Getting an insurer first to provide a defense, and then keeping the insurer from abandoning that defense during what can be years of expensive litigation, preoccupies many companies facing ruinous litigation expenses. The Washington Supreme Court, in Expedia, Inc. v. Steadfast Ins. Co. (July 3, 2014), just handed down twin holdings that should significantly benefit insureds, and their coverage counsel, faced with this task, which can mean the difference between fighting back and capitulating to settlement simply because the cost of litigating the merits is just too steep.
Expedia had been sued in about 80 different lawsuits by various taxing authorities claiming that Expedia had underpaid hotel taxes, which Expedia had calculated using the discounted, net rate paid to hotels rather than, as the taxing authorities wanted, the full cost paid by the hotel guest to Expedia. Zurich, the insurer for two of Expedia’s policies, refused to defend Expedia on the grounds the loss was not covered and that Expedia’s late notice had prejudiced Zurich’s defense.
Faced with mounting defense costs, Expedia sued Zurich for a declaration that Zurich had a duty to defend. In response, Zurich asked the trial court to delay ruling on Expedia’s request until Zurich conducted discovery related to the coverage issues, including what Expedia knew about its potential liability in the underlying taxing dispute. Recognizing that there was a “dangerous overlap” between the issues in the coverage case and the underlying tax cases, the trial court stayed its hand as to Expedia’s request to get Zurich to pay for the ongoing defense, but it also refused to let Zurich conduct discovery into facts that might well have prejudiced Expedia’s defense in the tax cases. That, of course, left Expedia to front the costs of defending the tax cases.
On discretionary review, the Washington Supreme Court held that the trial court should have adjudicated Expedia’s motion seeking to compel Zurich to defend the underlying tax cases, based only on the complaints and the policies (the “eight corners” rule, which refers to the four corners of both of these documents). The Court affirmed the Washington rule, which is very friendly to insureds, that the insurer’s duty to defend may be triggered by facts outside of the complaint, but it cannot be defeated by any such facts. It’s a one-way street for insureds. Accordingly, there was no legal reason to give Zurich the delay that it wanted.
But perhaps even more importantly, the Court held that Zurich’s potential late-notice defense, which would have required additional discovery about facts potentially defeating coverage but that could also prejudice Expedia’s defense of the underlying tax cases, could not stand as an obstacle to deciding the duty to defend without delay. Under the liberal rules triggering the duty to defend, this may well mean that Zurich — not Expedia — will have to pay for years of defending the tax cases while Zurich’s coverage defense sits on the sidelines.
But insureds, even under Expedia, should be careful not to let their guard down where the insurer, like Zurich, thinks that it’s defending a lawsuit that it should be able to walk away from. Insureds, coverage counsel, and defense counsel must be alert to the possibility that facts discovered in the underlying lawsuits may come back to haunt the insured in a coverage defense stalled by the holding in Expedia. That is, expert legal advice should guide an insured’s navigation of this thicket, especially where there is “dangerous overlap” between issues relevant both to the insured’s defense and the insurer’s duty to defend.