LIABILITY CARRIER CANNOT GET REIMBURSEMENT OF DEFENSE COSTS IN ABSENCE OF POLICY PROVISION ALLOWING REIMBURSEMENT
National Surety Corp. v. Immunex Corp., 162 Wn. App. 762, 256 P.3d 439 (2011) (Div. I)
by Pamela A. Okano, Reed McClure
October 12, 2011

Facts:

The insured was sued in several different lawsuits for allegedly artificially inflating its average wholesale price of prescription drugs. The insured advised its liability carrier that the federal government and several state governments had initiated investigations. The insurer asked for copies of the suit papers.

The insured did not, however, notify the insurer about lawsuits initiated by private parties until five years after the first complaint was filed. The insurer denied the tender based on the insured’s failure to provide suit papers. Subsequently, the insurer denied coverage but agreed to defend under a reservation of rights to obtain reimbursement of amounts paid if a court determined there was no coverage or duty to defend.

The insurer then filed a declaratory action. On cross-motions for summary judgment on the duty to defend issue, the trial court granted the insurer’s motion and denied the insured’s.

Subsequently, the trial court denied the insurer’s motion regarding payment of defense costs and granted the insured’s motion, finding that unless the insurer could show prejudice from late notice at trial, it had a duty to pay defense costs until the date the court confirmed there was no coverage. Both parties appealed.

Holding:

Division I affirmed. The liability policy contained “personal and advertising injury” coverage that provided protection against liability for “injury, including consequential Bodily Injury, arising out of one or more” of certain offenses, including “Discrimination.” The policy did not define “Discrimination.” The insured alleged that the “predominant theme” of the underlying private party complaints was discrimination in pricing amongst providers, discrimination in pricing between average wholesale price plaintiffs and providers, and a disparate impact on older Americans.

The court rejected the insured’s argument that the complaint alleged discrimination. Instead, they alleged that the insured had given false pricing information to those who paid providers for drugs. To determine whether “personal and advertising injury” coverage exits, the court must look to the type of offense alleged, rather than the nature of the injury. The claims here were not analogous to claims of discrimination.

Because “arising out of” means “originating from”, “having its origin in”, “growing out of” or “flowing from”, “arising out of discrimination” refers to offenses originating from discrimination. The injuries alleged here did not While some of the complaints alleged that consumers in certain groups paid higher prices as a result of the insured’s actions, the offenses result not from discrimination but from fraudulently inflating the average wholesale price. Just because the impact may have impacted some more than others, that does not mean the offenses originated from discrimination. The theories underlying the offenses are not that some paid higher prices compared to others, but that the price was fraudulently inflated.

As to whether the insurer could seek reimbursement of defense fees and costs, the court said “no.” The policy said that the insurer had “the right and duty to . . . defend any Insured against any suit, seeking damages . . . [t]o which Coverage B applies.” The policy said nothing about requiring the insured to reimburse defense costs and fees.

The duty to defend is broader than the duty to indemnify. The duty to defend attaches when a complaint is filed against the insured alleging a potentially covered claim. Where there is no language in the policy permitting reimbursement, the court would not rewrite the policy.

Further, the insured is not liable to pay for its own costs of defense under an equitable theory such as unjust enrichment. The offer of a defense under reservation of rights benefits the insurer as well as the insured, by allowing the insurer to protect its rights and avoid the risk of a poor defense. Although the insurer here had not yet taken on the defense when pre-tender defense fees and costs were incurred, it benefited by being able to insulate itself from a bad faith claim and possible coverage by estoppel. Hence, the payment of defense costs is not a pure gratuity to the insured, and there is no unjust enrichment if the insurer covers the cost of the defense until the trial court ordered otherwise.

It is true that breach of the duty to defend cannot occur before tender. However, pre-tender fees are recoverable from the insurer. There is a difference between the breach of a duty to defend (which cannot occur before tender) and the duty to reimburse an insured for pre-tender defense costs. A showing of actual and substantial prejudice is required before an insured’s breach will release the insurer from its duty to defend. Thus, unless the insurer here can show substantial and actual prejudice, it is liable for pre-tender defense costs. The court also held that whether the tender was late presented a question of fact.

The court rejected the insurer’s argument that it had shown prejudice as a matter of law because it failed to show an identifiable prejudicial effect on its ability to evaluate, prepare or present its defenses to coverage or liability.