Washington Court Analyzes an Insurer’s Right to Discovery in Duty to Defend Cases

On July 7, 2014, the Washington Supreme Court issued an opinion in Expedia, Inc. v. Steadfast Ins. Co., — Wn.2d —, — P.3d — (2014), addressing an insurance company’s right to discovery in duty to defend matters.  First, the Court considered whether an insurance company is entitled to additional discovery regarding its defenses before an insured is entitled to adjudication of whether the insurance company has a duty to defend.  The Court found that adjudication of the duty to defend should not be continued in order to provide the insurance company with additional time to take discovery.  Second, the Court addressed whether an insured is entitled to a stay of discovery that is potentially prejudicial in the underlying litigation.  Citing California precedent, the Court determined that all discovery in the coverage action should be stayed until a factual determination can be made regarding which parts of discovery are potentially prejudicial in the underlying litigation and that all discovery “logically related to the underlying claims should be stayed until such claims are fully adjudicated.”

The case concerned an insured that was subject to approximately 80 lawsuits by various states, counties, and municipalities concerning whether it collected the appropriate occupancy taxes from its customers.  The insured became aware of the potential issue as early as 2002, and the first lawsuit was filed in December 2004.  The insured tendered the first lawsuit in June 2005 and later that month the insurance company denied that it had a duty to defend on a number of grounds, including that the action was potentially willfully dishonest and thus excluded under the policy.  Throughout 2010 and 2011, the insured tendered about 62 additional lawsuits to its insurers, who again denied they had a duty to defend.

The insured filed suit seeking a declaration that the insurance company had a duty to defend, along with claims for insurance bad faith and violation of the Consumer Protection Act (CPA).  The insurance company counterclaimed for a declaration that there was no coverage for the claimed loss and, thus, no duty to defend.  In addition, the insurance company asserted a number of affirmative defenses, including late tender of the claim, known loss, material misrepresentation, and mistake.

After the trial court denied the insurance company’s motion for summary judgment, the insured moved for summary judgment seeking a declaration that the insurance company had a duty to defend it in the underlying lawsuits.  The insurance company moved for a continuance in order to seek additional discovery on its defenses of late notice, misrepresentation, mistake, and known loss.  The trial court granted the insurance company’s request.  The insured provided some discovery, but objected to other discovery on the grounds that the requested information would be prejudicial to the insured in the underlying litigation.  The insured then asked the trial court to reset a hearing on its summary judgment motion.  While the trial court recognized the potential prejudice associated with the additional discovery, it determined that it would not hear the insured’s motion until discovery was complete because it could not “conclude, as a matter of law, that this discovery is not relevant to the [insurance] company’s defenses.”  The insured petitioned for discretionary review, which was denied by the Court of Appeals, but granted by the Washington Supreme Court.

The Court found that the underlying lawsuits appeared to seek damages that “could conceivably” have been covered under the applicable policies which would trigger the insurance company’s duty to defend.  Despite that, the trial court delayed its adjudication of the duty to defend issue in order to permit the insurance company to take further discovery on its defenses.  The Court determined this delay was in error.  It rejected the insurance company’s citation to Nat’l Surety Corp. v. Immunex Corp., 176 Wn.2d 872, 297 P.3d 688 (2013), and argument that the case supported the conclusion that it was entitled to additional discovery to determine whether the late notice resulted in actual prejudice.  The Court stated that the Immunex case stood for the proposition that the issue of actual prejudice caused by late notice may relieve the insurance company of the cost of defense only after it has obtained a judicial determination that it does not have a duty to defend.  Accordingly, the Court found that the trial court should have adjudicated the duty to defend issue, then permit the insurance company to conduct further discovery on the late tender issue.  In the meantime, the insurance company had a duty to defend the insured until it was able to establish the facts necessary to establish that the insured’s late tender resulted in actual prejudice.

Next, the Court considered whether the trial court was correct when it permitted the insurance company to take additional discovery that was potentially prejudicial to the insured.  The Court began by noting that Washington courts have not squarely addressed the issue.  The Court then adopted the reasoning of California courts on the issue, which were cited by the insured.  The California cases held that an insured was entitled to have the duty to defend issue adjudicated and that any prejudicial discovery should be stayed pending resolution of the underlying litigation.  The Washington Supreme Court agreed and found that the trial court erred by delaying adjudication of the insured’s summary judgment motion concerning the duty to defend until the insured complied with potentially prejudicial discovery.

Maloney Lauersdorf Reiner frequently represents clients in duty to defend matters in Washington and is familiar and knowledgeable about the issues that frequently arise in such cases.  Contact us with any questions about this case or any other matter you see addressed in the Insurance Coverage Blog.

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