Opinion ID: 3050601
Heading Depth: 4
Heading Rank: 2

Heading: Failure to Invoke the Duty

Text: Industrial’s position is just as unpersuasive. Industrial asserts, as it also did in the district court, that it could not have breached the duty to defend because Goodstein never invoked that duty. Accordingly, Industrial argues, because the duty to 15 To support their claim that the September 28, 1990 letter invoked a duty to defend, Goodstein points to the fact that he mailed a similar letter to other insurers and those insurers responded by sending Goodstein reservation of rights letters. There is nothing in the record, however, to suggest that those insurers also received letters similar to the October 20, 1990 letter sent to Industrial. 15592 GOODSTEIN v. INDUSTRIAL INDEMNITY defend never arose in the first place, Washington’s late notice rule,16 under which an insurer must prove that the insured’s delay in tendering the defense claim caused the insurer “actual and substantial prejudice” to avoid liability for defense costs, does not apply.17 See Mutual of Enumclaw Ins. Co. v. USF Ins. Co., 153 P.3d 877, 882 (Wash. Ct. App. 2007); see also Pub. Util. Dist. No. 1 v. Int’l Ins. Co., 881 P.2d 1020, 1029 (Wash. 1994); Griffin, 29 P.3d at 782. [16] Industrial’s argument is creative, but it cannot fly. As an initial matter, Industrial cites no case law supporting the notion that there is a meaningful distinction between a late invocation of the duty to defend and a failure ever to invoke that duty.18 That is probably because, as a matter of both 16 Industrial has stated specifically and repeatedly that it is not asserting a late notice defense. In its brief to this court, Industrial declared that it “was not asserting late notice as a defense to coverage, it was moving to dismiss [the duty to defend claim] on the grounds that a defense was never requested.” Similarly, Industrial informed the district court that it “ha[d] not asserted late notice” as a defense to coverage in its summary judgment motion. 17 We note that the prejudice requirement is not limited to circumstances concerning late notice. Washington also, for instance, requires proof of prejudice where the insurer asserts as a defense to liability that the insured breached the policy’s cooperation clause, which precludes coverage where the insured litigates or settled a lawsuit without involving the insurer. E.g., Ore. Auto. Ins. Co. v. Salzberg, 535 P.2d 816, 819 (Wash. 1975); see also Pederson’s Fryer Farms, Inc. v. Transamerica Ins. Co., 922 P.2d 126, 131 (Wash. Ct. App. 1996) (stating general rule that “[e]ven where an insured breaches the insurance contract, the insurer is not relieved of its duty to pay unless it can prove actual and substantial prejudice caused by the insured”). Industrial has not argued in this court that Goodstein breached the cooperation clause, nor has it put forth a theory of prejudice arising from such a breach. We therefore do not address the impact of the policy’s cooperation clause. Should the issue be raised on remand, the district court may, of course, address it. 18 Industrial’s argument is predicated on Unigard’s statement that to invoke the duty to defend, “the insured must affirmatively inform the insurer that its participation is desired.” 983 P.2d at 1160. Assuming that the filing of this lawsuit somehow failed to satisfy that standard, Unigard GOODSTEIN v. INDUSTRIAL INDEMNITY 15593 Washington law and of simple logic, it makes no sense to say that a duty to defend was never invoked when, as here, the insured has sued the insurer for a breach of the duty to defend. The filing of the lawsuit itself constitutes a request for payment of defense costs under the policy,19 and at that point, the late notice rule applies. The logic of a recent Washington Court of Appeals case illustrates the point by analogy. In Mutual of Enumclaw, 153 P.3d 877, the insured was sued for construction defects. The insured tendered indemnification and defense claims to two insurance companies (collectively “Enumclaw”), but specifically decided not to tender the claims to a third (“USF”). Id. at 879-80. Enumclaw then settled the lawsuit. Id. at 880. As part of the settlement, the insured assigned its rights under all other policies to Enumclaw. Id. Enumclaw later discovered the USF policy and sued USF for contribution. Id. The trial court granted summary judgment for USF, holding that USF was “excused from its duty to perform under its policy or to contribute to a settlement procured by a coinsurer,” because the insured had affirmatively chosen not to tender the claim to USF. Id. The Washington Court of Appeals reversed, holding that Enumclaw, standing in the shoes of the insurer, could invoke the late tender rule through the instant lawsuit. Id. at 878, 881-82. Consequently, the court held, USF would be liable to contribute does not support the notion that Industrial can avoid liability without proving prejudice. After the quoted statement, the Unigard court went on to engage in prejudice analysis, id. at 1161-63, which suggests that even if the insured does not affirmatively inform the insurer that a defense is desired, the insurer remains liable for the breach of the duty to defend absent proof of “actual and substantial prejudice.” See Enumclaw, 153 P.3d at 882. 19 Industrial has not argued in this court that the government’s conduct related to the polluted properties did not constitute a “suit,” and we therefore do not consider the issue here. 15594 GOODSTEIN v. INDUSTRIAL INDEMNITY unless it could prove actual and substantial prejudice. Id. Enumclaw’s logic dictates that even if a claim for defense costs is never made until after the lawsuit is settled, and even if that claim is asserted in the form of a coverage suit rather than by a letter to the insurer demanding a defense or submitting defense costs, the insurance company is still liable for the defense costs absent evidence of substantial prejudice. [17] Accordingly, the fact that Goodstein may never have tendered a defense request to Industrial before filing this lawsuit20 does not relieve Industrial of its obligation to prove prejudice. 20 We note that even if Goodstein can show a breach of the duty to defend upon remand, he will not be able to recover as damages the amount by which the property value was depressed due to its polluted state. “[T]he well-accepted measure of damages for a good faith, but unjustified breach [of the duty to defend is] the costs and reasonable attorneys’ fees incurred by the insured in defending itself plus consequential damages that the insured incurred as a result of the breach.” Underwriters at Lloyds v. Denali Seafoods, Inc., 927 F.2d 459, 464 (9th Cir. 1991) (applying Washington law). The discounted price Goodstein received for selling the land “as is” cannot possibly be considered to have been caused by Industrial’s failure to defend. And, given our conclusion that Goodstein did not invoke the duty to defend until he filed this lawsuit, well after the sale of the polluted properties was completed, the decision to sell for a depressed price cannot be traced to any breach of the duty to defend either. Goodstein’s diminution in value loss, then, did not come about as “a result of the breach” and is not recoverable as damages for the alleged breach of the duty to defend. See id. If Goodstein can establish a breach of the duty to defend upon remand, consequently, he will be able at most to recover as damages any pretransfer costs incurred in defending, including, for example, costs incurred in investigating the environmental contamination such as hiring an expert to assess the pollution. See Unigard, 983 P.2d at 1159 & n.9; cf. Truck Ins. Exch. v. VanPort Homes, Inc., 58 P.3d 276, 281 n.5 (Wash. 2002) (“An insurer may be responsible for defense costs prior to tender.”). GOODSTEIN v. INDUSTRIAL INDEMNITY 15595