Background
This insurance coverage dispute arose from pollution class-action lawsuits related to an oil refinery and storage terminal in the U.S. Virgin Islands (“USVI”). In 2016, entities affiliated with ArcLight Capital Partners purchased the terminal assets and a dormant refinery out of bankruptcy. After restarting refinery operations, multiple classes of plaintiffs sued beginning in 2021, alleging the operators had “haphazardly restarted” the facility without proper improvements. ArcLight Capital Partners, LLC (“ACP”), ArcLight Energy Partners Fund VI, L.P. (“Fund VI”), Limetree Bay Holdings, LLC (“LBH”), and Freepoint Commodities LLC (“Freepoint”) — an indirect investor — were all named as defendants and collectively spent roughly $2.5 million defending themselves before they even learned about an applicable pollution liability insurance policy issued by Lexington Insurance Company.
After discovering the policy through counsel, the insureds notified Lexington at various points in 2022 through 2024 and sought reimbursement for the defense costs they had already incurred — so-called “pre-tender” defense costs, meaning expenses spent before formally requesting that the insurer step in. Lexington agreed to defend going forward but refused to reimburse pre-tender costs. The parties filed competing summary judgment motions on whether Lexington owed these pre-tender costs.
The Court’s Holding
Judge Wallace granted Lexington’s cross-motion for summary judgment and denied the insureds’ motions on all points. The court’s analysis turned on a conflict-of-laws question with significant practical consequences.
The court first established that under Delaware law, Lexington would be required to show it was prejudiced by the lack of timely notice before it could refuse to pay pre-tender costs. Tracing Delaware’s “implied-prejudice rule” from the 1974 Delaware Supreme Court decision in State Farm v. Johnson through to this court’s own 2019 Solera decision, Judge Wallace articulated three reasons Delaware law disfavors allowing insurers to escape pre-tender costs without showing prejudice: (1) the notice and consent breaches are not material breaches that defeat the policy’s core purpose; (2) the notice provisions protect the insurer’s right to control the defense, not its duty to defend; and (3) excusing the insurer from all pre-tender costs while it retains the premiums would create an unjust windfall.
However, the court found an actual conflict between Delaware law and USVI law on this point. While both jurisdictions require prejudice showings for late-notice defenses generally, the only USVI court to address pre-tender costs specifically followed the majority rule: insurers are simply not liable for defense costs incurred before the insured requests coverage, regardless of prejudice. Because the policy’s insured risk was located in the USVI, the refinery was there, and the first named insured was a USVI entity, the USVI had the most significant relationship to the dispute. Applying USVI law, Lexington owed nothing for pre-tender costs.
The court also confirmed that ACP was not covered under the policy at all, as it was not listed as a named insured and failed to identify which category of insured it might fall under. Finally, the court determined the specific tender dates for each insured: Freepoint tendered on January 8, 2024, and Fund VI tendered on January 25, 2024. LBH never independently tendered a defense request and was not entitled to any cost recovery.
Key Takeaways
- Even in jurisdictions like Delaware that apply an implied-prejudice rule to late-notice defenses, a conflict-of-laws analysis can route the dispute to a less insured-friendly jurisdiction. Here, the location of the insured risk in the USVI proved dispositive.
- Policyholders who incur defense costs before notifying their insurer face significant risk under the majority rule followed in most U.S. jurisdictions: pre-tender costs are simply not recoverable, regardless of whether the insurer was prejudiced.
- Each named insured on a policy with a “separation of insureds” provision must independently tender its own defense. One insured’s tender does not automatically extend to affiliated entities, even if they are all named insureds under the same policy.
- Entities seeking insurance coverage must be able to identify with specificity how they qualify as an insured under the policy. The court denied ACP’s request for further discovery, calling it a “fishing expedition” where ACP could not point to any factual basis for coverage.
Why It Matters
This decision is a significant ruling on pre-tender defense costs — a recurring and high-stakes issue in complex insurance disputes. The court provided a thorough survey of the competing legal frameworks, making this opinion a useful reference for practitioners navigating these questions in any jurisdiction. For policyholders, the practical lesson is clear: notify your insurer immediately upon learning of a potentially covered claim, even if you are already well into defending it. Delay in tendering can forfeit millions in otherwise recoverable defense costs.
The conflict-of-laws analysis also carries broader implications for companies with insured operations in multiple jurisdictions. The location of the insured risk — not the state of incorporation of the parties — drove the choice-of-law outcome here. Companies operating in jurisdictions that follow the majority “no pre-tender costs” rule should build internal protocols to ensure prompt identification and notification of applicable insurance policies whenever litigation arises. For insurance counsel, this case reinforces that policy structure matters: the separation-of-insureds clause required each entity to tender individually, creating a trap for the unwary in multi-entity corporate groups.