“California law enforces such no-voluntary-payments provisions in the absence of economic necessity, insurer breach, or other extraordinary circumstances.” That line from a California Court of Appeal opinion is the short answer to when an employer should tender a lawsuit or demand to its employment practices liability (EPLI) insurer: before spending money on it. Defense fees and settlements paid before the insurer hears about the claim may never be reimbursed. Late reporting under a claims-made and reported policy can cost the coverage itself.
What does it mean to tender a claim to an EPLI insurer?
A tender is written notice to the insurer that a claim has arrived, with a request that the insurer defend it and cover any loss. EPLI covers claims by employees and applicants, such as harassment or wrongful termination, on whatever terms the policy sets. Whether a given demand letter or agency charge triggers it depends on how your policy defines a “claim,” so that definition is the first page to read. One caution about the cases below: none involved an EPLI policy. They involve malpractice and general liability policies and an auto policy, plus a premises case, and they state general California insurance rules whose effect depends on your policy’s wording.
The tender should include a copy of the claim itself, the date the company received it, the policy number, and a request for a defense. Send it the way the policy’s notice section says to send it. If the policy names a claims address or email, use that one.
Does it matter whether the policy is claims-made?
Yes, more than almost anything else in the policy. An occurrence policy covers conduct during the policy period, even if the claim comes in later. A claims-made policy covers claims first made during the policy period. A claims-made and reported policy adds a second condition: the claim must also be reported to the insurer within the policy period or a reporting window the policy defines. The declarations, the insuring agreement, and the conditions will tell you which kind you have.
The difference changes what happens if notice is late. In Campbell v. Allstate Insurance Co. (1963) 60 Cal.2d 303, an auto-policy case about a cooperation clause, the Supreme Court of California held that the insurer had to prove it was substantially prejudiced by the breach, and it approved earlier decisions requiring prejudice for breach of a notice clause. Later courts describe that notice-prejudice rule as developed for occurrence policies, and California courts have refused to extend that protection to the reporting requirement in a claims-made and reported policy. In Root v. American Equity Specialty Insurance Co. (2005) 130 Cal.App.4th 926, the Fourth District explained why earlier decisions had refused: “To apply the notice-prejudice rule to a claims made and reported policy would have been to convert that policy into a pure claims made policy, and therefore give the insured a better policy than he paid for.”
Root did reverse a summary judgment for the insurer, but on narrow facts. The claim surfaced through a phone call in the last days of the policy period, the insured reported it as soon as he confirmed it, and the insurer had never offered him the chance to buy an extended reporting endorsement. The court held those facts could support an equitable excuse of the late report and stressed that it was not applying a general notice-prejudice rule. I wouldn’t build a coverage position on Root. The safer course is to report anything that might be a claim as soon as it arrives, and to check whether an expiring policy offers an extended reporting period.
Can we hire a lawyer or settle before the insurer responds?
You can, but you may pay for it yourself. Many liability policies contain a no-voluntary-payments or consent-to-settle clause, so check whether yours does. California enforces them. In Jamestown Builders, Inc. v. General Star Indemnity Co. (1999) 77 Cal.App.4th 341, the insured paid more than $1.2 million to settle claims it never tendered, and the court held the insurer didn’t have to reimburse those payments. The court explained that the clauses mean “insureds cannot unilaterally settle a claim before the establishment of the claim against them and the insurer’s refusal to defend in a lawsuit to establish liability.”
The same opinion rejected a second claim, for a smaller settlement the insured paid after it had notified the insurer. The court noted that “Jamestown concedes it settled without General Star’s consent,” and the insurer owed nothing for that settlement either. Notice alone isn’t enough. If the policy requires consent to settle, get the consent in writing before you sign.
The rule cuts the other way when the insurer walks away. Jamestown said that “insurers that decline a tendered defense are out of luck,” and that an insured abandoned by its carrier may protect itself with a reasonable settlement. That exception depends on a tender and a refusal, which is one more reason to tender early.
None of this means the company should sit still while it waits. Preserving documents and calendaring the response deadline protect the defense at little cost. Early legal advice does too, though fees incurred before tender may end up on the company. What the policy restricts is committing the insurer’s money: paying defense bills it hasn’t agreed to and offering or paying anything to settle.
Who picks the defense lawyer?
Usually the insurer. The Nede opinion described the usual arrangement: an insurer that owes a defense controls it and typically hires counsel who represents both insurer and insured. Insurers that use a standing list of approved firms call them panel counsel.
Civil Code section 2860 creates the main exception. When the policy imposes a duty to defend and a conflict of interest arises that requires independent counsel, “the insurer shall provide independent counsel to represent the insured unless, at the time the insured is informed that a possible conflict may arise or does exist, the insured expressly waives, in writing, the right to independent counsel.” Independent counsel is the lawyer the insured chooses and the insurer pays, often called Cumis counsel after San Diego Navy Federal Credit Union v. Cumis Insurance Society, Inc. (1984) 162 Cal.App.3d 358, a decision that predates the statute. Today section 2860 governs.
A reservation of rights, the insurer’s letter agreeing to defend while reserving the right to deny coverage later on stated grounds, is the usual starting point. It creates a conflict only when the defense lawyer’s handling of the case could decide the reserved coverage issue. Section 2860(b) begins with a limit: “a conflict of interest does not exist as to allegations or facts in the litigation for which the insurer denies coverage.” It continues that “when an insurer reserves its rights on a given issue and the outcome of that coverage issue can be controlled by counsel first retained by the insurer for the defense of the claim, a conflict of interest may exist.” The statute also says what doesn’t count: “No conflict of interest shall be deemed to exist as to allegations of punitive damages or be deemed to exist solely because an insured is sued for an amount in excess of the insurance policy limits.”
The Second District applied those limits in Nede Management, Inc. v. Aspen American Insurance Co. (2021, B307470), a published opinion. As to the individual insureds, the insurer had reserved rights only on punitive damages and amounts over its $1 million limit. The court held that no conflict entitled the insureds to independent counsel, even though they disliked how the appointed lawyer handled the case. It repeated an earlier court’s statement that “not every reservation of rights entitles an insured to select Cumis counsel,” and that “Absent some coverage dispute or reservation of rights that created a risk that Fields will serve Aspen’s interest to their detriment, independent counsel was not warranted.”
For an employer, the question is whether a reserved coverage issue depends on facts the defense lawyer will develop. Picture a reservation that excludes intentional conduct while the complaint pleads both intentional and negligent theories. The lawyer’s choices could shift liability from a covered theory to an uncovered one. That’s the kind of situation section 2860(b) addresses. A reservation based on something outside the lawsuit, like whether the claim was first made before the policy started, usually isn’t.
What does section 2860 let the insurer control even when we pick the lawyer?
More than most employers expect. Under section 2860(c), the insurer may require that independent counsel have “at least five years of civil litigation practice which includes substantial defense experience in the subject at issue in the litigation,” along with errors and omissions coverage. Unless the policy provides otherwise, the insurer’s obligation to pay “is limited to the rates which are actually paid by the insurer to attorneys retained by it in the ordinary course of business in the defense of similar actions in the community where the claim arose or is being defended.” Under the same subdivision, fee disputes not resolved under the policy’s own terms go to “final and binding arbitration by a single neutral arbitrator selected by the parties to the dispute.”
Section 2860(d) also requires independent counsel and the insured to keep the insurer informed of everything about the action except privileged material relevant to coverage disputes. And subdivision (f) keeps the policy’s cooperation duty in place: “Nothing in this section shall relieve the insured of his or her duty to cooperate with the insurer under the terms of the insurance contract.”
In my view, many employers ask the wrong question here. They want to know whether they can keep their regular lawyer. The better question is whether the reservation letter creates a conflict at all, and if it does, whether the rate cap in section 2860(c) leaves the company paying a difference it didn’t budget for.
Which EPLI policy terms decide what happens next?
| Policy term | What it controls | California rule | What to do |
|---|---|---|---|
| Definition of “claim” | Whether a demand letter or agency charge triggers coverage | Contract language governs | Read it the day anything arrives |
| Claims-made and reported condition | Whether coverage exists at all | Reporting requirement enforced without a prejudice showing (Root, and the cases it follows), except on narrow equitable facts | Report within the policy period or reporting window |
| General notice condition | Timing of notice | Prejudice rule developed for occurrence policies (Campbell), refused for claims-made reporting requirements (Root and cases it follows) | Give notice promptly anyway |
| No voluntary payments / consent to settle | Pre-tender fees and unconsented settlements | Enforced absent economic necessity, insurer breach, or extraordinary circumstances (Jamestown) | Get written consent before paying or settling |
| Defense and counsel selection | Who defends and at what rate | Insurer controls unless Civ. Code § 2860 conflict exists | Read the reservation-of-rights letter closely |
What should an employer do the week a claim arrives?
A short checklist, run the same week, avoids most coverage fights:
- Put a litigation hold on the personnel file, payroll and timekeeping records, emails and texts about the employee, and every version of the workplace policies involved.
- Calendar the response deadline on the summons or charge, and pull every EPLI policy that might apply (current and prior years), along with any arbitration agreement.
- Send a written tender to each insurer that might owe coverage, following the policy’s notice provision, and keep proof of when it went out.
- Hold off on paying defense invoices or discussing settlement numbers with the employee’s lawyer until the insurer has responded or consented in writing, and make sure no one takes action against the employee that could look like retaliation.
- Talk to a lawyer before responding to the claim, accepting a reservation of rights, or signing a waiver of independent counsel.
The firm’s page on defending employment lawsuits in California describes how harassment and wrongful termination claims are evaluated from the first demand forward.
EPLI questions California employers ask
Is a demand letter from an employee’s lawyer a claim we have to report?
It depends on the policy’s definition of “claim.” Some definitions reach written demands for money as well as lawsuits. The malpractice policy in Root, for example, defined a claim as a demand for money. If the policy is claims-made and reported, a demand letter that qualifies starts the reporting clock. When in doubt, report it. Under Root and the cases before it, a claims-made and reported policy’s reporting requirement is enforced without the insurer having to show prejudice, so late reporting can cost the coverage outright.
Can we keep our own employment lawyer instead of panel counsel?
Usually only if the policy allows it, the insurer agrees, or a conflict of interest (most often under Civil Code section 2860) requires independent counsel. An insurer that refuses to defend gives up control, as the next answer explains. A reservation of rights about punitive damages or amounts over the limits doesn’t create that conflict by statute. Even when the right exists, the insurer can require minimum qualifications and, unless the policy says otherwise, pay only the rates it pays its own defense lawyers in similar cases. Any difference is a business decision for the company.
What happens if the insurer refuses to defend?
The no-voluntary-payments clause stops protecting the insurer. Jamestown said insurers that decline a tendered defense “are out of luck,” and an insured left without a defense may make a reasonable settlement to protect itself. Document the tender, the refusal, and every step you take afterward, and get coverage advice before settling.
Do we have to tender if the claim looks small?
Tender it anyway unless you’ve decided, with eyes open, to handle it outside the policy. A small demand can grow into a lawsuit or a class or PAGA case, and the reporting deadline under a claims-made and reported policy doesn’t wait to see how big the claim gets. Paying a small claim yourself without consent may also forfeit reimbursement for it under Jamestown.
If your insurer has sent a reservation-of-rights letter
If your company has been sued by a former employee and the EPLI carrier has reserved its rights or questioned the timing of your notice, the policy language and the tender record usually decide who controls the defense. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including claims involving wrongful termination or harassment. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.
Sources
The statute is Civil Code section 2860. The opinions are Jamestown Builders, Inc. v. General Star Indemnity Co. (1999) 77 Cal.App.4th 341, Root v. American Equity Specialty Insurance Co. (2005) 130 Cal.App.4th 926, and Nede Management, Inc. v. Aspen American Insurance Co. (Sept. 20, 2021, B307470, mod. Oct. 5, 2021), each published. Campbell v. Allstate Insurance Co. (1963) 60 Cal.2d 303 sets out the notice-prejudice rule.
This post is general information about California and federal employment law as of November 5, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.