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Vol. 5, Iss. 5
April 29, 2016

Withdrawing From An Insured’s Defense -- On The Eve Of Trial

 

Insurers usually think long and hard before withdrawing from an insured’s defense. Sometimes the right to do so is seemingly clear – the only count, or two, that triggered the defense in the first place is dismissed by the court. Of course, even here, the insured may argue that it was the insurer’s appointed counsel that orchestrated this possibility. Other times the insurer’s right can be murkier – the information that now enables the insurer to conclude, that no defense is owed, was obtained in discovery or via some other external means. Can this information be used as support for the insurer’s decision to withdraw?

There are other considerations still. Even if the insurer believes that it is on solid footing to withdraw its defense, it may be less inclined to do so if trial is in the near future. There may be a concern that, even if the insurer had the right to withdraw, it will be seen as prejudicing the insured. Further, on account of this possibility, a court may later conclude that, well, maybe the insurer’s right to withdraw wasn’t so strong after all.

But what about an insurer that obtains a declaratory judgment that no defense is owed. Here the right to withdraw seems clear as a bell. The court has blessed the decision. Talk about a bullet proof vest. But what if this decision comes on the eve of trial? That was the issue in State Farm Fire and Casualty Co. v. Samia El-Moslimany, No. 15-124 (W.D. Wash. April 15, 2016).

State Farm undertook the defense of certain insureds in a defamation action filed against them. The insurer then filed an action, seeking a declaratory judgment, that it had no obligation to defend its insureds in the defamation action. The insureds argued that the court should not rule in State Farm’s favor because they would be prejudiced if State Farm’s defense were withdrawn on the eve of trial (scheduled for May 23, 2016).

Specifically, the insureds argued that “State Farm has provided defense counsel to them since early 2013, but waited until early 2015 to file its declaratory judgment action, and waited an additional year to file the motion currently under consideration. Defendants maintain that, if this Court finds no duty to defend, they will have only a few weeks to find new counsel and secure financing for that expense. Defendants state that it is bad faith for an insurer to pursue a declaratory judgment action while defending under a reservation of rights if the action ‘might prejudice its insured’s tort defense.’”

While the Washington federal court noted that the timing of its decision was “unfortunate,” it was not persuaded that there was bad faith on State Farm’s part. The court made several observations in coming to this conclusion:

• “Here, there is no indication State Farm has interfered in the underlying action of Sindi v. El-Moslimany, or done anything other than continue to provide for a defense in that matter. State Farm is entitled to pursue a declaratory judgment that it has no duty to defend and has established the absence of such duty in this case.”

• “The one-year delay between the filing of the declaratory judgment action and the motion for summary judgment resulted from State Farm’s repeated, unsuccessful attempts to effectuate service on defendant Sindi. State Farm reasonably waited until it succeeded in serving Sindi, and until it moved for a default judgment against her, to file its summary judgment motion.”

• “Nor does the delay between the initial provision of a defense and the filing of the declaratory judgment action reflect bad faith. An insurer is required to give the insured the benefit of the doubt, and must continue its defense until it can conclusively establish a claim is not covered by the insurance policy.”

• “Defendants have benefited from the fact that State Farm has paid all defense fees and costs to date.”

• “[D]efendants have submitted no evidence as to why they cannot retain their current counsel to continue defending them in Sindi v. El-Moslimany. Defendants suggest, but do not establish their defense counsel would withdraw on the eve of trial. That defendants will now be compelled to pay for their defense does not justify a denial of State Farm's motion.”

To be sure, State Farm Fire v. Samia El-Moslimany is an easier defense-withdraw situation than some others, because the insurer had the benefit of a judicial determination that no defense was owed. Nonetheless, some of the reasons provided by the court, for a finding of no bad faith, seem equally relevant to a situation where an insurer seeks to withdraw its defense, close to trial, based on the dismissal of the only potentially covered count(s) or the development of factual information that takes a case outside of the duty to defend.

 

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