From the Desk of Kyle Riley: In this case, the Washington Supreme Court held that insurers may not attempt to recover defense costs incurred under a reservation of rights defense while the insurer’s duty to defend is uncertain.
Claims Pointer: Insurers should not rely on a reservation of rights defense to ensure that defense costs will be recouped if, later, it is determined that there is no coverage.
Nat’l. Surety Corp. v Immunex Corp., in the Supreme Court of the State of Washington, No. 86535-3, — P3d —-, (March 7, 2013) (en banc).
National Surety Corporation (“National Surety”) insured Immunex Corporation (“Immunex”) under excess and umbrella policies between 1998 and 2002. In 2001, a string of lawsuits were filed against Immunex. It was not until October 3, 2006 that Immunex tendered defense of the litigation to National Surety. In March 2008, National Surety informed Immunex that it believed there was no coverage for the claims alleged against Immunex. National Surety disclaimed any obligation to defend or indemnify, but noted that it would investigate further. National Surety then filed a declaratory judgment action seeking a declaration of coverage.
In April 2009, the trial court concluded that National Surety had no duty to defend Immunex, but that National Surety was responsible for Immunex’s defense costs incurred through April of 2009. Both parties appealed and the Court of Appeals affirmed, holding that National Surety was liable for defense costs incurred up until the April 2009 determination of no coverage, unless it could show prejudice from late tender by Immunex.
On review, the Washington Supreme Court held that insurers may not seek to recoup defense costs incurred under a reservation of rights defense while the insurer’s duty to defend is uncertain. The Court reasoned that such a holding was consistent with previous Washington cases, “which have squarely placed the risk of the defense decision on the insurer’s shoulders.” The Court noted that an insurer deciding to cover a claim is given two choices, each with benefits and drawbacks. On the one hand, “when an insurer defends under a reservation of rights, it insulates itself from potential claims of breach and bad faith.” On the other hand, when an insurer denies coverage, “it saves money on legal fees but assumes the risk it may have breached its duty to defend or committed bad faith.”
The Court ultimately felt that National Surety attempted to have the best of both worlds: “protection from claims of bad faith or breach without any responsibility for the costs of defense if a court later determines there is no duty to defend.” The Court also noted that if National Surety were allowed to recover defense costs, its “offer” to defend would only protect itself from claims of breach, while placing all the risk of a determination of non-coverage on its insured.
Finally, the Court rejected National Surety’s argument that Immunex’s late tender relieved National Surety of its responsibility for defense costs. The Court found that National Surety would have incurred some defense costs, regardless of the time of tender. Accordingly, the late tender did not completely alleviate National Surety’s obligation to pay Immunex’s defense costs.
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