Foran Glennon Palandech Ponzi & Rudloff

August 2014

En Banc Washington Supreme Court Restricts Discovery Pertaining to Duty to Defend

Laura Wetterer

In a recent en banc decision, the Washington Supreme Court curtailed an insurance company’s attempt to obtain discovery that might show there was no duty to defend under an insurance policy.  The Court found that the Insurer could not pursue discovery that may potentially prejudice the Insured’s defense of the underlying action, even if that discovery might demonstrate that there was no duty to defend.

Factual Background.  The Insured, Expedia, was subjected to approximately 80 lawsuits by various taxing entities for allegedly failing to collect the correct amount of local occupancy taxes from its hotel customers.  Expedia had procured liability insurance that provided coverage for “damages arising out of a negligent act or negligent omission.”  Under the policy, the Insurer had a duty to defend “any Suit . . . seeking damages.”  The policy was subject to exclusions for: (1) intentional acts and (2) actions seeking civil or criminal fines, penalties, fees or sanctions.

Expedia tendered the occupancy tax lawsuits to its Insurer, which subsequently refused to provide a defense on several grounds, including that Expedia’s actions were “potentially willfully dishonest and thus excluded by the specific policy language,” as well as affirmative defenses of late tender.  Expedia filed an action for declaratory judgment, insurance bad faith, and violation of Washington’s Consumer Protection Act against the Insurer.  The Insurer subsequently counterclaimed, with both sides seeking adjudication of the duty to defend issue.  The trial court declined to rule on the duty to defend until discovery occurred.  The Court of Appeals denied Expedia’s motion for discretionary review, while the Washington Supreme Court granted it in.

Discussion.  The Washington Supreme Court held that that the trial court incorrectly failed to adjudicate the Insurer’s duty to defend as well as impermissibly conditioned adjudication of Expedia’s summary judgment motion on completion of discovery that might be prejudicial to the Insured.  First, the Court distinguished the duty to defend from the duty to indemnify, emphasizing the frequently stated proposition that the duty to defend is much broader, and is triggered if the insurance policy “conceivably covers allegations in the complaint.”  In this case, the Court asserted, the allegations of the underlying complaint could conceivably be covered by the policy.  Extrinsic evidence would not be permitted to foreclose the duty to defend.

While the trial court delayed adjudication for summary judgment on the Insurer’s duty to defend because “it believed [the Insurer] had a right to discovery to help prove its defenses,” the Washington Supreme Court found that discovery was impermissible because it could potentially prejudice the Insured in the underlying action.  The Insurer was obligated to defend, subject only to a right to stop defending if the Insurer could conclusively establish a lack of coverage.

Consequently, the Supreme Court also held that the trial court erred by allowing the Insurer to conduct discover as to whether the Insured’s tax actions were willful.  The Court found that this discovery was potentially prejudicial to the Insured’s underlying lawsuit as this was an element of those underlying claims.

Conclusion.  The Washington Supreme Court’s decision in the Expedia case represents a instance where the Insurer’s ability to obtain relevant information was curtailed due to potential prejudice on an underlying claim, and strict adherence to the “eight corners” rule that requires the duty to defend to be evaluated based on the allegations of the complaint and the terms of the policy.

The case is: Expedia, Inc. v. Steadfast Ins. Co., 88673-3, 2014 WL 3199497 (Wash. July 3, 2014).