It’s cynically said that no good deed goes unpunished. The Washington State Supreme Court seems to agree when it comes to insurers’ reservations of rights to seek reimbursement of fees and costs they have paid for the defense of claims that later prove not to be afforded coverage.
In National Surety Corp. v. Immunex Corp., No. 86535-3, Wash. S.Ct. 2013 (March 7, 2013), by a 5–4 decision, the Court required National Surety Corporation to pay for defense fees and costs that its insured incurred prior to National Surety’s victory in a declaratory relief action, in which the trial court found that the carrier had no duty to defend its insured, Immunex Corporation.
In so ruling, the Washington high court rejected the line of cases from other states that have allowed such reimbursement – notably Buss v. Superior Court, 16 Cal.4th 35 (1997) – in favor of a contrary line of cases. We outline below how the various courts’ decisions cited in National Surety line up on the issue of carrier reimbursement.
Immunex, a wholesale distributor of prescription drugs, had been the subject of federal and state regulatory investigations regarding its product pricing policies. The investigations triggered a series of civil lawsuits, 23 in all, against Immunex for alleged price manipulation that, allegedly, enabled health care providers to receive inflated Medicare and health insurance reimbursements.
On the eve of settling one of the underlying lawsuits, Immunex first gave notice of the suits to its excess and umbrellas carrier, National Surety, asserting that coverage existed under the discrimination clause of the policies issued by National Surety. The carrier replied in writing that it believed there was no coverage and that the cases did not arise from discrimination, though it would provide a defense under a reservation of rights “to recoup the amounts paid in defense if it is determined by a court that there is no coverage or duty to defend[.]”
Roughly a year after writing that letter, National Surety prevailed in the declaratory relief action it filed against Immunex, but the court in the coverage case did not absolve the insurer from having to pay the fees and costs incurred up to the date of its ruling. The Court of Appeals affirmed, and the state Supreme Court granted review, finding the case to be one of first impression in Washington.
The Court’s Rationale
The National Surety decision makes clear from the outset that it is not based on any peculiarity or ambiguity in the wording of the defense obligation in the policies before the Court. Rather, the Court bases its decision on public policy: “Both courts and the legislature have recognized that insurance contracts are imbued with public policy concerns.”
Under Washington law, as elsewhere, an insurer whose liability policy promises to defend its insured against covered claims has a broader duty to defend than it may ultimately have to indemnify the insured against loss. “When an insured [sic] 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.”
The Court goes on to treat the carrier’s decision to defend as self-interested:
“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 … . 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.” (Majority Opinion at p. 7)
As the Court commented later in the opinion:
“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.” (Majority Opinion at p. 13)
Thus, the National Surety decision rests squarely, if not firmly, upon the ipse dixit of public policy. The Court lays down a blanket rule that, as the dissenting opinion notes, leaves Washington State trial courts without the discretion to determine whether defense cost reimbursement should be allowed on a case-by-case basis. (Please note, however, that the policy in question did not contain a clause expressly allowing for defense reimbursement. Would Washington's public policy trump the contract between the parties?)
The Court next considered whether the insured’s untimely notice of the underlying claims obviated National Surety’s duty to defend, and, in keeping with earlier Washington cases, held that late notice only relieves an insurer of the duty to defend if the carrier proves “actual and substantial prejudice” from the late notice. The Court left this issue open for further trial court proceedings on the degree of prejudice sustained by the carrier, but noted that the defense fees and costs incurred by the insured prior to giving notice – expenses that the insurer would, by and large, have had no duty to pay if it could have brought its declaratory relief action years earlier – were not prejudice per se because National Surety would still have had to pay some portion of the defense costs.
The opinion contains a dissent that is as lengthy as the majority opinion, and provides a road map for insurers to use in states that have not yet weighed in on the defense reimbursement question.
National Surety Contrasted with Other States’ Decisions
Recognizing that it is addressing a new issue of law in Washington, the high court takes the opportunity to review decisions in other jurisdictions. For the readers’ convenience, we list those decisions here:
Cases finding a right to reimbursement under some circumstances:
- California, Buss v. Superior Court, 16. Cal.4th 35 (1997)
- Colorado, Hecla Mining Co. v. New Hampshire Insurance Co., 811 P.2d 1083 (1991)
- Connecticut, Security Insurance Co. of Hartford v. Lumbermens Mutual Cas. Co., 264 Conn. 688 (2003)
- Florida, Jim Black & Assocs. v. Transcontinental Insurance Co., 932 So.2d 516 (2006)
- Georgia, Illinois Union Insurance Co. v. NRI Construction Inc., 846 F.Supp.2d 1366 (Fed. Court predicting how a Georgia state court would rule) (2002)
- New Jersey, Hebela v. Healthcare Insurance Co., 370 N.J. Super. 260 (2004)
- Ohio, United National Insurance Co. v. SST Fitness Corp., 309 F.3d 914 (Fed. Court predicting how an Ohio state court would rule) (2002)
- Tennessee, Cincinnati Insurance Co. v. Grande Pointe, LLC, 501 F.Supp.2d 1145 (E.D. Tenn. 2007, predicting how a Tennessee state court would rule)
Cases finding no right to reimbursement, prior to the National Surety decision:
- Arkansas, Med. Liability Mutual Insurance Co. v. Alan Curtis Enterp., Inc., 373 Ark. 525 (2008)
- Illinois, General Agents Insurance Company of America, Inc. v. Midwest Sporting Goods Co., 215 Ill.2d 146 (Ill. S.Ct., 2005)
- Maryland, Perdue Farms, Inc. v. Travelers Casualty & Surety Co. of America, 448 F.3d 252 (4th Cir., 2006, predicting how a Maryland court would rule)
- Nevada, Capitol Indemnity Corp. v. Blazer, 51 F.Supp.2d 1080 (D. Nev. 1999, predicting how a Nevada state court would rule)
- Pennsylvania, American & Foreign Insurance Co. v. Jerry’s Sport Center, Inc., 606 Pa. 5584 (Pa. S.Ct., 2010)
- Wyoming, Shoshone First Bank v. Pacific Employers Insurance Co., 2 P.3d 510 (Wy. S.Ct., 2000)
In citing these cases, we caution that neither group of states has reached consistent rationales for their outcomes. For example, some states that follow the Buss decision do not carefully parse the policy terms, as the California court did, but find support for the same outcome in the principle of unjust enrichment – the same rationale used in the National Surety dissent. Likewise, the decisions that reject defense reimbursement do not all rest on “public policy,” as the National Surety majority did. In arguing the Buss group of cases or the National Surety group in other states, great care should be taken to compare apples with apples and not focus solely on the outcomes.
The problem with “blanket” answers that apply to all cases, like the majority’s opinion in National Surety, is that one size does not fit all.
There is a critical distinction between Buss and National Surety, which appears not to have influenced the Washington Supreme Court’s decision. Buss deals with the allocation of defense fees and costs as between covered and uncovered claims within a “mixed” complaint that states both kinds of allegations. Where some defense fees and costs can be allocated solely to the uncovered claims, the insurer may obtain reimbursement after paying for the defense of the entire case. National Surety deals with a case in which the entire case was found not to be covered at all, and where the one supposedly “covered” theory of liability, discrimination, was not even alleged.
In practice, allocating defense costs in a “mixed” case can be like organizing a haystack by the shades of hay color. It can be done, but is the effort worthwhile? Put another way: Is a reservation of rights (of the sort that gives rise to a right to independent counsel) always worth the cost of ceding the control of the case to the insured and its chosen counsel in those jurisdictions that follow that practice?
In Washington, carriers are between a rock and a hard place with an anvil overhead: the rock, coverage by waiver or estoppel if rights are not reserved; the hard place, the inability to obtain reimbursement for providing a prophylactic defense; and the anvil, potential bad faith liability. That seems to be where the Court wants them. Who will ultimately pay the price of the Court’s largesse?