived any delay in presenting notice or proof of loss by failing to promptly object on that ground. (Id. at p. 553.) The magistrate surmised that lawyers and judges involved in cases involving no-voluntary-payment provisions had not referred to section 554 because they understood the statute was intended to apply only where a carrier is trying to use an alleged violation of the prompt notice requirements to avoid all of its obligations under the insurance policy, and not where a carrier is trying to use a no-voluntary-payment clause only to avoid paying for pre-tender defense costs. (Id. at pp. 550-551.)