The United States District Court for the Western District of Washington, applying Washington law, has held that no Washington state public policy prevents an insurer from enforcing a defense cost recoupment provision. Massachusetts Bay Ins. Co. v. Walflor Indus., 2019 WL 1651659 (W.D. Wash. Apr. 17, 2019). The court resolved the issue based on precedent and saw no need to certify the question of the enforceability of such provisions to the Washington Supreme Court as the insured urged.
An insurer initially concluded that it had no duty to defend a suit alleging that products were distributed bearing the insured’s supplier’s trade name in violation of a distribution agreement. In response to the insured’s argument that the suit implicated the policy’s “personal and advertising injury” coverage, the insurer agreed to defend subject to a full reservation of rights, including the right to recoup defense costs if it was later determined that there was no coverage, pursuant to an endorsement providing for recoupment in that situation. After the claimant amended the complaint in the underlying suit, the insurer concluded that its initial denial had been correct, and it sought a declaratory judgment confirming that there was no coverage and that it was entitled to recoup defense costs.
The recoupment provision was entitled “WASHINGTON CHANGES – DEFENSE COSTS.” Applicable to all coverages under the policy, it stated that “if we initially defend … but later determine that none of the claims [defended] are covered … we have the right to reimbursement for the defense costs we have incurred.” It further provided that the insurer would have this right only where it defended under a written reservation specifically referencing the right to recoup.
The insured did not argue either that the recoupment provision was ambiguous or that the insurer’s reservation was insufficient; the insured argued only that the provision was void as a matter of Washington state public policy, citing National Surety Corp. v. Immunex Corp., 297 P.3d 688 (Wash. 2013). In Immunex, the Washington high court had determined that an insurer could not “unilaterally” create a right to recoup by conditioning a defense on a reservation of the right to recoup where the policy was silent on the issue. Here, the court found that Immunex was limited to situations where the policy did not address the issue and that it did not pronounce a broader public policy against recoupment.
The insured also argued that a public policy against recoupment could be inferred from Tank v. State Farm Fire & Casualty Co., 715 P.2d 1133 (Wash. 1986), which describes the “enhanced obligation” that an insurer defending under a reservation has towards its insured (e.g., the insurer must conduct a thorough investigation and retain competent independent counsel). The court found that the enhanced obligation consisted only of the duties enumerated in Tank and its progeny, and that Tank did not suggest the existence of a public policy against recoupment capable of overriding the plain language of the policy.