The Illinois rule that actual notice of a suit from any source without tender by the insured was sufficient to trigger the insured’s right to a defense, as set forth in Cincinnati Cos. v. West American Insurance Co., 183 Ill.2d 317, 701 N.E.2d 499, 233 Ill.Dec. 649 (1998), has been subverted to deny policyholders substantive rights to recover defense costs.  It is important to understand that this rule was adopted as the alternative to the “actual tender” rule.  Now referred to as the “actual notice” rule, it has been inappropriately broadened to prevent policyholders from recovering pre-tender defense costs.

The policy obligates the insurer to pay all sums and to defend any suit covered by the policy.  The defense obligation in the policy is not tied to notice.  It is unlimited and should cover all costs incurred in the defense of the suit, from its inception, barring the application of another exclusion or condition.

Clearly, the Washington Court of Appeals in Nat'l Sur. Corp. v. Immunex Corp., 256 P.3d 439 (Wash. App. 2011), got it right.  The court, quoting Griffin v. Allstate Ins. Co., 108 Wn. App. 133, 140, 29 P.3d 777, 36 P.3d 552 (2001), refused to hold that pre-tender fees and costs are not recoverable. 108 Wn. App. at 136 ("Subject to policy-based defenses, an insurer is liable for fees and costs incurred before the insured tenders defense of a covered claim.").  It distinguished the breach of a duty to defend, which cannot occur prior to tender, and the duty to reimburse an insured for costs incurred prior to tender("The scope of a duty, however, is defined not by its breach, but by the contract."). The notice provision does not contain the limitation that no defense costs will be paid until notice is given.

If a suit is covered, all reasonable costs of defense should be paid, whether incurred before or after notice.  If notice is late and the policy condition is breached, the insured will not be entitled to coverage.  Country Mut. Ins. Co. v. Livorsi Marine, Inc., 222 Ill.2d 303, 311 (2006).  If a duty to defend exists on the face of the complaint, the insurer is obligated to defend until the defense obligation is extinguished by adjudication.  If the insurer fails to defend, estoppel will be applied unless a declaratory judgment is timely filed.  General Agents Insurance Company of America, Inc. v. Midwest Sporting Goods Co., 215 Ill.2d 146, 828 N.E.2d 1092, 293 Ill.Dec. 594 (2005).

An insured may defend a covered case for a substantial amount of time without giving notice.  The “late notice,” however, may not be adequate to support a finding that the insured breached the notice condition. If the late notice was excusable and the suit is covered, there is no basis on which an insurer’s defense obligation should begin at “actual notice.”

Other courts have held that an insurer is liable for pre-notice defense costs unless the insurer can prove prejudice.  See J.J. Knauff, “A Little TLC: Tender, Liability, and Covenants vis-à-vis Recovery of Pre-Notice Defense Costs after PAJ, Incorporated v. Hanover Insurance Company and Its Projeny,” 16 Tex. Wesleyan L. Rev. 187, 197 (2010) (noting that defense costs are not “voluntary payments” and discussing decisions in multiple jurisdictions in which courts have found insurers liable for pre-notice defense costs where the insurer was unable to prove prejudice); Liberty Mutual Ins. Co. v. Black & Decker Corp., 383 F. Supp. 2d 200 (D. Mass. 2004) (discussing why an insurer’s obligation to pay defense costs is not contingent on notice).