Nat'l Sur. Corp. v. Immunex Corp. ( 2013 )

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IN CLERKS OFFICE
llJII8E COURT, STAlE OF WA8HifGTON
DATE MAR 0 7£(]13
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CHIEF JUSfiCi>
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
NATIONAL SURETY CORPORATION,
NO. 86535-3
Petitioner,
v. ENBANC
IMMUNEX CORPORATION,
Respondent. Filed - - MAR- - - -
- 0 7 2013
STEPHENS, J.-This court has long recognized that a liability insurer
uncertain of its obligation to defend its insured may undertake a "reservation of
rights" defense while seeking a declaration regarding coverage. The question in
this case is whether the insurer may unilaterally condition its reservation of rights
defense on making the insured absorb the defense costs if a court ultimately
determines there is no coverage. We answer no. We recognize, however, that an
insurer may avoid or minimize its responsibility for defense costs when an insured
belatedly tenders a claim and the insurer demonstrates actual and substantial
prejudice as a result. We affirm the Court of Appeals.
Nat'! Surety Corp. v. Immunex Corp., 86535-3
I
FACTS AND PROCEDURAL HISTORY
National Surety Corporation insured Immunex Corporation 1 under excess
and umbrella liability policies between 1998 and 2002. In August 2001, Immunex
notified National Surety that it was the subject of state and federal government
investigations into its wholesale drug pricing. Immunex represented that it could
not release information because of a confidentiality agreement. National Surety
acknowledged receiving this notice and requested copies of any complaints that
might emerge.
Beginning no later than 2001, a string of complaints was filed against
Immunex. These complaints alleged that Immunex reported inflated average
wholesale prices of its drugs that enabled providers of drugs-such as physicians,
hospitals, and pharmacies-to receive reimbursements from Medicare and other
third-party payors in amounts greater than what they actually paid. In all, at least
23 lawsuits related to pricing manipulation were filed against Immunex and other
drug manufacturers under theories including breach of contract, civil conspiracy,
fraud, and violations of state unfair trade and protection statutes and the federal
Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-
1968.
It was not until October 3, 2006 that Immunex first tendered defense of the
litigation to National Surety. In its tender letter, Immunex informed National
1
Immunex Corporation merged with Amgen Corporation in 2002.
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
Surety that it was on the eve of settling a California lawsuit, identified other
pending lawsuits, and requested payment for reasonable defense expenditures and
settlement costs. Specifically, Immunex asserted that coverage fell under the
umbrella insurance "Coverage B," which applied to cover "injury ... arising out
of ... [d]iscrimination," Clerk's Papers (CP) at 654. National Surety requested
suit papers and documentation, which Immunex sent in December 2006.
In March 2008, National Surety informed Immunex by letter that it
"believe[d] there [wa]s no coverage ... for the claims alleged against Immunex in
the [average wholesale price] litigation." CP at 1074. While National Surety
disclaimed any obligation to defend or indemnify, it indicated it "wishe[d] to
complete its investigation regarding coverage," CP at 1075, suggesting that its lack
of coverage determination was only preliminary. The letter stated:
[National Surety] agrees to defend Immunex until such time as it can
obtain a court determination confirming its coverage decision. [National
Surety] agrees to provide a defense even though it has not completed its
investigation regarding the known loss and breach of conditions issues
because [National Surety] wants to be sure it has protected Immunex's
interests while it pursues that investigation.
The lawsuit[s] were tendered to [National Surety] for defense on
October 3, 2006 ... and that is the date from which [National Surety] is
prepared to reimburse reasonable defense fees and costs .... [National
Surety] reserves the right to recoup the amounts paid in defense if it is
determined by a court that there is no coverage or duty to defend and that
[National Surety] is entitled to reimbursement.
CP at 1074-75.
About the same time it issued its reservation of rights letter, National Surety
filed a declaratory judgment action in King County Superior Court. Immunex
continued to be represented by its independent counsel in the average wholesale
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price litigation. After determining in April 2009 that National Surety had no duty
to defend because the complaints did not allege claims arising out of
discrimination, the trial court considered cross motions for summary judgment on
the issue of defense costs. The court concluded National Surety bore responsibility
for these costs incurred until the April 2009 ruling under its reservation of rights
defense, subject to set-offifit could prove prejudice from Immunex's late tender at
trial. The court denied National Surety's motion for reconsideration and entered
partial final judgment under CR 54(b) to facilitate an appeal. Both parties
appealed.
The Court of Appeals affirmed. Nat'l Sur. Corp. v. Immunex Corp., 162
Wash. App. 762, 256 P.3d 439 (2011). The Court of Appeals held National Surety
was liable for defense costs incurred up until the April 2009 determination of no
coverage, unless it could show prejudice from late notice. Id. at 780. Because fact
issues remained on the question of prejudice, the appellate court affirmed the
denial of National Surety's summary judgment motion. Id. at 782. We granted
National Surety's petition for review. Nat'l Sur. Corp. v. Immunex Corp., 173
Wash. 2d 1006, 266 P.3d 880 (2012).
II
ANALYSIS
The first question to be answered is whether an insurer may recover defense
costs incurred under a reservation of rights in the event a court ultimately
determines no duty to defend is owed. In answering this question, it is useful to
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
consider the nature of the duty to defend and the purposes of providing a defense
under a reservation of rights.
A. Overview of the Duty To Defend
Both courts and the legislature have recognized that insurance contracts are
imbued with public policy concerns. Or. Auto. Ins. Co. v. Salzberg, 85 Wash. 2d 372,
376-77, 535 P.2d 816 (1975); RCW 48.01.030 ("The business of insurance is one
affected by the public interest."). Indeed,
[i]nsurance contracts are unique in nature and purpose. An insured
does not enter an insurance contract seeking profit, but instead seeks
security and peace of mind through protection against calamity. The
bargained-for peace of mind comes from the assurance that the
insured will receive prompt payment of money in times of need.
Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136, 1148, 271 Cal. Rptr. 246 (1990)
(citations omitted). Because security and peace of mind are principal benefits of
insurance, insurers must fulfill their contractual obligations in good faith, "giving
equal consideration in all matters to the insured's interests." Tank v. State Farm
Fire & Cas. Co., 105 Wash. 2d 381, 386, 715 P.2d 1133 (1986).
The insurer's duty to defend is separate from, and substantially broader than,
its duty to indemnify. Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wash. 2d 751,
760, 58 P.3d 276 (2002) (citing Hayden v. Mut. of Enumclaw Ins. Co., 141 Wash. 2d
55, 64, 1 P.3d 1167 (2000)). The duty to indemnify applies to claims that are
actually covered, while the duty to defend '"arises when a complaint against the
insured, construed liberally, alleges facts which could, if proven, impose liability
upon the insured within the policy's coverage."' Truck Ins. Exch., 147 Wn.2d at
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Nat'l Surety Corp. v. Immunex Corp., 86535-3
760 (quoting Unigard Ins. Co. v. Leven, 97 Wash. App. 417, 425, 983 P.2d 1155(1999)); see also Woo v. Fireman's Fund Ins. Co., 161 Wash. 2d 43, 53-54, 164 P.3d
454 (2007) (recognizing duty to defend when claims against the insured are
conceivably covered).
"[I]f there is any reasonable interpretation of the facts or the law that could
result in coverage, the insurer must defend." Am. Best Food, Inc. v. Alea London,
Ltd., 168 Wash. 2d 398, 405, 229 P.3d 693 (2010). Facts that are extrinsic to the
pleadings, but readily available to the insurer, may give rise to the duty. Woo, 161
Wn.2d at 54. Although this duty to defend is broad, it is not triggered by claims
that clearly fall outside the policy. Kirk v. Mt. Airy Ins. Co., 134 Wash. 2d 558, 561,
951 P.2d 1124 (1998). An insurer's broad duty to defend against colorable claims
tendered by the insured, particularly when the insurer elects to defend under a
reservation of rights, is central to our decision. While the dissent focuses on
National Surety's contractual obligations, we have repeatedly held that the scope
of an insurer's duty to defend is broader than the terms of the policy.
When an insured is uncertain of its duty to defend, it may defend under a
reservation of rights while seeking a declaratory judgment relieving it of its duty.
Woo, 161 Wn.2d at 54 (citing Truck Ins. Exch., 147 Wn.2d at 761). Because a
reservation of rights defense is fraught with potential conflicts, it implicates an
enhanced duty of good faith toward the insured. Tank, 105 Wn.2d at 383. But we
have recognized that the risks of a reservation of rights defense are coupled with
benefits:
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
Although the insurer must bear the expense of defending the insured, by
doing so under a reservation of rights and seeking a declaratory judgment,
the insurer avoids breaching its duty to defend and incurring the potentially
greater expense of defending itself from a claim of breach.
Woo, 161 Wn.2d at 54. Additionally, defending under a reservation of rights
enables the insurer to protect its interests without facing claims of waiver or
estoppel and to walk away from the defense once a court declares it owes no duty.
By insuring itself against potentially disastrous findings of breach, bad faith,
waiver, and coverage by estoppel, an insurer unquestionably benefits from its
decision to defend under a reservation of rights-even when, as here, a court later
finds that it owes no duty to continue that defense. The dissent's conviction that
National Surety was pressed into defending Immunex without receiving any
benefit in return simply ignores the context in which this arrangement occurred.
We are not dealing here with otter sanctuaries, marital property, or choice-of-
forum rules. Instead, the insurance relationship-a relationship affected by the
public interest-allows for situations such as this when an insurer makes a rational
decision to protect itself against a greater downstream risk by undertaking certain
costs. Unjust enrichment is simply irrelevant because any "enrichment" of
Immunex was more than matched by benefit to National Surety. Our
understanding of the broad and reciprocal nature of an insurer's duty to defend
provides the proper context for answering the principal question in this case.
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Nat'l Surety Corp. v. Immunex Corp., 86535-3
B. May an Insurer Avoid Paying Defense Costs under a Reservation
of Rights Defense by Asserting a Right to Recoupment?
National Surety contends the trial court erred in requiring it to reimburse
Immunex for reasonable defense costs. Here, as a matter of contract, the relevant
policy imposed on National Surety "the right and duty to ... defend any [i]nsured
against any [s]uit, seeking damages ... [t]o which Coverage B applies." CP at
630-31 (emphasis omitted). National Surety was apparently unsure whether the
complaints filed against Immunex in the average wholesale pricing litigation were
covered under its policy. In light of its contractual obligations, it chose to defend,
subject to a reservation of rights as allowed under Tank and its progeny.
National Surety now contends it should not have to pay Immunex's defense
costs-despite its offer to defend subject to a reservation of rights-because the
court later determined it had no duty to defend. See, e.g., Suppl. Br. of Pet'r at 8
(arguing against imposing defense costs "now, after a determination of non-
coverage").
Recognizing that we have not considered this issue before, National Surety
relies on the leading California decision allowing recoupment of defense costs,
Buss v. Superior Court, 16 Cal. 4th 35, 65 Cal. Rptr. 2d 366, 939 P.2d 766 (1997).
There, a complaint filed against the insured asserted 27 causes of action, only one
of which (defamation) fell within coverage under its insurance policy with
Transamerica Insurance Company. Transamerica accepted the defense of the
action as tendered, but reserved its rights to reimbursement or an allocation of
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
covered and noncovered claims. !d. at 42. Later, the insured and Transamerica
entered into an agreement providing that the insured would reimburse
Transamerica a proportionate amount as determined by a court. !d.
Eventually, the insured settled the claims against him for over $8 million.
Transamerica had paid over $1 million in defense fees, only a small fraction of
which was allocable to defending the defamation claim. !d. The court first noted
that in a "mixed" action involving covered and uncovered claims, the insurer's
contractual duty to defend extends only to the potentially covered claims, even
though a prophylactic defense of the entire action is necessary to meaningfully
defend the potentially covered claims. !d. at 48-49. The court held that an insurer
may not seek reimbursement for defense costs as to claims that are at least
potentially covered because it has bargained to bear those costs. !d. at 49. In such
a situation, the court reasoned that "the insurer may not proceed by means of a
'reservation' of its 'right' of reimbursement" because there is no such right to
reserve. !d. at 50. Where claims are not even potentially covered, however, the
court held that an insurer may seek to recover defense costs allocable solely to
such claims. !d. at 52-53.
Similarly, Colorado courts have endorsed reimbursement in situations in
which the insurer "believes . . . it is under no obligation to defend" but defends
under a reservation of rights to seek reimbursement. Hecla Mining Co. v. N.H Ins.
Co., 811 P.2d 1083, 1089 (Colo. 1991).
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
A few other states have allowed recoupment with reasoning along these
lines. See, e.g., Sec. Ins. Co. of Hartford v. Lumbermens Mut. Cas. Co., 264 Conn.
688, 826 A.2d 107, 125 (2003) ("Where the insurer defends the insured against an
action that includes claims not even potentially covered by the insurance policy, a
court will order reimbursement for the cost of defending the uncovered claims in
order to prevent the insured from receiving a windfall."); Jim Black & Assocs. Inc.
v. Transcontinental Ins. Co., 932 So. 2d 516, 518 (Fla. Dist. Ct. App. 2006)
(holding insurer entitled to reimbursement of defense costs where duty to defend
never existed and the insurer sent a reservation of rights letter and appointed
mutually agreeable defense counsel); Hebela v. Healthcare Ins. Co., 370 N.J.
Super. 260, 851 A.2d 75, 86 (Ct. App. Div. 2004); see also United Nat 'l Ins. Co. v.
SST Fitness Corp., 309 F.3d 914, 920 (2002) (predicting Ohio would allow
recoupment where there is no duty to defend if the insurer "1) timely and explicitly
reserve[s] its right to recoup the costs; and 2) provide[s] specific and adequate
notice of the possibility of reimbursement" and insured fails to object); Cincinnati
Ins. Co. v. Grand Pointe, LLC, 501 F. Supp. 2d 1145, 1168 (E.D. Tenn. 2007)
(predicting Tennessee law would permit reimbursement for defense costs if insurer
reserves its right to recoupment and it is later determined insurer had no duty to
defend); Illinois Union Ins. Co. v. NRI Constr. Inc., 846 F. Supp. 2d 1366 (2012)
(predicting Georgia courts would permit reimbursement).
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
More recently, however, courts deciding in the first instance whether
insurers can recover defense costs have generally concluded that they cannot.
Their decisions provide valuable guidance.
In refusing to allocate costs between covered claims and uncovered claims in
a "mixed" action, the Supreme Court of Wyoming held that "unless an agreement
to the contrary is found in the policy, the insurer is liable for all of the costs of
defending the action." Shoshone First Bank v. Pac. Employers Ins. Co., 2 P.3d
510, 514 (Wy. 2000). The court likened a reservation of rights to recoup costs to a
unilateral modification ofthe coverage policy. Id. at 515-16.
Adopting similar reasoning, the Supreme Court of Illinois held that "[a]s a
matter of public policy, we cannot condone an arrangement where an insurer can
unilaterally modify its contract, through a reservation of rights, to allow for
reimbursement of defense costs in the event a court later finds that the insurer owes
no duty to defend." Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods
Co., 215 Ill. 2d 146, 293 Ill. Dec. 594, 828 N.E.2d 1092, 1102 (2005). Likewise,
the Supreme Court of Pennsylvania reasoned:
Where the insurance contract is silent about the insurer's right to
reimbursement of defense costs, permitting reimbursement for costs the
insurer spent exercising its right and duty to defend potentially covered
claims prior to a court's determination of coverage ... would amount to a
retroactive erosion of the broad duty to defend ... by making the right and
duty to defend contingent upon a court's determination that a complaint
alleged covered claims, and would therefore narrow Pennsylvania's long-
standing view that the duty to defend is broader than the duty to indemnify.
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
Am. & Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 606 Pa. 584, 2 A.3d 526, 544
(2010).
Following this line of reasoning, courts have refused to allow reimbursement
of defense costs based on a later determination of no coverage. See, e.g., Perdue
Farms, Inc. v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252, 258-59 (4th Cir.
2006) (predicting Maryland law would not permit reimbursement of defense costs
for noncovered claims); Capitol Indem. Corp. v. Blazer, 51 F. Supp. 2d 1080, 1090
(D. Nev. 1999) (holding that under Nevada law, reimbursement for defense costs is
allowed only if an agreement between the parties provides for reimbursement);
Med. Liab. Mut. Ins. Co. v. Alan Curtis Enters., Inc., 373 Ark. 525, 285 S.W.3d
233, 237 (2008) (holding that in the absence of statutory authority, insurer may not
recoup defense fees under a unilateral reservation of rights); Shoshone First Bank,
2 P .3d at 513-14 (disallowing allocation of defense costs where the policy did not
provide for recoupment). Notably, a federal district court in Virginia recently
predicted, albeit without much analysis, that Washington would disallow
recoupment of defense costs incurred in defending uncovered claims. Zurich Am.
Ins. Co. v. Pub. Storage, 743 F. Supp. 2d 548, 550-51 (E.D. Va. 2010).
By our decision today, this prediction proves accurate. Disallowing
reimbursement is most consistent with Washington cases regarding the duty to
defend, which have squarely placed the risk of the defense decision on the
insurer's shoulders.
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
It is the insurer that decides whether to defend (with or without a reservation
of rights) before any judicial determination of coverage. Providing a defense
benefits the insurer by giving it the ability to monitor the defense and better limit
its exposure. When an insurer defends under a reservation of rights, it insulates
itself from potential claims of breach and bad faith, which can lead to significant
damages, including coverage by estoppel. Truck Ins. Exch., 147 Wn.2d at 761. In
turn, the insured receives the benefit of a defense until a court declares none is
owed. Conversely, when an insurer declines to defend altogether, it saves money
on legal fees but assumes the risk it may have breached its duty to defend or
committed bad faith. See id.; Woo, 161 Wn.2d at 54.
We reject National Surety's view that an insurer can have the best of both
options: 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. This
"all reward, no risk" proposition renders the defense portion of a reservation of
rights defense illusory. The insured receives no greater benefit than if its insurer
had refused to defend outright.
National Surety argues that we approved its win-win option for insurers in
our decisions in Truck Insurance and Kirk. In Truck Insurance, we described a
reservation of rights defense while seeking a declaratory judgment as "a means by
which the insurer avoids breaching its duty to defend while seeking to avoid
waiver and estoppel." 147 Wn.2d at 761. Quoting Kirk, we then observed that
"' [w]hen that course of action is taken, the insured receives the defense promised
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Nat'l Surety Corp. v. Immunex Corp., 86535-3
and, if coverage is found not to exist, the insurer will not be obligated to pay."' I d.
(quoting Kirk, 134 Wn.2d at 563 n.3). National Surety relies on ambiguity in the
phrase "will not be obligated to pay" as supporting its contention that an insurer
need not pay for defense costs incurred before a court determination of no
coverage.
Taken in context, the language in Kirk and Truck Insurance does not support
National Surety's view. After obtaining a declaration of noncoverage, an insurer
"will not be obligated to pay" from that point forward. Any other rule would be at
odds with our observation that, under a reservation of rights defense, "the insured
receives the defense promised"-at least until the determination of noncoverage.
Kirk, 134 Wn.2d at 563 n.3 (emphasis added). If there were any question after
Kirk and Truck Insurance that a reservation of rights defense must be a real
defense, there is no question after Woo that "the insurer must bear the expense of
defending the insured." Woo, 161 Wn.2d at 54.
If National Surety were allowed to recover defense costs, its "offer" to
defend would serve solely to protect itself from claims of breach while placing the
full risk of a determination of noncoverage on its insured. This provides no
security to the insured. As the Third Circuit Court of Appeals has explained:
A rule permitting such recovery would be inconsistent with the legal
principles that induce an insurer's offer to defend under reservation of
rights. Faced with uncertainty as to its duty to indemnify, an insurer offers
a defense under reservation of rights to avoid the risks that an inept or
lackadaisical defense of the underlying action may expose it to if it turns
out there is a duty to indemnify. At the same time, the insurer wishes to
preserve its right to contest the duty to indemnify if the defense is
unsuccessful. Thus, such an offer is made at least as much for the insurer's
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
own benefit as for the insured's. If the insurer could recover defense costs,
the insured would be required to pay for the insurer's action in protecting
itself against the estoppel to deny coverage that would be implied if it
undertook the defense without reservation.
Terra Nova Ins. Co. v. 900 Bar, Inc., 887 F.2d 1213, 1219-20 (3d Cir. 1989)
(footnote and citations omitted).
Additionally, allowing recoupment to be claimed in a reservation of rights
letter would allow the insurer to impose a condition on its defense that was not
bargained for.
"The question as to whether there is a duty to defend an insured is a
difficult one, but because that is the business of an insurance carrier, it
is the insurance carrier's duty to make that decision. If an insurance
carrier believes that no coverage exists, then it should deny its insured
a defense at the beginning instead of defending and later attempting to
recoup from its insured the costs of defending the underlying action.
Where the insurance carrier is uncertain over insurance coverage for
the underlying claim, the proper course is for the insurance carrier to
tender a defense and seek a declaratory judgment as to coverage under
the policy. However, to allow the insurer to force the insured into
choosing between seeking a defense under the policy, and run the
potential risk of having to pay for this defense 1f it is subsequently
determined that no duty to defend existed, or giving up all meritorious
claims that a duty to defend exists, places the insured in the position
of making a Hobson's choice. Furthermore, endorsing such conduct
is tantamount to allowing the insurer to extract a unilateral
amendment to the insurance contract. If this became common
practice, the insurance industry might extract coercive arran~ements
from their insureds, destroying the concept of liability and litigation
insurance."
Midwest Sporting Goods, 828 N.E.2d at 1102 (quoting Shoshone First Bank, 2
P.3d at 516). Forcing an insured to make this "Hobson's choice" is inconsistent
with our holding in Tank, which requires an insurer to give its insured's interests
equal consideration. See Tank, 105 Wn.2d at 385-86.
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Nat'l Surety Corp. v. Immunex Corp., 86535-3
Disallowing recoupment in this instance does not leave insurers without
options to protect their interests. An insurer is not forced to undertake a defense if
it believes the claims asserted against the insured are not covered at all. See id. at
391. Here, however, National Surety did choose to defend Immunex, following
the reservation of rights approach our precedent allows. It cannot claim the
benefits of doing so and simultaneously avoid the costs.
We hold 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. 2
Accordingly, National Surety may be held responsible for the reasonable defense
costs incurred by its insured until the trial court determined National Surety had no
duty to defend. 3
We next consider whether National Surety's duty to defend may be excused
because oflmmunex's untimely tender of the claims.
2
We are aware of contrary dicta in Holly Mountain Resources, Ltd. v. Westport
Insurance Corp., 130 Wash. App. 635, 652 n.8, 104 P.3d 725 (2005), which appears to
support National Surety's position. There, the court posited that "[a] reservation of rights
is a means by which the insurer conditionally defends its insured, subject to potential
reimbursement by the insured upon later discovery that there was no duty to defend." !d.
We disaffirm this language in Holly Mountain in line with our holding. In doing so, we
note that our state's leading insurance law treatise refers to Holly Mountain's suggestion
that reimbursement is allowed under a unilateral reservation of rights as "erroneous[]"
and "wholly inconsistent" with the principles articulated in Tank. THOMAS V. HARRIS,
WASHINGTON INSURANCE LAW§ 17.01, at 17-1, 17-2 (3d ed. 2010).
3
It makes no difference that National Surety never actually paid any defense costs
before the declaration of noncoverage on April 14, 2009. We agree with the Court of
Appeals that this fact "cannot support a different result here than in a case where the
insurer had already provided a defense." Immunex, 162 Wn. App. at 777.
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Nat'l Surety Corp. v. Immunex Corp., 86535-3
C. Under What Circumstances Does an Insured's Late Tender
Relieve the Insurer of its Duty To Defend?
National Surety argues it cannot be held to pay for defense costs when
Immunex breached the policy by providing late notice of the underlying litigation.
There are two components to its argument. First, National Surety argues that no
duty to defend arises until a claim is tendered, and therefore it cannot be
responsible for defense costs incurred before this point. Second, it contends that
Immunex's late tender caused prejudice as a matter of law so that it is entitled to
summary judgment relieving it of any responsibility for defense costs.
In support of its argument that no duty to defend arose before tender,
National Surety cites to Leven, 97 Wash. App. 417. There, this court noted that "an
insurer's duty to defend does not arise unless the insured specifically asks the
insurer to undertake the defense of the action." !d. at 426-27. National Surety
interprets this language to mean that an insurer is exempt from paying pretender
defense costs. But Leven clearly states that an insured's late tender in violation of
the insurance contract does not relieve the insurer of its duty to defend unless it
proves actual and substantial prejudice from late notice. !d. at 427.
Leven is consistent with our decision in Mutual of Enumclaw Insurance Co.
v. USF Insurance Co., 164 Wash. 2d 411, 421, 191 P.3d 866 (2008), which
recognized that "[t]he duties to defend and indemnify do not become legal
obligations until a claim for defense or indemnity is tendered." National Surety
seems to interpret this statement to mean that it cannot be legally obligated to pay
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pretender defense costs. All that USF establishes, however, is that a "'breach of
the duty to defend cannot occur before tender.'" Id. (quoting Griffin v. Allstate Ins.
Co., 108 Wash. App. 133, 141, 29 P.3d 777, 36 P.3d 552 (2001)). In noting that the
duty to defend is not a legal obligation until tender, the court was stating the rather
obvious proposition that in terms of timing, the duty to defend or indemnify is not
legally enforceable until the insured has apprised its insurer that it seeks its
performance. Nothing in our opinion in USF suggests that pretender defense costs
are not recoverable once tender has been made.
In fact, the duty to defend arises not at the moment of tender, but upon the
filing of a complaint alleging facts that could potentially require coverage. Truck
Ins. Exch., 147 Wn.2d at 760. As the Court of Appeals noted in Griffin, "Certainly
breach of the duty to defend cannot occur before tender. The scope of a duty,
however, is defined not by its breach, but by the contract." 108 Wn. App. at 141.
Accordingly, an insured can recover pretender fees and costs except where a late
tender prejudiced the insurer. Id. at 139. 4
As in other contexts involving breach of policy provisions by the insured,
the insurer must show that late notice actually and substantially prejudiced its
interests before performance of its duties will be excused. USF, 164 Wn.2d at 426.
4
Notably, National Surety's reservation of rights letter recognized its need to
establish prejudice before being excused from its duty to defend based on the untimely
tender. See, e.g., CP at 1067 ("[T]o the extent that breach of the policy conditions caused
prejudice to [National Surety]-and it seems likely that [National Surety] has been
prejudiced by the late notice-Immunex has forfeited coverage under the policies."); CP
at 1074 ("To the extent Immunex's breach of those conditions has caused prejudice to
[National Surety], the breach will result in a loss of coverage.").
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Nat'! Surety Corp. v. Immunex Corp., 86535-3
"Prejudice" means a damage or detriment to one's legal claims. BLACK'S LAW
DICTIONARY 1299 (9th ed. 2009). In line with this definition, to establish prejudice
an "insurer must prove that an insured's breach of a notice provision had an
identifiable and material detrimental effect on its ability to defend its interests."
USF, 164 Wn.2d at 430. This rule will require a different showing depending on
the interest at stake. See id. Several of the factors mistakenly seized upon by the
dissent as free-floating "equitable considerations" are in fact relevant to a showing
of actual and substantial prejudice. See dissent at 11-12 (failure to cooperate with
the insurer or comply with policy terms); id. at 12-13 (long delay).
National Surety insists that Immunex's late tender caused prejudice as a
matter of law. In this regard, National Surety argues that "prejudice to the insurer
is established as a matter of law when, as here, an insured selectively delays tender
of a claim for years in order to control the defense and settlement of the claims
without the consent of the insurer." Br. ofResp't/Cross-Appellant at 45-46.
It is possible a declaratory judgment might have been obtained much earlier
had Immunex promptly tendered the defense. However, in its alternative motion
for summary judgment, National Surety asserted it was not liable for any defense
costs. 5 Simply showing that tender was late fails to establish, as a matter of law,
that timely tender would have prevented incurring any defense costs. Indeed, the
5
National Surety argued Immunex forfeited its right to coverage by belatedly
tendering the defense of the average wholesale pricing litigation. CP at 1170, 1177. As
already discussed, however, an insured's breach of a policy provision does not result in a
forfeiture unless, and then only to the extent, that the breach prejudices the insurer.
-19-
Nat'! Surety Corp. v. Immunex Corp., 86535-3
fact that National Surety offered to pay for Immunex's defense cuts against this
contention: it is clear that National Surety would have incurred some defense costs,
regardless of the time of tender. Discovery remains to be conducted, and questions
of prejudice generally involve disputed facts. See USF, 164 Wn.2d at 427
("Whether or not late notice prejudiced an insurer is a question of fact, and it will
seldom be decided as a matter of law."). Summary judgment on the question of
prejudice is inappropriate.
III
CONCLUSION
When an insurer undertakes to defend its insured under a reservation of
rights, it must pay defense costs until it obtains a judicial declaration that it owes
no duty to defend. It cannot unilaterally disavow its financial responsibility in a
reservation of rights letter. An insurer who owes a duty to defend may nonetheless
be excused from its obligation to the extent it demonstrates actual and substantial
prejudice flowing from its insured's untimely tender of the claim.
We affirm the trial court's orders requiring National Surety to reimburse
Immunex for reasonable defense fees incurred before the determination of no
coverage and denying summary judgment on the late tender question. We remand
for further proceedings consistent with this opinion.
-20-
Nat 'I Surety Corp. v. Immunex Corp., 86535-3
· WECONCUR:
21
Nat'/ Surety Corp. v. lmmunex Corp., No. 86535-3
No. 86535-3
WIGGINS, J. (dissenting)-Rather than focus on the equities of the case at
hand, the majority seizes on this opportunity to pronounce that insurers who defend
under a reservation of rights may never recoup defense costs after a court
determines that an insurance policy does not cover an insured's claim and that the
insurer never had a duty to defend. This rule is both overly broad and unnecessary,
and in the context of this case, it is unjust. I dissent.
I would reverse the Court of Appeals in part1 and remand with instructions to
the trial court to vacate its order granting summary judgment to lmmunex on the
issue of defense costs. The trier of fact, not this court, should weigh the facts of this
case to decide whether National Surety should be forced to pay for lmmunex's
defense costs.
DISCUSSION
The majority concludes that insurers may never recoup defense costs paid
under a reservation of rights because a defense under a reservation of rights
protects insurers by limiting their liability on claims of bad faith or breach, rendering
"the defense portion of a reservation of rights defense illusory," majority at 13
(emphasis omitted). But the out-of-state authority the majority says provides
"valuable guidance," majority at 11, actually gives little guidance at all. And even the
1
I agree with the Court of Appeals and with the majority that summary judgment is
inappropriate on the issue of prejudice resulting from lmmunex's late tender of its claim.
See Nat'/ Sur. Corp. v. lmmunex Corp., 162 Wash. App. 762, 782, 256 P.3d 439 (2011);
majority at 19-20.
No. 86535-3
cases that do provide some support for the majority's position involve facts and
circumstances very distinct from those at issue here.
More importantly, the majority fails to acknowledge that its rule-that insurers
may never recoup defense costs paid under a reservation of rights even when it is
later determined that the insurer owed no duty to defend-is the minority view. The
majority does not mention that a majority of American courts have allowed insurance
companies to recoup reservation-of-rights defense costs and overlooks the leading
theory, unjust enrichment, that most of these jurisdictions, and the Restatement
(Third) of Restitution and Unjust Enrichment, have invoked to justify insurer
recoupment.
This court should follow the majority rule and majority rationale, opting to
engage in an analysis based on fairness under the circumstances of this case to
determine whether National Surety's payment of lmmunex's defense costs would
work an unjust enrichment in lmmunex's favor. The majority does not acknowledge
these considerations and would allow lmmunex and other similarly situated insureds
to receive defense costs, after a determination that no defense is owed, in exchange
for nothing at all. Instead of announcing such a sweeping and categorical rule that
ignores the unique facts at hand, Washington courts should make individualized
determinations on the recoupment issue by balancing the equities of each case.
In this case, because individualized determinations on the issue of
recoupment reveal several genuine issues of material fact, summary judgment on
the issue of defense costs was inappropriate. We should remand this case for
2
No. 86535-3
consideration of the facts that bear on whether payment of lmmunex's defense costs
would result in an unjust enrichment to the detriment of National Surety.
I. A majority of American jurisdictions allow recoupment under an unjust
enrichment theory
The majority ignores the fact that a majority of American jurisdictions that
have considered the recoupment issue have permitted recoupment,2 The
jurisdictions that have allowed recoupment have largely done so on the basis of
unjust enrichment, holding that insureds who receive their defense costs for
uncovered claims are unjustly enriched because they gain a benefit they never
bargained for. This is also the position taken by the drafters of the Restatement
(Third) of Restitution and Unjust Enrichment.
The leading case allowing recoupment, Buss v. Superior Court, 16 Cal. 4th
35, 65 Cal. Rptr. 2d 366, 939 P.2d 766 (1997), held that forcing an insurer who
reserves its right to recoup defense costs paid for uncovered claims would work an
unjust '"enrichment' of the insured by the insurer through the insurer's bearing of
unbargained-for defense costs." 939 P.2d at 777. Following the line of reasoning in
Buss, several other courts the majority cites have recognized the importance of
2
A couple of the cases cited by the majority for its position recognize that the majority rule
allows insurers to recoup costs under a reservation of rights for uncovered claims. See
Med. Liab. Mut. Ins. Co. v. Alan Curtis Enters., Inc., 373 Ark. 525, 285 S.W.3d 233, 235
(2008); Shoshone First Bank v. Pac. Employees Ins. Co., 2 P.3d 510, 514 (Wyo. 2000); see
also Michael M. Marick, An Insurer's Right to Recoup Non-Covered Defense Costs and
Indemnity Payments, in NEW APPLEMAN ON INSURANCE: CURRENT CRITICAL ISSUES IN
INSURANCE LAW 3 (Jul. 2007) ("A majority of the state courts to have considered the issue of
whether an insurer may recoup defense costs expended on behalf of its insured have
allowed recoupment."); see also id. at 23-37 (50-state survey demonstrating a majority of
American jurisdictions allow recoupment).
3
No. 86535-3
reimbursement under an unjust enrichment theory. As the Connecticut Supreme
Court noted,
A cause of action for reimbursement is cognizable to the extent
required to ensure that the insured not reap a benefit for which it has
not paid and thus be unjustly enriched. Where the insurer defends the
insured against an action that includes claims not even potentially
covered by the insurance policy, a court will order reimbursement for
the cost of defending the uncovered claims in order to prevent the
insured from receiving a windfall.
Sec. Ins. Co. of Harford v. Lumbermens Mut. Cas. Co., 264 Conn. 688, 826 A.2d
107, 125 (2003). Similarly, in Hebela v. Healthcare Insurance Co., the Appellate
Division of the New Jersey Superior Court held that "the right of reimbursement
exists because the insured would be unjustly enriched in benefiting by, without
paying for, the defense of a non-covered claim." 370 N.J. Super. 260, 851 A.2d 75,
86 (Ct. App. Div. 2004); see also Cincinnati Ins. Co. v. Grand Pointe, LLC, 501 F.
Supp. 2d 1145, 1169 (E.D. Tenn. 2007) ("It would be inequitable for Defendants to
retain the benefits of the defense [of claim not covered in the insurance policy]
without repayment of the defense costs."). These cases hold that insurers that
defend subject to a reservation of rights, despite believing a claim is not covered,
have an equitable right to reimbursement under an unjust enrichment theory if it
turns out the claim was not covered by the pertinent insurance policy.
The Restatement (Third) of Restitution and Unjust Enrichment also endorses
the view that insurers should be able to pursue a restitution claim in this scenario.
The Restatement provides:
If one party to a contract demands from the other a performance that is
not in fact due by the terms of their agreement, under circumstances
making it reasonable to accede to the demand rather than to insist on
4
No. 86535-3
an immediate test of the disputed obligation, the party on whom the
demand is made may render such performance under protest or with
reservation of rights, preserving a claim in restitution to recover the
value of the benefit conferred in excess of the recipient's contractual
entitlement.
RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 35(1 ), at 571
(2011 ). 3 The American Law Institute included a specific illustration very similar to the
facts of this case that clearly supports recoupment of defense costs to insurers that
defend under a reservation of rights:
[Insured] repudiates the obligation to reimburse [Insurer], no matter
what the outcome, but accepts [lnsurer]'s defense of [Piaintiff]'s claims.
[Insurer] proceeds to defend [Insured], having notified [Insured] that it is
acting pursuant to a unilateral reservation of rights. [Insurer]
subsequently obtains a declaratory judgment that [Plaintiff's] lawsuit is
outside the scope of [lnsurer]'s duty to defend, because it states no
claims that even potentially covered under the policy. [Insurer] has a
claim under this section to recover the amounts reasonably expended
in the defense of the [Plaintiff's] lawsuit.
/d. at 580, cmt. c, illus. 12. The Reporter's Note following the illustrations indicates
that this scenario is "based on" Buss and other similar cases, concluding that
"[r]estitution then permits the insurer to recover that part of the benefit conferred on
the policyholder that exceeds the insurer's obligation." /d. at 585, Reporter's Note on
cmt. c.
Given that the leading theory permitting recoupment in this context, unjust
enrichment, is found both in reported cases and the Restatement, the majority's
3
This court has repeatedly relied on the current and previous iterations of the Restatement
of Restitution for guidance in a variety of contexts in which issues of unjust enrichment and
quasi contractual claims arise. See, e.g., Young v. Young, 164 Wash. 2d 477,489-91, 191 P.3d
1258 (2008); Bank of Am., N.A. v. Prestance Corp., 160 Wash. 2d 560, 576 n.13, 160 P.3d 17(2007); Nelson v. Appleway Chevrolet, Inc., 160 Wash. 2d 173, 187-88, 157 P.3d 847 (2007);
In re Marriage of Langham & Kolde, 153 Wash. 2d 553, 566-67, 106 P.3d 212 (2005);
Chandler v. Wash. Toll Bridge Auth., 17 Wash. 2d 591, 601, 137 P.2d 97 (1943).
5
No. 86535-3
assertion that unjust enrichment is "simply irrelevant," majority at 7, is simply
disingenuous. The majority fixates on the benefit that National Surety receives by
providing a defense under a reservation of rights, concluding that lmmunex's
enrichment is matched by National Surety's avoidance of claims of breach, bad faith,
and coverage by estoppel. /d. But it is baffling to say that National Surety is
benefited or enriched by complying with the decisional law of this court. National
Surety, uncertain of its duty to defend, did exactly as we have instructed: it offered to
defend under a reservation of rights to ensure that it complied with its obligation to
its insured. See Woo v. Fireman's Fund Ins. Co., 161 Wash. 2d 43, 54, 164 P.3d 454(2007); Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wash. 2d 751, 761, 58 P.3d 276(2002); Kirk v. Mt. Airy Ins. Co., 134 Wash. 2d 558, 562, 951 P.2d 1124 (1998); Tank v.
State Farm Fire & Cas. Co., 105 Wash. 2d 381, 386-87, 390, 715 P.2d 1133 (1986).
National Surety did not receive a "benefit"; rather, it prudently made certain that it
complied with its duties under the law..
The trial court granted summary judgment in National Surety's favor because
it determined that "National Surety ha[d] no duty to defend lmmunex with regard to
any of the claims made against lmmunex in the actions tendered to National Surety."
Clerk's Papers (CP) at 1023. Because National Surety never had a duty to defend
lmmunex under the terms of the insurance policy, ordering National Surety to pay
lmmunex's defense costs, as the majority does today, gives lmmunex something
6
No. 86535-3
that it never bargained for in its insurance contract. 4 I turn to Washington law to
consider whether majority's opinion would result in lmmunex's unjust enrichment.
II. Unjust enrichment theory provides a more flexible and equitable approach to
respond to the various facets each case presents
Unjust enrichment is an equitable doctrine that allows recovery for the value
of benefits retained absent a contractual relationship, as required by the notions of
fairness and justice. Young v. Young, 164 Wash. 2d 477, 484, 191 P.3d 1258 (2008).
'"[E]quitable doctrines grew naturally out of the humane desire to relieve under
special circumstances from the harshness of strict legal rules."' Kingery v. Dep't of
Labor & Indus., 132 Wash. 2d 162, 173, 937 P.2d 565 (1997) (quoting Ames v. Dep't of
Labor & Indus., 176 Wash. 509, 513, 30 P.2d 239 (1934 )). When a court sits in
equity, it has great discretion in considering the complex factual matters involved in
each case to "fashion[] broad remedies to do substantial justice to the parties."
Esmieu v. Hsieh, 92 Wash. 2d 530, 535, 598 P.2d 1369 (1979).
Our case law applying equitable principles supports a balancing approach
that weighs case-specific facts to determine whether a party has been unjustly
enriched. Most recently in Young, this court considered work performed by Jim and
4
The majority accuses me of "focus[ing] on National Surety's contractual obligations"
instead of on the proposition that "the scope of an insurer's duty to defend is broader than
the terms of the policy." Majority at 6. But my focus is on unjust enrichment, the purpose of
which is to remedy the value of benefits undeservedly conferred outside the contractual
relationship. As to the majority's statement that an insurer's duty to defend is broader than
the policy's terms, I am mystified. While I agree with the majority's general proposition that
an insurer's duty to defend is broader than its duty to indemnify, see majority at 5 (citing
Truck Ins. Exch., 147 Wn.2d at 760 (citing Hayden v. Mut. of Enumclaw Ins. Co., 141 Wash. 2d
55, 64, 1 P.3d 1167 (2000))), I am aware of no authority--and the majority provides none-
that would broaden the duty·to defend to matters beyond the policy's terms.
7
No. 86535-3
Shannon Young to prepare Judith Young's otter sanctuary. 5 164 Wn.2d at 481. Later,
when Judith Young refused to pay Jim and Shannon, the trial court determined that it
would be unjust for Judith Young to retain the value of Jim and Shannon's work
without compensation. !d. at 482. Under the unjust enrichment theory, the trial court
allowed Jim and Shannon to recover the market value of their improvements but
deducted general contractor's costs pursuant to a cost expert's report. /d. We held
that the trial court used the improper measure of unjust enrichment recovery by
deducting the general contractor's costs without analysis of the circumstances: "[t]he
trial court erred in totally deducting all of these costs without an examination of
whether these costs had some consequential relationship to the value of the benefit
conferred." !d. at 488-89. Young demonstrates the importance of placing the unjust
enrichment inquiry into the unique factual context of every case.
We engage in a careful balancing of the facts and circumstances in other
equitable contexts as well. See, e.g., Gildon v. Simon Prop. Grp., Inc., 158 Wash. 2d
483, 495, 145 P.3d 1196 (2006) (noting that the court looks to equity and good
conscience that calls for determinations dependent on the facts and circumstances
of individual cases when considering joinder of a necessary party under CR 19); In
re Pennington, 142 Wash. 2d 592, 603, 14 P.3d 764 (2000) (considering the various
factors under Connell v. Francisco, 127 Wash. 2d 339, 898 P.2d 831 (1995), to
determine whether and how to equitably distribute parties' property at the end of a
5
The majority ignores Young, this court's most recent opinion discussing the principle of
unjust enrichment, because it concerned an otter sanctuary instead of an insurance policy.
Majority at 7. It should go without saying that Young and other cases are cited for the
principles of law they espouse, not for factual distinctions that make no difference.
8
No. 86535-3
meretricious relationship in order to avoid unjust enrichment); Myers v. Boeing Co.,
115 Wash. 2d 123, 138, 794 P.2d 1272 (1990) (holding that balancing various factors to
determine whether to apply forum non conveniens "will lead to fair and equitable
results"); Tyler Pipe Indus., Inc. v. Dep't of Revenue, 96 Wash. 2d 785, 792, 638 P.2d
1213 (1982) ("[S]ince injunctions are addressed to the equitable powers of the court,
the [injunction] criteria must be examined in light of equity including balancing the
relative interests of the parties."). In short, as in other equitable contexts, when
considering unjust enrichment, courts balance the unique circumstances of each
case to determine whether one party will receive a benefit to which, under notions of
fairness and justice, it is not entitled.
Turning to the mechanics of the claim itself, in order to establish an unjust
enrichment claim, the plaintiff must demonstrate that "(1) the defendant receive[ d) a
benefit, (2) the received benefit is at the plaintiff's expense, and (3) the
circumstances make it unjust for the defendant to retain the benefit without
payment.'' Young, 164 Wn.2d at 484-85. As a result of the majority's opinion,
lmmunex will receive the benefit of payment for its defense costs at National
Surety's expense. Thus, the first two elements of National Surety's unjust
enrichment claim would be easily met. The only remaining issue-whether
circumstances would make it unjust for lmmunex to receive payment of its litigation
costs instead of paying for them itself-depends on a careful balancing of the
equities in this case.
9
No. 86535-3
Ill. Genuine issues of material fact exist regarding whether National Surety's
payment of lmmunex's defense costs would unjustly enrich lmmunex
Several considerations would assist in determining whether forcing National
Surety to pay lmmunex's defense costs would result in lmmunex's unjust
enrichment. These considerations should be carefully balanced before disposal on
summary judgment.
A. Timing of Payment
"Recoupment" of National Surety's payments for lmmunex's defense is not an
actual issue in this case. At least at the time the trial court determined the summary
judgment motion on defense costs, National Surety had not paid for any of
lmmunex's legal defense. Thus, the real issue is whether National Surety now must
pay for defense costs that have already been determined to fall outside National
Surety's duty to defend.
The majority states that "[i]t makes no difference that National Surety never
actually paid any defense costs before the declaration of noncoverage on April 14,
2009." Majority at 16 n.3. The Court of Appeals came to the same conclusion. Nat'!
Sur. Corp., 162 Wn. App. at 777. I fail to see how this could be so. This is not a clear
situation where National Surety is at fault for not paying defense costs. In fact, the
record reveals that delay over executing a confidentiality agreement was at least
one reason that attorney bills were not more promptly produced to National Surety.
See CP at 1199 (letter from lmmunex's counsel to National Surety's counsel on April
28, 2009, stating, "for some time we have worked to put in place a confidentiality
agreement to allow lmmunex to produce to National Surety the attorney bills that it
10
No. 86535-3
has requested in connection with making payment to lmmunex"). National Surety
actually requested that lmmunex provide attorney billings in its March 2008
reservation of rights letter.
If National Surety's failure to pay costs was a result of its lack of access to
billings through no fault of its own, it seems particularly unjust to force National
Surety to pay defense costs now, after a determination that it never owed any
defense costs. This is just the type of fact-specific inquiry that should enter the
calculus in determining whether National Surety's payment for defense costs at this
late date would unjustly enrich lmmunex.
B. Participation in the defense and compliance with policy terms
When insurers are uncertain regarding their duty to defend, Washington law
permits them to defend under a reservation of rights and simultaneously seek a
declaratory judgment that they have no duty to defend. Woo, 161 Wn.2d at 54. Upon
providing a defense subject to a reservation of rights, insurers are generally able to
participate in forming the defense by hiring lawyers, making budgetary
determinations, a!ld gathering additional information regarding the claims.
An insurer's participation in setting up a defense to claims against its insured
is an important consideration in determining whether insurers should be permitted to
recoup defense costs paid under a reservation of rights. This is so because it
comprises an essential part of the insurer's bargain with its insured. In this case,
lmmunex's policies provided that lmmunex must "[c]ooperate with [National Surety]
in the investigation or settlement of any claim; or defense of [lmmunex] against any
Suit . . . [m]ake no admission of liability ... [i]ncur no expense ... [a]ssume no
11
No. 86535-3
obligation ... without [National Surety's] consent." CP at 639. lmmunex appears to
have violated this portion of its policy, at least in one respect, when it sent a letter to
National Surety "to inform ... that lmmunex is in the process of negotiating a
settlement of State of California, pursuant to which lmmunex would pay an amount
within the limits of its insurance coverage." CP at 584, 1059. Informing National
Surety of its plans for imminent settlement does not seem to comply with the policy
terms that National Surety bargained for: at the very least, lmmunex was required to
cooperate with National Surety and keep it informed of important developments like
settling lawsuits. 6 Such facts should be considered in determining whether lmmunex
would be unjustly enriched if National Surety is now required to pay for defense
costs-. including costs of settlements-despite perhaps never obtaining the benefit
of its bargain to participate in providing a defense.
C. Unreasonable delay
The facts of this case demonstrate a protracted claim process. In 2001,
lmmunex first notified National Surety of civil investigations. National Surety
promptly responded, requesting more information. In 2003, lmmunex provided a
status report, stating that it would forward any complaints against it as soon as they
were served. More than three years elapsed before lmmunex tendered its claims.
Eighteen more months passed while lmmunex and National Surety exchanged
correspondence regarding whether lmmunex's claims were covered until National
Surety agreed to provide a reservation-of-rights defense and instituted the instant
6
RCW 48.18.520 provides in pertinent part that "[e]very insurance contract shall be
construed according to the entirety of its terms and conditions as set forth in the policy .... "
12
No. 86535-3
declaratory judgment action in King County Superior Court in March 2008. lmmunex
sought a stay of the declaratory judgment action resulting in another year before the
trial court made its determination that National Surety owed no duty to defend.
I am not suggesting that any of the delays in this claim process were
unreasonable, but only that this is a valid question that remains open. The majority
and the Court of Appeals acknowledge that lmmunex's delay in tender should be
considered as to whether National Surety was prejudiced. Nat'/ Sur. Corp., 162 Wn.
App. at 782; majority at 19. Delay should also be considered in the context of a
restitutionary claim for recoupment of defense costs.
D. Entitlement to recover for the same loss under other policies
The record before us does not disclose much regarding lmmunex's policy with
National Surety, other than that there is an excess policy, not at issue here, and an
umbrella policy, under which lmmunex sought coverage. Whether such policies
cover claims in the first instance depends on whether a primary policy is in place,
actually applies, or is exhausted. See Hodge v. Raab, 151 Wash. 2d 351, 355, 88 P.3d
959 (2004) (quoting RCW 48.22.030(2), which describes "umbrella policies" as
policies that apply only in excess to primary insurance); MacKenzie v. Empire Ins.
Cos., 113 Wash. 2d 754, 757-59, 782 P.2d 1063 (1989) (describing differences
between umbrella policies and general liability policies). If an insured may recover
for the same loss from several different insurance providers but opts to pursue only
one of them, that fact should certainly be considered as to whether the insured
would be unjustly enriched by forcing the insurer to foot the bill, especially where the
insurer had no duty to do so.
13
No. 86535-3
E. Good faith
Washington insurance statutes require that "all persons be actuated by good
faith, abstain from deception, and practice honesty and equity in all insurance
matters. Upon the insurer, the insured, their providers, and their representative rests
the duty of preserving inviolate the integrity of insurance." RCW 48.01.030. Because
the legislature has recognized the central importance of good faith in the general
context of insurance, whether insurers and insureds meet their good faith standard
should certainly enter into the determination of whether an insurer may recover
defense costs paid under a reservation of rights.
F. Disparity in bargaining power between the parties
At least in the context of awarding attorney fees to insureds that are forced to
litigate against their insurers for coverage determinations, we have recognized a
"disparity of bargaining power between an insurance company and its policyholder."
Olympic S.S. Co. v. Centennial Ins. Co., 117 Wash. 2d 37, 52, 811 P.2d 673 (1991).
This disparity should also be taken into account in a situation like the one before us:
if there is a significant imbalance of power between insurer and insured, the
insurer's ability to recoup defense expenditures under a reservation of rights should
be limited accordingly.
At the same time, this court has indicated that the power differential is at its
greatest when insurance companies use standardized, nonnegotiable contracts
presented on a take-it-or-leave-it basis. McGreevy v. Or. Mut. Ins. Co., 128 Wash. 2d
26, 35, 904 P.2d 731 (1995). This suggests that when the parties have the ability to
negotiate the terms of an insurance policy on relatively equal footing, the power
14
No. 86535-3
differential would change significantly. Where the insured is, as here, a sophisticated
corporation with ready access to legal advice that negotiates an insurance policy in
its corporate capacity, one would expect the power differential to be less than for an
individual purchasing an insurance policy for personal use. In short, the parties'
relative bargaining power is another important factor in considering whether an
insurer can assert a restitution claim to recoup defense costs paid under a
reservation of rights.
Though by no means exhaustive, the factors discussed here should be .used
to determine whether insurance companies that provide defenses subject to
reservations of rights may state restitution claims to recover defense costs paid to
their insureds if it turns out they never had a duty to defend in the first place. In this
case, these fact-specific considerations indicate that a genuine issue of material fact
still exists whether lmmunex's enrichment would be unjust. Summary judgment on
the defense cost issue was therefore inappropriate.
IV. The cases cited by the majority in support of categorically denying
recoupment are unpersuasive and distinguishable
The majority's conclusion is based on an assumption that the issue before us
7
is a binary one-either recoupment is allowed in all cases or it is allowed in none.
7
The majority also makes the unsupported assertion that "[m]ore recently . . . courts
evaluating whether insurers can recover defense costs have generally concluded that they
cannot." Majority at 11. The majority's perception of a recent trend to disallow recoupment is
belied by a number of recent cases reaching the opposite result. See, e.g., Ill. Union Ins.
Co. v. NRI Constr., Inc., 846 F. Supp. 2d 1366, 1377 (N.D. Ga. 2012); EMC Ins. Cos. v. Mid-
Continent Cas. Co., 884 F. Supp. 2d 1147, '1173 (D. Colo. 2012) ("[W]here an insurer
discharged its duty to defend and coverage was nonexistent, it may seek reimbursement for
those costs it expended in defending the insured."); Dupree v. Scottsdale Ins. Co., 947
N.Y.S.2d 428, 429, 96 A.D.3d 546 (N.Y. App. Div. 2012) ("Absent a final adjudication that
plaintiff's alleged wrongdoing does indeed fall under the policy's exclusions, the policy
15
No. 86535-3
See majority at 10-11. A closer examination of the cases the majority relies on
demonstrates that the majority's assumption oversimplifies and inaccurately portrays
the pertinent case law. The cases cited by the majority are largely a grab bag of
unrelated theories and distinguishable facts, never leading to any discernible
coherent theory on which to deny recoupment.
The majority cites several cases for the proposition that permitting
recoupment of defense costs under a reservation of rights would permit insurers to
'"unilaterally modify its contract."' Majority at 11 (quoting Gen. Agents Ins. Co. of
Am., Inc. v. Midwest Sporting Goods Co., 215 111.2d 146, 293 Ill. Dec. 594, 828
f\I.E.2d 1092, 1102 (2005); see also majority at 11-12. Although Midwest Sporting
Goods held that it could not "condone an arrangement where an insurer can
unilaterally modify its contract, through a reservation of rights, to allow for
reimbursement of defense costs in the event a court later finds that the insurer owes
no duty to defend," 828 N.E.2d at 1102, none of the other cases the majority relies
on provides such unequivocal support to sustain, factually or legally, a categorical
rule against recoupment. 8
remains in effect and defendant is required to pay attorneys' fees and defense costs,
subject to recoupment in the event it is ultimately determined that the exclusions apply."
(citation omitted)); Maxum lndem. Co. v. Eclipse Mfg. Co., 848 F. Supp. 2d 871, 884 (N.D.
Ill. 2012) (holding that insurer is entitled to reimbursement of its costs because it provided a
defense even though it had no duty to defend).
8
Even Midwest Sporting Goods is factually distinct. There, Midwest Sporting Goods timely
tendered defense of the suit to its liability carrier, Gainsco, which denied coverage. 828
N.Ed.2d at 1093. After the complaint against it was amended, Midwest Sporting Goods
again timely sought coverage from Gainsco, which offered to defend under a reservation of
rights that would have permitted it to recoup any defense costs that were later determined
that Gainsco did not owe. /d. at 1093-94. Unlike this case, the tender of claims was
immediate and Gainsco actually paid defense costs and participated in the litigation as it
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No. 86535-3
In Shoshone First Bank v. Pacific Employers Insurance Co., 2 P.3d 510, 512
(Wyo. 2000), the Wyoming Supreme Court rejected recoupment where there was at
least one covered claim and the insurer had already paid for the defense. The court
reasoned that the insurance_ policy did not distinguish "between covered and non-
covered claims so far as the defense of those claims [was] concerned." /d. at 515.
Thus, the Shoshone court felt that allowing recoupment for all defense costs when
some claims were covered under the policy would allow the insurer to unilaterally
modify the insurance contract. /d. Unlike Shoshone, there was no mixture of covered
and uncovered claims here, just a claim that was never covered by the parties'
insurance policy.
Several of the majority's cases are readily distinguished by the fact that those
insurers participated in selecting counsel and reviewing bills, and thus benefited
from providing a defense. See Am. & Foreign Ins. Co. v. Jerry's Sport Ctr., Inc., 606
Pa. 584, 2 A.3d 526, 544-45 (201 0) (noting that the insurer "had not only the duty to
defend, but the right to defend under the insurance contract. This arrangement
benefited both parties." (emphasis added)); Terra Nova Ins. Co. v. 900 Bar, Inc., 887
F.2d 1213, 1219 (3d Cir. 1989) (noting that by defending under a reservation of
rights, the insurer avoided the risk of what "an inept or lackadaisical defense of the
underlying action may expose [the insurer] to if it turns out there is a duty to
indemnify"); see also Perdue Farms, Inc. v. Travelers Cas. & Sur. Co. of Am., 448
F.3d 252, 259 (4th Cir. 2006) (same). Unlike these cases, it cannot be said that
was occurring. /d. at 1093, 1095.
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No. 86535-3
National Surety was given an opportunity to avoid a subpar defense because, as
already discussed, lmmunex paid its own defense costs well before it tendered any
claim to National Surety and National Surety never participated in any aspect of
lmmunex's defense.
The majority's other cases are even more easily distinguished. In Capitol
Indemnity Corporation v. Blazer, 51 F. Supp. 2d 1080 (D. Nev. 1999), the court
denied recoupment because the insurer failed to give its insured '"unambiguous
notice that it may later be held responsible for costs incurred,"' id. at 1090 (quoting
Forum Ins. Co. v. County of Nye, No. 91-16724, 1994 WL 241384, at *3 (9th Cir.
June 3, 1994) (unpublished)). Had the insurer clearly indicated that it was reserving
its rights and intended to seek reimbursement, as National Surety did in this case,
the court likely would have allowed reimbursement. Blazer cuts against the
majority's categorical rule.
In Medical Liability Mutua/Insurance Co. v. Alan Curtis Enterprises, Inc., 373
Ark. 525, 285 S.W.3d 233 (2008), the real issue was not recoupment of fees
following a defense under a reservation of rights but lack of statutory authority to
award attorney fees. The court considered various approaches to the issue of
recoupment, but ultimately stated that the recoupment issue was irrelevant "because
... attorneys' fees are not allowed in Arkansas except where expressly provided for
by statute." /d. at 235. This case hardly supports the majority's position.
In Zurich American Insurance Co. v. Public Storage, applying Washington law,
the court denied the insurer's request for recoupment because "[a]s a court sitting in
diversity, it [was] inappropriate to blaze a new trail in Washington insurance law."
18
No. 86535-3
743 F. Supp. 2d 548, 551 (E.D. Va. 201 0). The majority's claim that the court
predicted Washington would disallow recoupment is not accurate, majority at 12; the
federal court simply refused to allow recoupment because there was no Washington
case on point that permitted it to do so. Public Storage, 743 F. Supp. 2d at 551.
In sum, while some of the cases point to the majority's desired result, they are
very factually different from the case we must decide here. The majority has relied
on these cases for their ultimate conclusion but has overlooked their facts and their
reasoning. These cases are unpersuasive and should not control our decision.
CONCLUSION
The majority's blanket determination that insurers may never recoup defense
costs under a reservation of rights ignores the unique facts of each case and fails to
appreciate the diversity and inapplicability of the different theories on which out-of-
state jurisdictions have denied recoupment in certain circumstances. The majority
fails to acknowledge that a majority of jurisdictions allow recoupment and that most
do so on the equitable basis of avoiding unjust enrichment. Rather than accept the
majority's all or nothing approach, this court should balance the equities of each
case to determine whether an insurer has stated a legitimate claim in restitution to
recover for its insured's unjust enrichment. Instead of affirming summary judgment
on the issue of lmmunex's entitlement to enrichment in the form of uncovered
defense costs, I would reverse the Court of Appeals and remand this matter to the
trial court to consider the facts specific to this case as discussed in this opinion to
determine whether such enrichment would be unjust.
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No. 86535-3
I dissent.
20