Obtaining the Full Benefit of Your Liability Insurance Coverage in WA– The Insureds’ Right to Recover Pre-tender Defense Costs

Many defendants facing civil litigation are forced to incur attorneys’ fees and costs to defend lawsuits covered by their liability policies before a liability insurer is even aware of the claim.  The immediate requirements of unanticipated civil litigation in the form of a lawsuit or administrative action can place an enormous additional burden on a defendant who has already paid for liability insurance in anticipation of, and in hopes of avoiding this risk. For a whole host of reasons there is often delay between filing and service of a lawsuit and an insurer taking over the defense. The Court system, and its administrative counterparts, may place an enormous burden on a defendant who, having purchased liability protection as part of its risk management program, nevertheless is required to pay attorneys’ fees and costs out of pocket before the claim can be defended by the liability insurer.  Thankfully, Courts in Washington have recognized this potential adverse impact and have allowed for an insured to seek and obtain reimbursement for defense fees and costs incurred from its liability insurer even where those expenses were incurred before the liability insurer knows or has reason to know of the potentially covered claim.

By way of background, liability insurance is intended to protect against the risk of third-party claims arising from the conduct of a business, operation of an auto, ownership of real property, or rental of residential property.  Insurance companies and brokers market and sell liability insurance as part of both their commercial and personal lines of business.  Liability insurance is normally included in both commercial and personal lines insurance programs.  Historically liability insurance offers the same basic product to the insurance consumer: (1) a contractual obligation to defend claims brought against the insured for a variety of covered risks such as losses arising from negligent acts, some other miscellaneous non-intentional torts, as well as contractual liability in some limited cases; and (2) a promise to indemnify the insured in the event it, he, or she is found liable to the third party for a covered claim.  

The notice of a new suit from an insured requesting defense is referred to as a “tender.”  Claims may be tendered by the broker, the insured’s attorney, or directly by the insured.  In many cases, because there is confusion over the specific risks covered, the parties covered, or dates of coverage there is a delay between the date a lawsuit is filed and served and when a claim is “tendered” to the liability insurer.  Because of this delay, businesses and individuals often need to retain counsel to defend a claim before an insurer is put on notice or even identified. Depending on the type of litigation involved, the initial litigation work may be extensive and require that the defendant incur a significant amount of attorneys’ fees and litigation costs out of pocket before the tender is made and defense accepted by the insurer.  The amount of these “pre-tender” defense costs can be substantial, sometimes exceeding the amount of civil damages sought by the plaintiff or claimant.  Some litigations require near immediate action to protect the interests of the defendant.  Given the adversarial nature of our system of civil justice, plaintiff’s and other claimants have no interest in delaying their efforts at establishing liability and recovering damages while a defendant identifies that there is a liability insurer that owes a duty to defend the lawsuit.

When an insurer receives the suit along with the tender, if it determines some claims are covered, it will accept the defense. Normally this entails assignment of counsel of its choosing who are either with a “panel” law firm or staff attorneys who are employees of the insurer.  However, in those instances where a tender is delayed, the insured may have incurred substantial fees and costs associated with the defense by hiring its own attorney to defend and manage the lawsuit.   In those cases where there have been significant fees and costs incurred before defense was tendered, a business or person may assume there is no right to recover because the defense had not been tendered and duty had not been “accepted.”   This is wrong.  Consumers of liability insurance products are well served to understand that the duty to defend is created by the contract, not by the act of tendering the defense. The right to reimbursement flows from the contractual right under the policy, not the act of tendering. This important distinction is not lost on insurers but is often lost on insureds that have paid for this coverage but lack understanding of what it entails.

Exacerbating this disconnect between the insurance product and the needs of the insured litigant, common policy forms used by insurers attempt to limit or delay the “duty to defend” with language suggesting that the duty arises only after the suit is tendered to the insurer by the insured. Thankfully, Washington Courts have analyzed this important concept, correctly finding a right to recover costs of pre-tender defense cost that is not tied to, or triggered by, a tender of defense. This important right has often been overlooked due to murky policy language and other conduct obfuscating the nature of the insurer’s obligation in the event of a lawsuit. 

Simply stated, at least in Washington State, the contractual duty to defend requires an insurer to reimburse its own insured for those fees and costs incurred both before and after the claim is tendered, subject to certain exceptions. In Griffin v. Allstate, 108 Wash.App. 13329 P.3d 777 (2001), the Washington Court of Appeals held that an insurer breached its duty to defend when it refused to reimburse its insured for costs incurred before tender. In so holding, the Court observed that the scope of the defense duty is defined not by its breach, but by the contract which ties the duty to the filing and/or service of covered claims, not the act of tendering the defense.

Griffin involved an insurer, Allstate, which had policy language purporting to limit the defense obligation to those claims that had been tendered. The Court rejected this effort to limit the defense coverage available and recognized that for purposes of the liability policy, the operative duty arises upon filing of the covered claim and is not created by the insured’s act of tendering its defense.  Id.  In fact, the Court specifically rejected Allstate’s efforts to limit its duty with policy language that required a tender as a condition precedent to the duty to defend.  In order to avoid or limit a defense obligation based on a late tender, an insurer must make a showing of actual and substantial prejudice before an insured's breach will release an insurer from its duty under the policy. The Court specifically placed the burden of proving prejudice on the insurer. Griffin, supra; see also National Sur. Corp. v. Immunex Corp., 162 Wash.App. 762 256 P.3d 439, 448 (2011) (Duty to Defend. Insurer was required to reimburse defense costs up until point it was declared no duty to defend existed.); and Mutual of Enumclaw Ins. Co. v. USF Ins. Co., 164 Wash.2d 411, 191 P3d 866 (2008).