The Supreme Court of Washington has recently addressed the issue of whether a Liability Carrier which defends under a Reservation of Rights, including a reservation of its right to recoup its defense expenses for noncovered claims which the Carrier defended, and if a Court later determines that there was no Coverage, i.e., no Duty to Defend, may the Liability Carrier then recover its defense expenses from its own Insureds in such cases. Many Courts have addressed this precise issue by answering "yes". See generally Dennis J. Wall, Litigation and Prevention of Insurer Bad Faith § 3:6, "Informing the Insured: Insurer Assertion of Rights to Reimbursement From the Insured of Clearly Noncovered Indemnity and Defense Expenses" (West 3d Edition, 2013 Supplement in process).
In a recent decision, the Supreme Court of Washington has answered "no" to this question. As the majority of the Court put it at the outset of its opinion:
¶ 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.
National Surety Corp. v. Immunex Corp., 2013 WL 865459 *1 (Wash. March 7, 2013)(en banc).
The majority's holding drew a sharp rebuke from a dissenting Justice in this case:
¶ 43 Rather than focus on the equities of the case at hand, the majority seizes on this opportunity to pronounce that insurers who defend under a reservation of rights may never recoup defense costs after a court determines that an insurance policy does not cover an insured's claim and that the insurer never had a duty to defend. This rule is both overly broad and unnecessary, and in the context of this case, it is unjust. I dissent.
National Surety Corp. v. Immunex Corp., 2013 WL 865459 *11 (Wash. March 7, 2013).
The issues are joined. Although the division among the Courts is a close one, the Washington Supreme Court majority followed an apparent minority view in this case. Liability Carriers in Washington State would be well advised to govern themselves accordingly.
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