Why it matters

The Washington Supreme Court handed down two holdings that should significantly benefit policyholders. Recognizing that a duty to defend is triggered if the insurance policy conceivably covers allegations in the complaint, the Court ruled that a trial court had erred by allowing an insurer to delay a decision on its duty to defend in order to conduct discovery regarding potential coverage defenses. The Supreme Court also clarified that once an insured establishes that the duty to defend is triggered, the insurer will be on the hook for payments until a court determination, after more discovery and briefing, that the insurer is excused. The Court further held that any discovery that is potentially prejudicial to an insured in an underlying litigation must be stayed until the underlying litigation is fully adjudicated.

Detailed Discussion

In this case, Expedia and its affiliates faced a barrage of lawsuits filed by various taxing authorities alleging that Expedia had underpaid hotel taxes.

Expedia tendered the lawsuits to Zurich and a number of other insurers (collectively, “Zurich”). Zurich denied that it had a duty to defend on a number of grounds, including that the action was potentially willfully dishonest and thus excluded under the policy.

Faced with increasing defense costs, Expedia sought a declaration that Zurich had a duty to defend. In response, Zurich requested that the trial court delay ruling on Expedia’s motion until Zurich conducted discovery related to the coverage issues, including what Expedia knew about its potential liability in the underlying taxing dispute. Recognizing that there was a “dangerous overlap” between the issues in the coverage case and the underlying cases, the trial court stayed Expedia’s duty-to-defend motion. The court also refused to allow Zurich to conduct discovery into facts that might have prejudiced Expedia’s defense in the underlying cases. That, of course, left Expedia to front the costs of defending the underlying lawsuits.

When the matter reached the Washington Supreme Court, the Court ruled that the trial court should have adjudicated the duty-to-defend issue first. Then Zurich could attempt to prove its defenses. “In the meantime, however, Zurich should have been required to defend Expedia if the court found that the duty to defend had been triggered.”

The Court observed that the duty to defend is a broader duty than the duty to indemnify and that the duty to defend is triggered whenever a complaint could be construed to allege facts that would impose liability within the policy’s coverage. Here, the underlying complaints could be read to allege facts within the policy’s coverage. Therefore, the duty was triggered.

In addition, the Court held that the trial court erred by allowing Zurich to conduct discovery as to the issue of whether Expedia’s tax actions were willful rather than negligent and therefore outside the scope of coverage. The Court agreed with Expedia that this discovery was potentially prejudicial to Expedia in its litigation with taxing authorities since the issue of Expedia’s willfulness was part of the tax claims against it.

To read the opinion in Expedia, Inc. v. Steadfast Insurance Co., click here.