The AGC of Washington recently gave amicus support in successfully persuading the state’s highest court to grant special review of a case that could be important to construction contractors’ insurance rights. The case involves the circumstances in which an insurance company must defend its insured. The promise of an insurer-paid defense is part of almost all contractors’ liability policies. When a contractor gets sued, the defense benefit can be the most important part of the policy, since it protects the contractor against what could be crippling litigation costs.
A frequent conflict between insurers and their insureds arises when the insured gets sued in circumstances that make it unclear whether the claims in the suit are actually covered by the policy. The insurer would prefer not to have to defend until or unless someone determines that there is coverage. But the insured needs a defense right away, and when buying what is usually fairly broad liability coverage, the insured is seeking to protect against the burdens of litigation in a broad array of potential lawsuits. So the general rule is that a liability insurer must defend the insured in any suit where there is even potential coverage for claims alleged in the lawsuit. If the insurer cannot eliminate the possibility for coverage, then the insurer must defend. What’s more, the insurer can not go in search of facts that might preclude coverage before deciding whether to defend. If the allegations of the lawsuit, construed liberally, could impose a covered liability on the insured, then the insurer must defend. And if any reasonable interpretation of the relevant facts or law could result in a covered liability against the insured, then the insurer must defend.
The Washington Supreme Court has for years been in the national forefront in developing and explaining insurers’ duty to defend their insureds unless and until the insurer can eliminate any potential for coverage. Earlier this year the high court published a decision explaining how that very principle applied even to defense costs where the insurer defended, but was later found to have not been required to defend.
Because the consequences of an insurer breaching its defense obligations can be severe (the insurer may ultimately have to cover liabilities that the policy excluded, or could even be assessed with punitive damages), Washington insurers take their defense obligations very seriously, defending the insured when the insurer finds any significant doubt about whether it needs to so. The current case, in which the AGC is an amicus party, goes against that trend. The case is a suit by the on-line travel company Expedia against its liability insurers.
Expedia is in the business of arranging hotel accommodations for consumers via the internet. Consumers shop and make reservations for hotel rooms on Expedia’s website. Expedia charges them for their hotel room, for local taxes, and for service and facilitation fees. But a variety of local jurisdictions claim that Expedia should be charging (and paying to local governments) more in the way of taxes than Expedia has been doing. A number of municipalities around the country are suing Expedia for underpayment of those taxes. Expedia tendered defense and indemnity of those suits to its liability insurers, and the insurance company denied the tenders (including refusing to defend Expedia in the lawsuits).
Expedia therefore sued its insurers, here in Washington, to establish that Expedia is entitled to an insurer-paid defense. Early on, the insurers asked for dismissal of that suit, arguing that there was no potential coverage for the claims against Expedia. But the insurers lost that motion. The trial court found that the insurers had not established that no potential for coverage existed.
Expedia then pointed out that because the insurers could not eliminate the potential for coverage, Washington law requires them to defend. Expedia asked the trial court to enter an Order saying as much, and to declare the insurers in breach for refusing to defend. The insurers opposed the motion, and argued that the trial court shouldn’t even consider Expedia’s motion until after the insurers had conducted discovery in the case. The trial court agreed, and that decision is what is currently in dispute.
The Washington Supreme Court has said that when a lawsuit against an insured presents the potential for coverage, the insurer must defend right away, and cannot delay its defense while it does discovery that might ultimately eliminate its potential coverage. Expedia told the trial court that this principle should defeat the attempt by its insurers to delay resolution of their duty to defend. Indeed, delay in resolving the insurers’ defense obligation imposed on Expedia the ongoing litigation defense costs that the broad duty to defend was supposed to protect it against.
Expedia asked the Washington court of appeals to review the trial court’s delay in establishing the insurers’ defense obligation, and to direct that the trial court decide Expedia’s pending motion against its insurers without any further delay. But the court of appeals declined to review the issue.
Expedia then petitioned the Washington Supreme Court to accept review, and to act where the court of appeals had declined to act. Expedia approached the AGC and asked that the AGC support its petition by emphasizing to the Supreme Court how the defense benefit in liability insurance policies is crucial to a variety of businesses, including construction contractors. The AGC of Washington agreed to support Expedia’s petition, and filed a brief for Supreme Court review. Although Supreme Court review of a case at an interim stage is quite rare, in this case Expedia and the AGC succeeded in persuading the Supreme Court to accept review. The high court will now proceed to accept appellate briefs, hear oral argument from counsel for the parties, and then publish a binding decision that will become law not only in this case, but throughout the state.