The Washington Supreme Court held that an insurer may not unilaterally condition its defense of a policyholder on the reimbursement of defense costs in the event that a court ultimately determines that there is no coverage. National Surety Corp. v. Immunex Corp., 2013 WL 865459 (Wash. Mar. 7, 2013). In so ruling, the court relied on the broad scope of an insurer’s defense obligation, stating that “allowing recoupment to be claimed in a reservation of rights letter would allow the insurer to impose a condition on its defense that was not bargained for.” As discussed in our January 2011 and September 2010 Alerts, courts nationwide are split as to whether an insurer is entitled to reimbursement of defense costs following a judicial determination that the insurer has no obligation to defend and/or indemnify. Courts that have allowed reimbursement have relied on unjust enrichment and implied contract theories.
The National Surety court also ruled in favor of the policyholder on the issue of when an insurer’s duty to defend arises. The court held that defense obligations arise “not at the moment of tender, but upon the filing of a complaint alleging facts that could potentially require coverage.” As such, the court concluded that once tender is made, a policyholder may be entitled to recover pretender defense costs. However, defense costs are not recoverable where notice was provided in an untimely fashion, resulting in “actual and substantial” prejudice to the insurer.