Nat'l Sur. Corp. v. Immunex Corp.

• Decision Date: 07 March 2013
• Docket Number: No. 86535–3.,86535–3.
• Citation: 176 Wash.2d 872,297 P.3d 688
• Parties: NATIONAL SURETY CORPORATION, Petitioner, v. IMMUNEX CORPORATION, Respondent.
• Court: Washington Supreme Court

176 Wash.2d 872

297 P.3d 688

NATIONAL SURETY CORPORATION, Petitioner,

v.IMMUNEX CORPORATION, Respondent.

No. 86535–3.

Supreme Court of Washington, En Banc.

March 7, 2013.

Jerret E. Sale, Deborah Lynn Carstens, Bullivant Houser Bailey PC, Catherine Wright Smith, Howard Mark Goodfriend, Smith Goodfriend PS, Seattle, WA, for Petitioner.

James Richard Murray, Dickstein Shapiro LLP, Washington, DC, Linda D. Kornfeld, Damon A. Thayer, Jenner & Block LLP, Los Angeles, CA, for Respondent.

Bryan Patrick Harnetiaux, Attorney at Law, Spokane, WA, David P. Gardner, Winston & Cashatt, Spokane, WA, George M. Ahrend, Ahrend Albrecht PLLC, Ephrata, WA, amicus counsel for Washington State Association.

STEPHENS, J.

[176 Wash.2d 875]¶ 1 This court has long recognized that a liability insurer uncertain of its obligation to defend its insured may undertake a “reservation of rights” defense while seeking a declaration regarding coverage. The question in this case is whether the insurer may unilaterally condition its reservation of rights defense on making the insured absorb the defense costs if a court ultimately determines there is no coverage. We answer no. We recognize, however, that an insurer may avoid or minimize its responsibility for defense costs when an insured belatedly tenders a claim and the insurer demonstrates actual and substantial prejudice as a result. We affirm the Court of Appeals.

IFACTS AND PROCEDURAL HISTORY

¶ 2 National Surety Corporation insured Immunex Corporation ¹ under excess and umbrella liability policies between 1998 and 2002. In August 2001, Immunex notified National Surety that it was the subject of state and federal government investigations into its wholesale drug pricing. Immunex represented that it could not release information because of a confidentiality agreement. National Surety acknowledged receiving this notice and requested copies of any complaints that might emerge.

¶ 3 Beginning no later than 2001, a string of complaints was filed against Immunex. These complaints alleged that Immunex reported inflated average wholesale prices of its drugs that enabled providers of drugs—such as physicians, hospitals, and pharmacies—to receive reimbursements from Medicare and other third-party payors in amounts greater than what they actually paid. In all, at least 23 lawsuits related to pricing manipulation were filed against Immunex and other drug manufacturers under theories including breach of contract, civil conspiracy, fraud, and violations of state unfair trade and protection statutes and the federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961–1968.

¶ 4 It was not until October 3, 2006 that Immunex first tendered defense of the litigation to National Surety. In its tender letter, Immunex informed National Surety that it was on the eve of settling a California lawsuit, identified other pending lawsuits, and requested payment for reasonable defense expenditures and settlement costs. Specifically, Immunex asserted that coverage fell under the umbrella insurance “Coverage B,” which applied to cover “injury ... arising out of ... [d]iscrimination,” Clerk's Papers (CP) at 654. National Surety requested suit papersand documentation, which Immunex sent in December 2006.

¶ 5 In March 2008, National Surety informed Immunex by letter that it “believe [d] there [wa]s no coverage ... for the claims alleged against Immunex in the [average wholesale price] litigation.” CP at 1074. While National Surety disclaimed any obligation to defend or indemnify, it indicated it “wishe [d] to complete its investigation regarding coverage,” CP at 1075, suggesting that its lack of coverage determination was only preliminary. The letter stated:

[National Surety] agrees to defend Immunex until such time as it can obtain a court determination confirming its coverage decision. [National Surety] agrees to provide a defense even though it has not completed its investigation regarding the known loss and breach of conditions issues because [National Surety] wants to be sure it has protected Immunex's interests while it pursues that investigation.

The lawsuit[s] were tendered to [National Surety] for defense on October 3, 2006 ... and that is the date from which [National Surety] is prepared to reimburse reasonable defense fees and costs.... [National Surety] reserves the right to recoup the amounts paid in defense if it is determined by a court that there is no coverage or duty to defend and that [National Surety] is entitled to reimbursement.

CP at 1074–75.

¶ 6 About the same time it issued its reservation of rights letter, National Surety filed a declaratory judgment action in King County Superior Court. Immunex continued to be represented by its independent counsel in the average wholesale price litigation. After determining in April 2009 that National Surety had no duty to defend because the complaints did not allege claims arising out of discrimination, the trial court considered cross motions for summary judgment on the issue of defense costs. The court concluded National Surety bore responsibility for these costs incurred until the April 2009 ruling under its reservation of rights defense, subject to set-off if it could prove prejudice from Immunex's late tender at trial. The court denied National Surety's motion for reconsideration and entered partial final judgment under CR 54(b) to facilitate an appeal. Both parties appealed.

¶ 7 The Court of Appeals affirmed. Nat'l Sur. Corp. v. Immunex Corp., 162 Wash.App. 762, 256 P.3d 439 (2011). The Court of Appeals held National Surety was liable for defense costs incurred up until the April 2009 determination of no coverage, unless it could show prejudice from late notice. Id. at 780, 256 P.3d 439. Because fact issues remained on the question of prejudice, the appellate court affirmed the denial of National Surety's summary judgment motion. Id. at 782, 256 P.3d 439. We granted National Surety's petition for review. Nat'l Sur. Corp. v. Immunex Corp., 173 Wash.2d 1006, 266 P.3d 880 (2012).

IIANALYSIS

¶ 8 The first question to be answered is whether an insurer may recover defense costs incurred under a reservation of rights in the event a court ultimately determines no duty to defend is owed. In answering this question, it is useful to consider the nature of the duty to defend and the purposes of providing a defense under a reservation of rights.

A. Overview of the Duty To Defend

¶ 9 Both courts and the legislature have recognized that insurance contracts are imbued with public policy concerns. Or. Auto. Ins. Co. v. Salzberg, 85 Wash.2d 372, 376–77, 535 P.2d 816 (1975); RCW 48.01.030 (“The business of insurance is one affected by the public interest.”). Indeed,

[i]nsurance contracts are unique in nature and purpose. An insured does not enter an insurance contract seeking profit, but instead seeks security and peace of mind through protection against calamity. The bargained-for peace of mind comes from the assurance that the insured will receive prompt payment of money in times of need.

Love v. Fire Ins. Exch., 221 Cal.App.3d 1136, 1148, 271 Cal.Rptr. 246 (1990) (citations omitted).

Because security and peace of mind are principal benefits of insurance, insurers must fulfill their contractual obligations in good faith, “giving equal consideration in all matters to the insured's interests.” Tank v. State Farm Fire & Cas. Co., 105 Wash.2d 381, 386, 715 P.2d 1133 (1986).

¶ 10 The insurer's duty to defend is separate from, and substantially broader than, its duty to indemnify. Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wash.2d 751, 760, 58 P.3d 276 (2002) (citing Hayden v. Mut. of Enumclaw Ins. Co., 141 Wash.2d 55, 64, 1 P.3d 1167 (2000)). The duty to indemnify applies to claims that are actually covered, while the duty to defend “ ‘arises when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy's coverage.’ ” Truck Ins. Exch., 147 Wash.2d at 760, 58 P.3d 276 (quoting Unigard Ins. Co. v. Leven, 97 Wash.App. 417, 425, 983 P.2d 1155 (1999)); see also Woo v. Fireman's Fund Ins. Co., 161 Wash.2d 43, 53–54, 164 P.3d 454 (2007) (recognizing duty to defend when claims against the insured are conceivably covered).

¶ 11 “[I]f there is any reasonable interpretation of the facts or the law that could result in coverage, the insurer must defend.” Am. Best Food, Inc. v. Alea London, Ltd., 168 Wash.2d 398, 405, 229 P.3d 693 (2010). Facts that are extrinsic to the pleadings, but readily available to the insurer, may give rise to the duty. Woo, 161 Wash.2d at 54, 164 P.3d 454. Although this duty to defend is broad, it is not triggered by claims that clearly fall outside the policy. Kirk v. Mt. Airy Ins. Co., 134 Wash.2d 558, 561, 951 P.2d 1124 (1998). An insurer's broad duty to defend against colorable claims tendered by the insured, particularly when the insurer elects to defend under a reservation of rights, is central to our decision. While the dissent focuses on National Surety's contractual obligations, we have repeatedly held that the scope of an insurer's duty to defend is broader than the terms of the policy.

¶ 12 When an insured 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. Woo, 161 Wash.2d at 54, 164 P.3d 454 (citing Truck Ins. Exch., 147 Wash.2d at 761, 58 P.3d 276). Because a reservation of rights defense is fraught with potential conflicts, it implicates an enhanced duty of good faith toward the insured. Tank, 105 Wash.2d at 383, 715 P.2d 1133. But we have recognized that the risks of a reservation of rights defense are coupled with benefits:

Although the insurer must bear the expense of defending the insured, by doing so under a reservation of rights and seeking a declaratory judgment, the insurer avoids breaching its duty to defend and incurring the...