Recently the Washington supreme court unanimously decided a case that brings good news to Washington contractors and others who purchase liability insurance. The case involves the Bellevue-based travel website Expedia, which is in the middle of a dispute against its liability insurers.
Expedia negotiates discounted rates with hotels, and arranges hotel reservations for online consumers. Expedia charges its customers for state and local occupancy taxes, which Expedia then pays over to those taxing authorities. But Expedia applies the occupancy taxes only to the discounted hotel rates that it pays to hotels, not on the total amount the consumer pays to Expedia, which includes fees charged by Expedia. Nearly 80 state and local jurisdictions insist Expedia should be collecting their taxes based on the total amount Expedia charges, and they are suing Expedia for underpaying those taxes.
Expedia had purchased liability insurance covering claims for damage from negligence of Expedia in the conduct of its business. Expedia tendered the tax lawsuits against it to its insurers. The insurers denied the tenders and refused to provide a defense for Expedia in the lawsuits. So Expedia sued them in King County superior court for breach of the insurance policies.
The threshold issue in Expedia’s suit is whether the insurers are required to defend Expedia, even while the insurers contend that their policies do not actually cover Expedia for the liability it is facing. This issue is often crucial to Washington contractors and businesses as well. 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.
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 cannot 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 shorthand for these principles is that they are the ‘8-corner rule.’ The insurer must determine whether potential coverage exists not based on whatever the actual facts are (or may turn out to be), but based upon the words recited in the four corners of the insurance policy, and based upon the allegations set out in the four corners of the Complaint against the insured. The Expedia insurers tried to get Expedia’s lawsuit dismissed on the theory that there was no potential coverage, based upon various insurance exclusions. But the insurers lost that motion because they could not eliminate the possibility that claims alleged against Expedia might be covered by their policies.
Expedia then asked the trial court to declare that the insurers were required to provide a defense until such time as the insurers could eliminate any potential coverage. Somewhat surprisingly, the trial court denied that motion as well. It also ordered that the insurers would be allowed to conduct discovery (such as taking depositions of Expedia representatives) to help the insurers in their quest to defeat coverage.
At that point Expedia asked for Washington appellate courts to intervene, which rarely happens in the middle of trial court proceedings. The Washington supreme court accepted review, and last week’s decision is the successful resolution of that review.
In a strongly-worded decision, the supreme court reaffirmed that the insurer’s duty to defend is broader than its ultimate duty to indemnify for damages, and that the insurer must provide a defense whenever potential coverage exists, measured under the ‘8-corner rule.’ What’s more, the insurer may (and often must) investigate claims tendered by its insured, but when it comes to the duty to defend, the insurer’s investigation works only for the insured’s benefit, not the insurer’s. So when investigating its duty to defend, the insurer’s investigation of facts outside the ‘8-corners’ of the policy and the Complaint can only trigger a duty to defend, not eliminate one.
Washington courts have for several decades been at the national forefront in establishing principles that protect the rights of companies and consumers who purchase insurance. Last week’s Expedia decision continues that tradition. Not only does the case affirm in strong terms the breadth of insureds’ right to a paid defense whenever a policy might ultimately cover claims against the insured, but the case goes on to declare that an insurer cannot proceed with its own steps to establish that no coverage exists (such as taking depositions of its insured) if those steps would prejudice the insured in the underlying dispute. Instead, the supreme court ruled, those steps by the insurer must wait until the underlying dispute is over.