Liability insurance policies require notice be provided to the insurer to allow the insurers time to adequately investigate and respond to claims.   An insured’s failure to provide notice to its carrier can result in the insured losing the benefits of its policies.

Some courts have deemed an insured’s failure to provide notice within time periods that are as short as a couple of months  to be a breach of a policy’s notification requirements.  Most states, however, also require a showing (by the insured or the insurer) that the carrier was prejudiced by the tardy notice before a loss of coverage results.

The recent ruling in Expedia, however, calls into question whether insurers can delay providing a defense based on allegedly late notice.

In fact, the rulings by the Expedia Court could be viewed as “double whammy” for insurers.   Not only will they be obligated to pay defense costs until they get a judicial ruling, but their ability to seek a judicial ruling on the duty to defend may be limited if their actions could be prejudicial to their insureds.

It is hard to say how the Expedia ruling will affect the handling of insurance claims going forward, but if nothing else, it provides further ammunition for policy holders seeking a defense from their carriers.   Another pro-insured ruling in an already pro-insured State.

 Expedia Ruling 

As explained in Expedia,  that to prevail on a defense of late tender in Washington, a carrier must demonstrate that it was “actually and substantially prejudiced” by the delay.   Generally speaking, it is difficult for carriers to make a showing of actual and substantial prejudice because it requires they demonstrate that things would have been better if they had participated earlier.  If a carrier can make such a showing, it could obtain relief from the duty to indemnify and defend the underlying claim.

Expedia involves a declaratory judgment action the travel company brought against its insurers seeking to confirm their duty to defend lawsuits filed by various taxing authorities (states, counties, municipalities, etc.).   Expedia had known about the potential claims in 2002, but had not notified its carriers until 2005, about six months after the first case was filed.   The carriers denied coverage and refused to provide a defense based on numerous grounds.

Expedia then tendered an additional 62 lawsuits to its carriers in 2010 and 2011, and again they denied coverage and refused a defense.  When Expedia brought its declaratory judgment action, the insurers counterclaimed arguing, among other things, that they had no duty to defend the company because Expedia had failed to provide timely notice.

Expedia moved for summary judgment on the duty to defend, and the carriers sought and were granted a continuance to seek discovery related to the late notice.  This ruling effectively delayed any adjudication of Expedia’s claim.  Expedia petitioned the Supreme Court for discretionary review.

The Supreme Court reversed and held that the trial court had erred in delaying adjudication on the issue of the carriers’ duty to defend. “Determining whether the duty to defend has been triggered,” the Court reasoned, “is a separate inquiry from whether an insurer may be relieved of its duty to defend or indemnify due to a defense such as a claim of late tender by the insured.”  The duty to defend is determined on the “eight corners of the insurance contract and the underlying complaint,” and arises when a “complaint construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy’s coverage.”

The Court said it was “incorrect” for the trial court to have delayed the decision on the duty to defend while the insurers conducted their discovery.  If the carriers had a duty to defend Expedia, they were required to have done so while they attempted to establish their late tender defense.

The Court went on to say that the carriers were obligated to pay defense costs until they obtained a “judicial declaration” saying they had no duty to defend.  Finally, the Court directed the trial court to stay the carriers’ discovery until it made a factual determination as to whether the discovery was potentially prejudicial to Expedia in its defense of the tax claims.