For many years, Washington courts have offered insurers little guidance about how to handle disputes about late notice or the reasonableness of defense costs while defending under a reservation of rights. In a recent decision, the Washington Court of Appeals suggested that an insurer defending under a reservation of rights may not be obligated to pay defense costs prior to resolution of a late notice defense and a determination of reasonableness — or at minimum should not be found to have acted in bad faith by failing to do so.

Case Background and Trial Court Proceedings

The unpublished decision in National Surety Corporation v. Immunex Corporation, 2018 WL 582450 (Jan. 29, 2018), arises in a long-running coverage dispute. Immunex requested coverage from its insurer, National Surety, in connection with multiple lawsuits alleging unlawful practices in Immunex’s average wholesale pricing of drugs. Id. at *1. Although the underlying lawsuits were filed as early as November 2001, Immunex did not tender its defense to National Surety until 2006. National Surety raised a late notice defense, but eventually agreed to defend under a reservation of rights and filed a declaratory judgment action to clarify its rights. Id.

Following extensive coverage litigation, the Washington Supreme Court agreed with National Surety that its policies did not provide coverage. However, the court held that unless National Surety could prove actual prejudice caused by the late notice, it nevertheless would be obligated to pay defense costs incurred prior to the court’s ruling on coverage. See National Surety Corp. v. Immunex Corp., 176 Wn.2d 872, 297 P.3d 688 (2013).

On remand, Immunex asserted claims for breach of contract, bad faith, violation of the Consumer Protection Act (CPA), and violation of the Insurance Fair Conduct Act (IFCA). Immunex, 2018 WL 582450, at *1. The trial court granted summary judgment dismissal of these claims, finding that National Surety could not be held liable on these claims because it had accepted the defense under a reservation of rights. Id.

The case proceeded to trial on the issue of whether National Surety was prejudiced by Immunex’s delay in tendering its claim. Id. Immunex alleged that it was entitled to reimbursement for all of its defense fees and costs in the underlying litigation, which were in excess of $15.4 million. Id. At trial, the jury was required to determine: (1) whether National Surety was prejudiced by the timing of Immunex’s notice or tender of the underlying litigation; and (2) if so, then taking into account such prejudice, what was the amount of reasonable and necessary defense fees and costs incurred in the underlying litigation for which National Surety was liable to Immunex. The jury found that National Surety was prejudiced by late notice and granted judgment in the amount of $670,000. Id.

Court of Appeals Holds Insurer May Seek Determination of “Reasonableness” of Defense Costs Prior to Payment Despite Agreeing to Defend Under a Reservation of Rights.

Immunex appealed the trial court’s dismissal of its claims, arguing that National Surety was obligated to reimburse Immunex’s defense costs before National Surety received a judgment on its late notice defense and whether Immunex’s claimed defense costs were reasonable. Id. at *3.

In a decision written by Judge Marlin Appelwick, the Court of Appeals disagreed with Immunex, explaining that although an insurer’s decision to defend under a reservation of rights obligates the insurer to pay reasonable defense costs, it does not require immediate payment when the insurer disputes whether the costs are “reasonable.” Id. at *3.

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 Surety asserted it owed nothing. It had a right to ask the court to determine the reasonableness of the fees and costs.

Id. Since National Surety’s late notice defense raised questions about what defense costs were reasonable, National Surety was entitled to have the question of reasonableness determined in a court of law prior to payment:

The case was remanded [from the Washington Supreme Court] 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. 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.

Id. (emphasis added). The Court of Appeals, therefore, affirmed the trial court’s dismissal of Immunex’s claims for breach of contract, bad faith, and CPA and IFCA violations. Id. at *4.

Conclusion

The new Immunex decision provides support for insurers defending under a reservation of rights who maintain late notice defenses or otherwise challenge the reasonableness of defense costs to seek a determination about reasonableness prior to payment. Due to the extended nature of this coverage litigation, however, it is reasonably likely this decision may be appealed again to the Washington Supreme Court.