Opinion ID: 3050601
Heading Depth: 3
Heading Rank: 2

Heading: Invocation of the Duty to Defend

Text: Industrial argues that we need not further concern ourselves with whether the duty to defend was breached, because Goodstein’s claim that it was comes much too late. Given that the duty to defend can be breached without implicating the duty to indemnify, our analysis of the timing issue begins with when, if at all, Goodstein invoked the duty to defend in the first instance.
Goodstein asserts that he invoked the duty via the September 28, 1990 letter, which he claims gave Industrial notice of GOODSTEIN v. INDUSTRIAL INDEMNITY 15591 the fact that the DOE had declared the properties polluted.15 A review of the full record before us, however, makes clear that this position is untenable. [15] Washington courts have rejected the notion that “a tender of defense is sufficient if the insured puts the insurer on notice of the claim.” Unigard Ins. Co. v. Leven, 983 P.2d 1155, 1160 (Wash. Ct. App. 1999). “[A]n insurer cannot be expected to anticipate when or if an insured will make a claim for coverage; the insured must affirmatively inform the insurer that its participation is desired.” Id.; see also Griffin v. Allstate Ins. Co., 29 P.3d 777, 782 (Wash. Ct. App. 2001); Time Oil Co. v. Cigna Prop. & Cas. Ins. Co., 743 F. Supp. 1400, 1420 (W.D. Wash. 1990). Goodstein’s October 22, 1990 letter went to great pains to inform Industrial that no claim had been made: “Please note, however, in case there is any confusion, we are not presently making any claims under the policies.” (Emphasis added). Far from informing Industrial that its participation was desired in any investigation, negotiation or defense regarding the extent of Goodstein’s liability for the pollution, see Unigard, 29 P.3d at 782, Goodstein specifically disclaimed any intent to invoke coverage under the policies. Goodstein cannot now claim Industrial’s duty to defend arose as a result of that early correspondence.
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
[18] Industrial cannot establish prejudice as a matter of law on the record before us. The existence of prejudice is a question of fact, Tran v. State Farm Fire & Cas. Co., 961 P.2d 358, 365 (Wash. 1998), as to which the insurer “has the affirmative burden of proof,” Pulse v. Nw. Farm Bureau Ins. Co., 566 P.2d 577, 579 (Wash. Ct. App. 1977). To establish prejudice, Washington courts “reject speculation, and require evidence of concrete detriment resulting from delay, together with some specific harm to the insurer caused thereby.” Canron, Inc. v. Fed. Ins. Co., 918 P.2d 937, 941 (Wash. Ct. App. 1996); see also Unigard, 983 P.2d at 1161 (“To establish actual prejudice, the insurer must demonstrate some concrete detriment, some specific advantage lost or disadvantage created, which has an identifiable prejudicial effect on the insurer’s ability to evaluate, prepare or present its defenses to coverage or liability.”). [19] Industrial has never articulated any theory of prejudice in this action, nor has it proffered any evidence in support of such a defense. Instead, it points to the fact that Washington courts have, on occasion, found prejudice as a matter of law and suggests we do the same.21 See, e.g., Nw. Prosthetic v. Centennial Ins., 997 P.2d 972, 975-96 (Wash. Ct. App. 2000); Unigard, 983 P.2d at 1163; see also Twin City Fire Ins. Co. v. King County, 749 F. Supp. 230, 233-34 (W.D. Wash. 1990), aff’d, 942 F.2d 794 (9th Cir. 1991) (unpublished). Such cases are not the norm, however — they are “extreme 21 Washington state courts sometimes refer to the existence of a presumption of prejudice, citing Felice v. St. Paul Fire & Marine Ins. Co., 711 P.2d 1066 (Wash. Ct. App. 1985). See, e.g., Pub. Util. Dist. No. 1, 881 P.2d at 1029. However in Felice, the court did not merely presume prejudice but found actual prejudice, because the insured had already proceeded to trial before informing the insurance company. Felice, 711 P.2d at 1071 (“This actually prejudiced [the insurer] because it precluded the opportunity to evaluate the facts and determine whether a trial and expenses for an appeal were warranted.”). 15596 GOODSTEIN v. INDUSTRIAL INDEMNITY cases.” Pub. Util. Dist. No. 1, 881 P.2d at 1029; Pulse, 566 P.2d at 579; see also Pederson’s Fryer Farms, Inc. v. Transamerica Ins. Co., 922 P.2d 126, 132 (Wash. Ct. App. 1996) (recognizing that “Washington courts have found prejudice as a matter of law in only a few cases”). Moreover, even in these “extreme” cases the Washington courts engaged in a close evaluation of the specific injury alleged by the insurer, such as the loss of opportunity to mount a viable defense or the loss of opportunity to investigate a questionable claim against the insured, before concluding that prejudice existed as a matter of law. See Nw. Prosthetic, 997 P.2d at 973, 976 (finding prejudice established as a matter of law where insured settled a debatable defamation claim before the insurer had a meaningful opportunity to investigate it, and the settlement was “achieved by parties who shared an interest in characterizing the $325,000 payment as defamation damages,” because that was the only claim covered under the policy); Unigard, 983 P.2d at 116163 (concluding insurer established prejudice as a matter of law where insurer lost the opportunity to mount the defense that its insured was not a strictly-liable “former operator” of contaminated site, which could have been based on insured’s own statement that he had no “operations or involvement” in the site); see also Tran, 961 P.2d at 365-66 (finding actual prejudice as a matter of law where insured’s refusal to provide financial documents containing material information not available from any other source prevented the insurer from being able to investigate the possibility that the insured’s claim was fraudulent). Industrial has not asserted that any similar situation existed here. Indeed, Washington has expressly refused to find prejudice as a matter of law in an environmental cleanup case where because of late notice the polluted property was investigated, assessed by experts, and completely remediated without the insurer’s participation. Pederson’s Fryer Farms, 922 P.2d at 130-32. The court in Pederson’s Fryer Farms denied TransGOODSTEIN v. INDUSTRIAL INDEMNITY 15597 america’s motion for directed verdict on the prejudice issue because “Transamerica fail[ed] to indicate how this delay hampered its ability to investigate, evaluate or defend against the State’s assertion that Pederson’s was required to remedy the contamination.” Id. at 132. Moreover, “Pederson’s did not deprive Transamerica of its right to control the litigation, as no action was filed against Pederson’s.” Id. Finally, the court rejected Transamerica’s argument that it could have disputed Pederson’s liability for the cleanup costs because there was no evidence even arguably falling within any of the narrow exceptions to the Model Toxic Act’s strict liability provisions. Id. at 132-33. As in Pederson’s Fryer Farms, there is no evidence in the record of this case suggesting Industrial could have taken any steps to mitigate or dispute Goodstein’s liability for the pollution, or that Industrial was in any other way damaged by Goodstein’s alleged breach. [20] In sum, Industrial has in its motion for summary judgment fallen short of meeting its burden to warrant judgment as a matter of law on the duty to defend claim. It has failed to demonstrate that this is such an “extreme” case that the prejudice determination should not be decided by a jury, as it normally is under Washington law. Indeed, Industrial has failed to articulate any theory at all by which it could be said to have suffered actual and substantial prejudice due to Goodstein’s alleged breach of its obligations under the policy. [21] We therefore reverse the district court’s grant of summary judgment for Industrial on the duty to defend claim, as Goodstein invoked the duty by filing this lawsuit for damages and Industrial has failed to establish that it was prejudiced as a matter of law by Goodstein’s late notice of the claim. We emphasize that we express no view on the merits of the duty to defend cause of action, including whether there was a duty to defend at all on these facts and whether, if so, any damages were incurred for its breach. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.