Just over three years ago, the Washington Supreme Court decided that a liability insurance carrier is not entitled to reimbursement of defense costs if it agreed to defend under a reservation of rights, and a court later determined it did not have a duty to defend its insured. National Sur. Co. v. Immunex Corp., 297 P.3d 688 (Wash. 2013). The court had two rationales for its holding. First, according to the court, allowing reimbursement would conflict with Washington’s rules placing the risk of the defense decision on the carrier. Second, since reimbursement was not part of the policy, granting such a right would give the carrier consideration it did not bargain for. Id. at 691-5. But the court left open the possibility that the carrier could challenge its obligation to pay the costs, if it showed that the insured breached the policy terms, and it was prejudiced as a result. Id. at 695-7. Today, I have interesting updates on one of the court’s rationales, and on the Immunex case itself.
First, the contractual rationale may be moot now for some insureds and claims. Insurance carriers have started including endorsements in their liability policies that explicitly permit reimbursement of defense costs. Here’s one our practice group has seen in current use:
If we initially defend an insured (“insured”) or pay for an insured’s (“insured’s”) defense but later determine that none of the claims (“claims”), for which we provided a defense or defense costs, are covered under this insurance, we have the right to reimbursement for the defense costs we have incurred.
The right to reimbursement under this provision will only apply to the costs we have incurred after we notify you in writing that there may not be coverage and that we are reserving our rights to terminate the defense or the payment of defense costs and to seek reimbursement for defense costs.
Form IL 01 23 11 13, Insurance Services Office, Inc. (2013). We know of no court decisions concerning this endorsement. How it fares in litigation will be interesting to see. One would think that a carrier using this endorsement, and complying with its conditions, would be able to recoup defense expenses because the right would be established by contact. But the Immunex court left itself an “out” from being bound to follow the bargain struck by an insured and a carrier. Since the Immunex court stated a non-contractual reason for its ruling (historical judicial placement of the risk of decision on the carrier), I question whether this endorsement would survive a trip to the state supreme court.
Second, it may interest our readers to know that in the Immunex case itself, National Surety essentially prevailed at trial after it was remanded to the trial court. As discussed above, the Supreme Court’s decision had left open the possibility that a carrier could escape paying defense costs if the insured breached a policy provision and that breach caused prejudice to the carrier. In Immunex, the breach was a years-long delay in reporting claims to National Surety. In May of this year, the trial was held on Immunex’s claim for millions of dollars in defense costs, against which National Surety’s raised a defense of breach and prejudice. The jury found that Immunex “actually and substantially prejudiced” National Surety by its late notice and its timing of the tender of defense. The jury also found that due to that breach and prejudice, Immunex could recover only $670,000 of its claimed $17 million of defense costs. Apparently the jury understood and rejected the inequity of an insured running up defense costs, and then demanding that all of those costs be paid by an unsuspecting carrier. That’s good to hear.
Finally, I note that the reimbursement issue is likely to come up – whether in underwriting or in claims – only where the insured is a sophisticated commercial concern. Carriers are unlikely to either use the endorsement, or assert breach/prejudice defenses, where personal insurance is the basis for the claim. So, the proverbial average purchaser of insurance has little to fear from these developments.
