The Washington Supreme Court joined a minority of jurisdictions that hold that insurers may not unilaterally reserve the right to seek reimbursement for defense costs paid in defending non-covered claims through a reservation of rights letter. In National Surety Corp. v. Immunex Corp., the Washington Supreme Court, in a five to four decision, held that insurers defending under a reservation of rights may not seek reimbursement for defense costs from the insured, even if there is a determination that the insured is not entitled to coverage under the policy No. 86535-3 (March 7, 2013). In so holding, the court recognized that, upon a showing of actual and substantial prejudice resulting from an insured’s delayed tender, an insurer could minimize or avoid liability for defense costs.

In Immunex, National Surety Corporation issued umbrella and excess liability policies to Immunex Corporation from 1998 to 2002. In 2001, the insured reported it was under investigation by state and federal government regarding wholesale pricing of its drug product. That same year, various entities sued the insured, alleging the insured reported inflated prices for its products, allowing for Medicare reimbursement to product providers in higher amounts than the provider actually paid for the product.