National Surety Corporation v. Immunex Corporation ( 2018 )

FILED
COURT OF APPEALS
'STATE OF DIVA
WASHINGTON
2010 JAN 29 A14 9:2L
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
NATIONAL SURETY CORPORATION, )
) No. 75674-5-1
Respondent, )
)
v. ) DIVISION ONE
)
IMMUNEX CORPORATION, ) UNPUBLISHED OPINION
)
Appellant. ) FILED: January 29, 2018
)
APPELWICK, J. —At issue is the amount of defense costs for which Immunex
is entitled to be reimbursed. Immunex argues that the trial court, on remand, erred
in dismissing its counterclaims on summary judgment, and it erred in excluding
evidence regarding National Surety's duty to investigate its claims. We affirm.
FACTS
National Surety Corporation insured Immunex Corporation. The policy
periods at issue are September 1, 1998 to September 1, 2002. On October 3,
2006, Immunex sent a letter to National Surety explicitly requesting coverage for
a number of lawsuits filed on or after November 27, 2001, all alleging unlawful
practices in its average wholesale pricing(AWP)of drugs. On December 14,2006,
National Surety denied coverage, and asked Immunex to provide any additional
information that might change that coverage decision. On March 9, 2007,
Immunex responded, arguing that the AWP claims were covered by its policy.
No. 75674-5-1/2
On March 31, 2008, after further correspondence, National Surety agreed
to defend under a reservation of rights. While denying coverage, it agreed to
defend "until such time as it can obtain a court determination confirming its
coverage decision [and] 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
[it] is entitled to reimbursement." It concurrently filed for declaratory relief stating
that the AWP litigation was not covered.
On April 15, 2009, the trial court granted National Surety this requested
declaratory relief. However, the trial court denied National Surety's summary
judgment motion to be relieved from paying any of Immunex's defense fees and
costs. And, the trial court granted Immunex's partial summary judgment motion,
finding that unless National Surety could prove prejudice from late notice at trial, it
could be obligated to pay defense costs until the date the court confirmed the
claims were not covered. The trial court then entered partial final judgment
pursuant to CR 54(b) in order to permit appeal.
lmmunex appealed and National Surety cross-appealed. This court
affirmed. Nat'l Sur. Corp. v. Immunex Corp., 162 Wn. App. 762, 782, 256 P.3d
439 (2011). National Surety petitioned for review. The Supreme Court also
affirmed and remanded to the trial court for determination of the defense fees and
costs owed by National Surety. Nat'l Sur. Corp. v. lmmunex Corp., 176 Wn.2d
872, 891, 297 P.3d 688 (2013).
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No. 75674-5-1/3
On remand, Immunex brought counterclaims for breach of contract, bad
faith, violation of the Consumer Protection Actl (CPA), and violation of the
Insurance Fair Conduct Act2 (IFCA). National Surety moved for partial summary
judgment on these counterclaims. The trial court granted the motion. The only
issue remaining, the extent that National Surety was prejudiced by any delay in
Immunex tendering its claim, proceeded to trial. Immunex sought reimbursement
for fees and costs in excess of $15,400,000. The jury found that National Surety
was prejudiced, and granted judgment in the amount of $670,000. Immunex
appeals.
DISCUSSION
Immunex alleges two errors. First, it argues that the trial court erred in
granting summary judgment on its contractual and extracontrabtual claims.
Second, it argues that, the trial court erred in excluding evidence regarding
National Surety's duty to investigate.
I. Summary Judament on Immunex's Claims
When reviewing a summary judgment order, this court engages in the same
inquiry as the trial court. Hertoq v. City of Seattle, 138 Wn.2d 265, 275, 979 P.2d
400 (1999). Summary judgment is proper when there are no genuine issues of
material fact, and the moving party is entitled to judgment as a matter of law. Id.All facts and reasonable inferences are considered in the light most favorable to
the nonmoving party. Id. Questions of law are reviewed de novo. Id.1 Ch. 19.86 RCW.
2 RCW 48.30.010-.015.
No. 75674-5-1/4
Immunex asserted a breach of contract counterclaim based upon National
Surety's failure to defend. In addition, it asserted counterclaims for
extracontractual liability under common law bad faith and the Washington IFCA
and CPA based on National Surety's failure to pay defense costs. Immunex
argues that National Surety never in fact defended it in the underlying action, and
therefore cannot claim this safe harbor.3
"An insurer has a duty to defend 'when a complaint against the insured,
construed liberally, alleges facts which could, if proven, impose liability upon the
insured within the policy's coverage.' An insurer is not relieved of its duty to defend
unless the claim alleged in the complaint is 'clearly not covered by the policy.'"
Woo v. Fireman's Fund Ins. Co., 161 Wn.2d 43, 52-53, 164 P.3d 454 (2007)
(citation omitted) (quoting Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d
751, 760, 58 P.3d 276 (2002)).
"If the insurer is uncertain of its duty to defend, it may defend under a
reservation of rights and seek a declaratory judgment that it has no duty to defend.
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." Id. at 54 (citation omitted).
its duty to defend, an insurer generally has the right to select the
3 "To fulfill
defense counsel who will represent its insured." Kruger-Willis v. Hoffenburq, 198
Wn. App. 408, 416, 393 P.3d 844, 848 (2017), review denied, 189 Wn.2d 1010,
402 P.3d 818 (2017). Alternatively, "[t]he duty to defend can be enforced by
requiring the insurer to reimburse the insured for its costs in defending against the
claim." Waite v. Aetna Cas. & Sur. Co., 77 Wn.2d 850, 858, 476 P.2d 847(1970).
Here, Immunex sought reimbursement of its defense costs incurred in the litigation.
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No. 75674-5-1/5
"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.' [W]e then observed
that '[w]hen that course of action is taken, the insured receives the defense
promised and, if coverage is found not to exist, the insurer will not be obligated to
pay.' 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." Immunex, 176 Wn.2d at 885
(second alteration in original)(Citations omitted)(internal quotation marks omitted)
(quoting Truck Ins„ 147 Wn.2d at 761).
"Taken in context, the language in Kirk[ v. Mt. Airy Ins. Co., 134 Wn.2d 558,
563, 951 P.2d 1124 (1998)] 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
W.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 W.2d at 54, 164 P.3d 454." Immunex, 176 Wn.2d at 885-86.
"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.
Accordingly, National Surety may be held responsible for the reasonable defense
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No. 75674-5-1/6
costs incurred by its insured until the trial court determined National Surety had no
duty to defend." Id. at 887-88 (footnote omitted).
National Surety argued to the trial court on remand that language in our
prior opinion required dismissal of Immunex's counterclaims: "Although here
National Surety has not yet taken on the actual defense of Immunex, National
Surety had the benefit of insulating itself from a bad faith claim and possible
coverage by estoppel." Immunex, 162 Wn. App. at 778. Whether National Surety
could be liable for breach of contract or extra-contractual relief for failure to timely
pay defense costs was not a question squarely before the court. This statement
was merely a straightforward application of Woo. Both the Court of Appeals and
the Supreme Court were clearly aware that payment had not been made at the
time of the appea1.4 Neither hinted that this fact had any impact on the application
of Woo relative to the defense under reservation of rights. Neither court hinted
that the issues in Immunex's counterclaims were alive on remand.
This is not surprising. By defending under a reservation of rights, National
Surety assumed as a matter of law the obligation to pay reasonable defense costs.
The only question was how much was reasonable; the only duty was to pay.
Immunex asserted a counter claim for more than $15 million dollars. National
4 "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." Immunex, 176 Wn.2d at 887-88. In a footnote to that sentence it
added, "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, 176
Wn.2d at 888 n.3 (quoting Immunex, 162 Wn. App. at 777).
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No. 75674-5-1/7
Surety asserted it owed nothing. It had a right to ask the court to determine the
reasonableness of the fees and costs sought. The first appeal addressed whether
the obligation was extinguished by reservation of a right of recoupment in the
reservation of rights letter. That claim was rejected, but the court stated, "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." Immunex, 176 Wn.2d at 875. The
case was remanded to the trial court to determine factually if, and to what extent,
the late tender of defense by Immunex prejudiced National Surety with respect to
defense costs. Id. at 890-91. Until the reasonableness of the defense costs was
resolved by the jury and reduced to judgment, tender of payment in this case was
not required.
Immunex contends that if the trial court's ruling is allowed to stand, it would
result in a "foundational shift in Washington insurance law," because insurers can
insulate themselves from bad faith liability by issuing a reservation of rights. To
grant the relief Immunex requests and reinstate its breach of contract and extra-
contractual claims would require us to graft an exception onto the rule in Woo: an
insurer defending under reservation of rights "avoids breaching its duty to defend
and incurring the potentially greater expense of defending itself from a claim of
breach" unless it does not pay defense costs pending any determination of
reasonableness. 161 Wn.2d at 54. The trial court properly dismissed Immunex's
claims for bad faith, breach of contract, and IFCA and CPA violations.
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No. 75674-5-1/8
II. Evidentiary Decision
Immunex contends that the trial court erred by excluding evidence of
National Surety's claim handling. This court reviews a trial court's evidentiary,
decision for abuse of discretion. City of Spokane v. Neff, 152 Wn.2d 85, 91, 93
P.3d 158 (2004). A trial court abuses its discretion if its decision is manifestly
unreasonable or based on untenable grounds or untenable reasons. In re
Marriage of Littlefield, 133 Wn.2d 39, 46-47, 940 P.2d 1362(1997).
The trial court specifically excluded evidence of National Surety's duties,
but allowed evidence of National Surety's conduct:
NSC's [National Surety Corporation] motion to preclude Immunex
from presenting evidence of NSC's alleged bad faith, or damages
other than defense costs incurred during the AWP litigation, is
GRANTED IN PART AND DENIED PART. There are no surviving
claims of breach, bad faith, waiver, or coverage by. estoppel against
NSC. Therefore, evidence about NSC's legal duties are not relevant.
Immunex is correct, however, when it says, "fairness demands that
Immunex be permitted to introduce evidence of what NSC in fact did
in the months and years following receipt of notice of the AWP
lawsuits." NSC claims it would have acted differently had it received
certain information earlier. Immunex may therefore counter that
assertion with evidence demonstrating whether and how NSC acted
on information it did receive. Immunex is incorrect when it says,
"fairness likewise demands that Immunex be permitted to present the
jury with evidence concerning the insurer's duty to investigate the
AWP lawsuits and render a coverage determination." Evidence of
an insurer's duty to investigate or render a coverage determination
is not relevant to the issues for trial, and is ORDERED excluded.
lmmunex agrees that its claim for damages at trial is limited to the
costs it incurred in defending against the AWP litigation; NSC's
motion to exclude evidence of other damages is granted.
We agree that evidence regarding breach of duty to investigate was not
relevant. Whether a duty was breached did not bear on the question of prejudice
suffered due to late tender. The only issues remaining for trial were: (1) when
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No. 75674-5-1/9
should Immunex have tendered its claim and (2) if it had tendered its claim
properly, what costs would National Surety have incurred?
"To establish actual prejudice resulting from delayed notice, an insurer must
adduce affirmative proof of an advantage lost or disadvantage suffered as a result
of the delay, which has an identifiable detrimental effect on the insurer's ability to
evaluate or present its defenses to coverage or liability." Canron, Inc. v. Fed. Ins.
Co., 82 Wn. App. 480, 491-92, 918 P.2d 937 (1996). lmmunex argues that the
evidentiary decision left the jury with "unbalanced evidence." But, nothing in the
trial court's order limited Immunex's ability to present evidence of the extent of
National Surety's opportunity to investigate the claims after it first was notified of
the lawsuits. Evidence about what National Surety did and when remained
admissible. Evidence about what National Surety could have done to reduce its
losses, but did not do, remained admissible.
And, the jury heard evidence of what National Surety should have been
doing to avoid suffering prejudice. lmmunex presented testimony from two experts
on how National Surety should have acted. When asked, "what was supposed to
be included in the investigation," one expert testified at length about what National
Surety's obligations were: "These are national standards. They will apply to
virtually every state in the union in terms of what the industry standard is for the
investigation of the claims." (Emphasis added.) Another expert testified that, upon
tender, National Surety had "certain obligations that they need to comply with that
include evaluating the complaint itself, doing a preliminary investigation, so that
they can come to an understanding as to what this claim is about." National Surety
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No. 75674-5-1/10
did not object to either of these experts' statements about the existence and nature
of the duty to investigate. The jury was able to factor this evidence about claim
handling into its decision about the amount of prejudice suffered. The trial court's
evidentiary decision did not leave the jury with unbalanced evidence.
The trial court did not abuse its discretion in excluding evidence of duty.
We affirm.
WE CONCUR:
g."-:PreVe--.Th •
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