In Expedia, Inc. v. Steadfast Ins. Co., the Washington Supreme Court unanimously held that insurers that promise to defend an insured party from lawsuits must pay for the cost of defense as soon as the duty is triggered, regardless of whether the insurer has a defense that might ultimately relieve it of this duty.   An insured party is therefore entitled to payment by the insurance company of the cost of defending lawsuits from the time the duty to defend is triggered until a court declares that the insurance company has no duty to defend.

Background

Through insurance policies taken out by Expedia, Zurich and a number of other insurers (collectively “Zurich”) promised to defend Expedia from certain lawsuits.  This duty to defend was limited in two significant ways: 1) only claims of negligent acts or omissions were covered while claims of intentional acts were excluded and 2) only claims for damages were covered while civil or criminal fines, penalties, fees or sanctions were excluded.  In this case, Expedia and its affiliates faced a barrage of lawsuits regarding payment of hotel occupancy taxes. Expedia tendered the lawsuits to Zurich to defend Expedia (i.e. to pay the legal fees).  Zurich refused, claiming (among other arguments) that Expedia’s tender was late and that the suits may be excluded from the policy.

Expedia sued Zurich and Zurich counterclaimed, both sides seeking adjudication of the duty to defend. Ultimately, Expedia filed a motion for summary judgment seeking declaratory judgment that Zurich had a duty to defend it.  The trial court declined to decide the motion until allowing discovery on both claims of late tender and exclusion of the tax lawsuits from coverage.

Expedia moved for adjudication of the summary judgment issue.  The trial court denied the motion.  The Court of Appeals denied the motion for discretionary review.  Expedia then sought and received discretionary review from the Washington Supreme Court

Holding

The Washington Supreme Court first ruled that the trial court should have determined whether Zurich’s duty to defend Expedia was triggered.  The Court observed that the duty to defend was a broader duty than the duty to indemnify and that the duty to defend is triggered whenever a complaint could be construed to allege facts that would impose liability within the policy’s coverage.  Here, the tax complaints could be read to allege facts within the policy’s coverage.  Therefore, the duty was triggered.

The Court held that the trial court erred by allowing discovery on Zurich’s defenses before making a decision on whether the duty was triggered. Instead, the trial court should have ruled whether the lawsuits were covered.  If so, Zurich would have to pay the costs of legal defense.  Zurich could end its obligation to pay only by proving that it was relieved of its duty to defend because of a defense to coverage such as late tender.

In its second holding, the Supreme Court held that the trial court erred by allowing Zurich to conduct discovery as to the issue of whether Expedia’s tax actions were willful rather than negligent and therefore outside the scope of coverage.  The Court agreed with Expedia that this discovery was potentially prejudicial to Expedia in its litigation with taxing authorities since the issue of Expedia’s willfulness was part of the tax claims against it.

Analysis

The Supreme Court has clarified that once an insured establishes that the duty to defend is triggered by a lawsuit that could potentially be within the four corners of the policy, the insurer will be on the hook for payments until a court determines after more discovery and briefing that the insurer is excused.  In the meantime, the insurer cannot take any actions – such as pursuing discovery – that would prejudice the rights of its insured.  The opinion is one of many Washington Supreme Court opinions zealously protecting policyholders’ rights.