With characteristic good humor, Judge Robart of the Western District of Washington recently reiterated a very important principle in the resolution of duty to defend issues: the insurance carrier may not seek a determination on the duty to defend while the underlying case is still going on if in doing so the court would be asked to make rulings that have any potential to prejudice the insured’s defense of the underlying case. You can find the decision here. In the case a law firm was sued by a former client over mishandling of discovery in a workplace injury case that resulted in the former client being sanctioned (and the lawyer involved being disciplined by the bar). The firm’s malpractice carrier agreed to defend but “reserved its right” to file a declaratory judgment action to determine whether certain potential exclusions precluded coverage, thus absolving it of the duty to defend. Judge Robart solicited briefing from the parties as to how he might decide the carrier’s contentions without prejudicing the defense of the underlying case. But, as he noted, even the best laid plans of judges often go awry: the briefing only confirmed that because there were significant disputes of fact and law between the carrier and the law firm, including about when the firm “knew” about the discovery misconduct, continued litigation of the coverage dispute could prejudice the law firm’s defense. Therefore the court granted the law firm’s motion to stay the case until after the underlying dispute resolved. The lesson for policyholders is that although the standard admonition to carriers is to pick up the defense and then file a declaratory judgment action to resolve duty to defend issues, the carrier should not be permitted to always do so.
