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Embroidme.Com, Inc. v. Travelers Property Casualty Co. of America

United States Court of Appeals, Eleventh Circuit

January 9, 2017

EMBROIDME.COM, INC., Plaintiff-Appellant,

         Appeal from the United States District Court for the Southern District of Florida D.C. Docket No. 9:12-cv-81250-KAM

          Before JORDAN and JULIE CARNES, Circuit Judges, and GOLDBERG, [*] Judge.

          JULIE CARNES, Circuit Judge

          This appeal concerns a dispute between an insured and its insurer. The insured, plaintiff, Inc. ("EmbroidMe"), was sued in federal district court based on alleged copyright infringement. Luckily for EmbroidMe, it had an insurance policy with defendant Travelers Property Casualty Company of America ("Travelers") in which Travelers agreed to indemnify EmbroidMe should the latter be deemed liable on this type of claim. The policy further provided that Travelers had a right and duty to defend its insured against any lawsuit seeking damages on such a claim.

         Notwithstanding the existence of this policy, EmbroidMe chose not to notify Travelers of the claim filed against it or to request that Travelers provide EmbroidMe with a defense on the suit. Instead, EmbroidMe retained a law firm and litigated the case on its own in district court for over eighteen months, amassing legal bills exceeding $400, 000 before finally notifying Travelers of the litigation and tendering the claim both for indemnification and defense purposes. Upon receipt of this notification, Travelers agreed that the policy potentially provided indemnification for the claim and, that being so, it further agreed to defend EmbroidMe going forward. Travelers refused, however, to reimburse EmbroidMe for the legal bills it had incurred during the lengthy period of time it chose to handle the litigation on its own. In fact, provisions of the policy make clear that Travelers was not obligated to pay any expenses that its insured incurred in litigating a covered claim unless the insured had first obtained Travelers' consent to generate those expenses.

         Because EmbroidMe had not obtained Travelers' permission (nor even informed Travelers of the claim filed against it), this very large omission would seem to foreclose any argument that it was entitled to reimbursement of these past legal fees. EmbroidMe nonetheless insists that it is entitled to reimbursement, relying on a Florida statute that requires an insurer who seeks to deny coverage based on a particular coverage defense to notify the insured of its reliance on that defense within thirty days of becoming aware of its existence. Here, Travelers first communicated to EmbroidMe its refusal to pay pre-tender legal expenses thirty-nine days after speaking with EmbroidMe's general counsel about the claim. EmbroidMe argues that because Travelers' notification was made after the thirty-day statutory deadline had elapsed (albeit by only a few days), it must now pay up on these pre-tender legal expenses that it never authorized.

         The district court rejected EmbroidMe's argument, concluding that Travelers' refusal to reimburse expenses of EmbroidMe to which it had not consented did not constitute a coverage defense, meaning that the statutory time period for an insurer to notify its insured of its defense to coverage did not apply. For that reason, the court granted Travelers' motion for summary judgment, and denied EmbroidMe's competing motion. We agree with the district court and affirm its ruling.

         I. BACKGROUND

         Specializing in "embroidery, garment printing, custom apparel, promotional products, screen printing and personalized gifts at more than 300 resource centers throughout the United States, Canada and Australia, " EmbroidMe is, according to its website, "the world's largest promotional products franchise." Homepage, (last accessed Dec. 22, 2016). In April 2010, JCW Software, LLC ("JCW") filed a copyright infringement lawsuit against EmbroidMe, alleging that the latter had improperly distributed copies of the former's "Fast Manager" software program in violation of a 2007 settlement agreement.

         Although EmbroidMe was insured with Travelers under a liability insurance policy that potentially covered the particular claim at issue in the litigation and specified that Travelers had both the right and duty to defend EmbroidMe in such litigation, EmbroidMe did not contact Travelers to tender the claim or to request that Travelers assume its duty of representation. Instead, it retained Florida law firm McHale & Slavin, P.A. ("McHale & Slavin") to handle the representation.

         Thereafter, from June 2010 until October 2011, EmbroidMe paid all of McHale & Slavin's fees, with no notice to Travelers that there was even litigation pending. But then on October 10, 2011-some eighteen months after the filing of the complaint against it-EmbroidMe decided to tender the claim and its defense of the underlying copyright infringement suit to Travelers. A Travelers' case handler and EmbroidMe's General Counsel discussed the claim three days later.

         On November 21, 2011, which was forty-two days after EmbroidMe tendered the claim to Travelers and thirty-nine days after the parties spoke, Travelers sent EmbroidMe a "reservation of rights" letter. As to whether there was a duty to defend EmbroidMe in the litigation, Travelers agreed that because JCW's allegations against EmbroidMe appeared to fall within the policy's "web-site injury" provision, those allegations imposed on Travelers a duty to defend EmbroidMe. Notwithstanding its obligation to defend EmbroidMe in the litigation, Travelers indicated, in the "coverage analysis" section of the letter, that it reserved the right to ultimately challenge its obligation to provide coverage for any damages imposed against EmbroidMe should certain facts be established during the litigation. For example, should it be established that EmbroidMe's liability arose out of the commission of a dishonest, fraudulent, or malicious wrongful act or out of a breach of contract, then damages imposed against EmbroidMe would not be covered by the policy.

         In addition to Travelers' reservation of rights as to coverage issues, which was contained in the above "coverage analysis" section, the letter also included a section addressing "defense counsel issues." In that section, the letter acknowledged Travelers' "right and duty to defend including the right to appoint defense counsel." The letter indicated Travelers' willingness to consider continuing to use the attorneys that EmbroidMe had previously retained and noted the factors, including rates, that would influence Travelers in "any retention decisions." But the letter made clear that Travelers would pay only post-tender defense costs, which meant that it refused to reimburse EmbroidMe for the $405, 989.84[1] the latter had spent on legal fees before tendering the copyright infringement claim to Travelers on October 10, 2011.

         Having expressed the above positions on the issues of coverage and of the parameters of its duty to defend, Travelers assumed the defense of EmbroidMe in the copyright infringement lawsuit and soon thereafter contacted McHale & Slavin to discuss whether it would retain the firm to continue its representation of EmbroidMe in the litigation. Although of the opinion that the firm was well- qualified to handle the defense of EmbroidMe going forward, Travelers' case handler noted that he would have to discuss the firm's billing rates before formally retaining it. It took a while for the law firm and Travelers to come to final terms on a retainer agreement, which they formally entered into on February 20, 2012. Nonetheless, Travelers paid McHale & Slavin's their attorney's fees and costs incurred after the date of EmbroidMe's tender of the claim.[2] Travelers refused, however, to pay McHale & Slavin at the $400 per hour rate it had been charging EmbroidMe prior to Travelers' entry into the case. Instead, the retainer agreement ultimately arrived at obligated Travelers to pay only $315 per hour.

         On March 1, 2012, shortly after Travelers had entered into the formal retainer agreement with McHale & Slavin, EmbroidMe sent a letter to Travelers stating its disagreement with Travelers' refusal to pay pre-tender legal fees, as set out in Travelers' November 2011 reservation of rights letter. Not willing to take Travelers' earlier "no" for an answer, EmbroidMe repeatedly sought to change Travelers' mind as to the decision it had set out in its November 2011 letter.

         Meanwhile, a flurry of activity was occurring in the litigation filed against EmbroidMe. JCW filed a second, related suit against EmbroidMe in June 2012. In addition, the district court dismissed the copyright infringement claims made in the original 2010 action that had given rise to coverage for EmbroidMe under the "web site injury" provision of the insurance policy. Ultimately, the district court directed JCW and EmbroidMe to engage in mediation of both the 2010 and 2012 lawsuits, and both cases settled on August 14, 2012. Throughout all the above, Travelers continued to provide EmbroidMe a defense.

         Shortly after the settlement, Travelers sent EmbroidMe a letter reiterating its position that it was not required it to pay the pre-tender defense fees and costs that EmbroidMe had incurred prior to tendering its claim to Travelers and without the latter's permission. A couple of months later, EmbroidMe filed a breach of contract suit in state court against Travelers seeking reimbursement for these fees and costs. Asserting diversity jurisdiction, Travelers removed the suit to the federal district court in the Southern District of Florida.

         Each party filed a motion for summary judgment. Essentially, these motions were mirror images of each other. EmbroidMe contended that Travelers was estopped from denying its duty to pay pre-tender fees and costs because its communication of that denial was made after the deadline set for notification of coverage defenses by Florida's "Claims Administration Statute." Fla. Stat. § 627.426 (1983). In response and in support of its own summary judgment motion, Travelers contended that the policy provisions excluding it from any responsibility to pay legal fees incurred by the insured without its prior approval constituted an exclusion, not a defense to coverage of a claim. In support, Travelers noted that the Supreme Court of Florida has made it clear that the Claims Administration Statute applies only to coverage defenses, not to coverage exclusions.

         The district court agreed with Travelers, granting its motion for summary judgment and ruling that Travelers was not required to pay legal expenses that EmbroidMe had unilaterally incurred prior to tendering the claim to Travelers and during the time when EmbroidMe had chosen to handle its defense with no involvement by Travelers.[3] This appeal followed.


         We review the grant or denial of a motion for summary judgment de novo. Bank of Brewton v. Travelers Cos., Inc., 777 F.3d 1339, 1341-42 (11th Cir. 2015) (citing Mais v. Gulf Coast Collection Bureau, Inc., 768 F.3d 1110, 1119 (11th Cir. 2014)). An insurance policy is a contract and therefore interpretation of the language in such a policy constitutes a ruling on a question of law, which is also subject to de novo review. Hegel v. First Liberty Ins. Corp., 778 F.3d 1214, 1219 (11th Cir. 2015) (citing Graber v. Clarendon Nat'l Ins. Co., 819 So.2d 840, 842 (Fla. 4th DCA 2002)).

         Because this action was removed to federal court on the basis of diversity jurisdiction, state law controls as to any issue not governed by the Constitution or treaties of the United States. Mid-Continent Cas. Co. v. Am. Pride Bldg. Co., LLC, 601 F.3d 1143, 1148 (11th Cir. 2010). The parties agree, as do we, that Florida law governs this dispute. When we address issues of state law, we are therefore bound by decisions issued by that state's appellate courts. However, when we have issued a precedential decision interpreting that state law, our prior precedent rule requires that we follow that decision, absent a later decision by the state appellate court casting doubt on our interpretation of that law. World Harvest Church, Inc. v. Guideone Mut. Ins. Co., 586 F.3d 950, 957 (11th Cir. 2009). Accord Roboserve, Ltd. v. Tom's Foods, Inc., 940 F.2d 1441, 1451 (11th Cir. 1991); Newell v. Harold Shaffer Leasing Co., Inc., 489 F.2d 103, 107 (5th Cir. 1974).


         The district court granted Travelers' motion for summary judgment, ruling that Travelers was not required to pay the legal expenses that EmbroidMe incurred prior to tendering the claim to Travelers, during which time period EmbroidMe chose to handle alone its defense of the JCW litigation, with no involvement by or assistance from Travelers. The court concluded that the insurance contract expressly excluded expenses incurred by an insured absent the agreement of Travelers to pay those expenses. Further, the above constituted an exclusion from coverage, not a defense to coverage that was otherwise provided by the policy. This distinction was significant because had Travelers' refusal to pay for pretender legal expenses been considered to be a defense to coverage of a claim, the Florida Claims Administration Statute ("CAS") would kick in and require that Travelers have notified EmbroidMe of this defense within the time limits provided for by the statute, which it did not do. But because Travelers relied on an exclusion, not a coverage defense, its failure to notify EmbroidMe within the time period set out in the statute did not estop Travelers from relying on that ground in refusing to pay these unapproved expenses.

         Accordingly, resolution of this appeal turns on whether Travelers was required to comply with the CAS when asserting its refusal to reimburse EmbroidMe for pre-tender defense fees the company chose to incur. We agree that Travelers relied on an exclusion, not a coverage defense, in its refusal to pay EmbroidMe's pre-tender legal expenses, and therefore the CAS does not control. Although there is no Florida case squarely addressing the facts of this case, we are guided by the interpretation that Florida law has given to these two terms in other disputes involving their definition. Based on that review, we conclude that the policy here excludes from coverage legal expenses incurred by an insured without the approval of the insurer. Travelers' reliance on this policy provision constitutes the assertion of a policy exclusion, not a defense to coverage. Further, EmbroidMe's contrary position tends to conflate the concepts of an insurer's duty to defend and its duty to timely convey a coverage defense.

         A. The Terms of the Insurance Policy Precluded EmbroidMe From Reimbursement of Attorney's Fees That It Incurred Without First Obtaining Travelers' Consent

         EmbroidMe argues that it is entitled to reimbursement of the almost half million dollars in attorney's fees that it incurred prior to ever advising Travelers that it wanted Travelers to defend it in the litigation and to indemnify it for any damages imposed on it as a result of the covered claims. The clear language of the policy, however, ...

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