Insurer Defending Under Reservation Of Rights May Not Subsequently Recover Defense Costs From Insured

Insurers who are uncertain of their defense and indemnity obligations to policyholders will often undertake defense of the insured under a reservation of rights while the issue of coverage is determined in a separate court proceeding.  However, if the court determining coverage ultimately decides that the insurer had no duty to defend, can the insurer recover the defense costs it incurred from its insured?  According to a recently decided opinion by the Washington Supreme Court, the answer is no.[i]

The coverage dispute arose as a result of 23 lawsuits filed against Immunex for allegedly reporting inflated wholesale prices of its drugs which allowed providers to receive larger reimbursements from Medicare and other third-party payors than the providers actually paid for the drugs.  Immunex had first informed its insurer, National Surety of the investigations in 2001, but delayed first tendering defense of any litigation until October 2006.  Immunex alleged that coverage existed under an umbrella policy provision covering injury “arising out” of “discrimination,” and requested reimbursement of defense costs and settlement expenditures.  National Surety responded in March 2008 that it believed there was no coverage for the drug pricing claims but agreed to defend Immunex while it completed its investigation.   National Surety agreed to reimburse Immunex for defense costs back to the 2006 date of tender but reserved its rights to recoup those costs if a court later determined there was no duty to defend.

Shortly thereafter, National Surety filed a declaratory judgment action to determine the coverage issue while Immunex continued to be represented by independent counsel in the drug pricing litigation.  In April 2009, the trial court ultimately determined that National Surety had no duty to defend Immunex because the complaints did not allege claims arising out of “discrimination.”  However, the trial court ruled that National Surety was still responsible for Immunex’s defense costs from the 2006 date of tender up to the date of the coverage ruling.  National Surety unsuccessfully appealed the ruling on defense costs to the Court of Appeals and ultimately the Washington Supreme Court agreed to hear the insurer’s appeal.

The Washington Supreme Court, in deciding this issue for the first time, ultimately sided with the policyholder and upheld the two lower court decisions rejecting the insurer’s right to seek recoupment of defense costs incurred during the reservation of rights period.  The Court reasoned that even though National Surety was ultimately found to have no duty to defend, it obtained benefits from defending Immunex under a reservation of rights in the form of insulation against potential claims by the insured for breach and bad faith, and the damages which can result, including “coverage by estoppel.”   If the insurer’s position were accepted, the insurer could retain the protective benefits of defending under a reservation of rights, without bearing any of the costs of accepting the insured’s defense in the interim.  The Court’s ruling did leave open the possibility that National Surety could avoid some portion of defense cost reimbursement to Immunex if it could prove it was “actually and substantially” prejudiced by Immunex’s late tender of defense.

This case demonstrates the benefit of tendering defense to one’s insurer even where coverage may be a long shot.  Even though the court ultimately determined that the claims against Immunex were not covered and that National Surety did not owe a defense, Immunex will undoubtedly obtain a significant monetary benefit merely from having tendered defense to its insurer.


[i] National Surety Corp. v. Immunex Corp., 2013 WL 865459, __ P.3d __ (2013).

Scroll to Top