National Surety Corporation, Petitioner, v. Immunex Corporation, Respondent, 176 Wash. 2d 872

Stephens, J. ¶1 This court has long recognized that a liability insurer uncertain of its obligation to defend its insured may undertake a “reservation of rights” defense while seeking a declaration regarding coverage. The question in this case is whether the insurer may unilaterally condition its reservation of rights defense on making the insured absorb the defense costs if a court ultimately determines there is no coverage. We answer no.

We recognize, however, that an insurer may avoid or minimize its responsibility for defense costs when an insured belatedly tenders a claim and the insurer demonstrates actual and substantial prejudice as a result. We affirm the Court of Appeals. I FACTS AND PROCEDURAL HISTORY ¶2 National Surety Corporation insured Immunex Corporation under excess and umbrella liability policies between 1998 and 2002. In August 2001, Immunex notified National Surety that it was the subject of state and federal government investigations into its wholesale drug pricing.

Immunex represented that it could not release information because of a confidentiality agreement. National Surety acknowledged receiving this notice and requested copies of any complaints that might emerge. ¶3 Beginning no later than 2001, a string of complaints was filed against Immunex. These complaints alleged that Immunex reported inflated average wholesale prices of its drugs, which enabled providers of drugs — such as physicians, hospitals, and pharmacies — to receive reimbursements from Medicare and other third-party payors in amounts greater than what they actually paid.

In all, at least 23 lawsuits related to pricing manipulation were filed against Immunex and other drug manufacturers under theories including breach of contract, civil conspiracy, fraud, and violations of state unfair trade and protection statutes and the federal Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968. ¶4 It was not until October 3, 2006 that Immunex first tendered defense of the litigation to National Surety.

In its tender letter, Immunex informed National Surety that it was on the eve of settling a California lawsuit, identified other pending lawsuits, and requested payment for reasonable defense expenditures and settlement costs. Specifically, Immunex asserted that coverage fell under the umbrella insurance “Coverage B,” which applied to cover “injury . . . arising out of . . . [discrimination,” Clerk’s Papers (CP) at 654.

National Surety requested suit papers and documentation, which Immunex sent in December 2006. ¶5 In March 2008, National Surety informed Immunex by letter that it “believe [d] there [wa]s no coverage ... for the claims alleged against Immunex in the [average wholesale price] litigation.” CP at 1074. While National Surety disclaimed any obligation to defend or indemnify, it indicated it “wishe[d] to complete its investigation regarding coverage,” CP at 1075, suggesting that its lack of coverage determination was only preliminary.

The letter stated: [National Surety] agrees to defend Immunex until such time as it can obtain a court determination confirming its coverage decision. [National Surety] agrees to provide a defense even though it has not completed its investigation regarding the known loss and breach of conditions issues because [National Surety] wants to be sure it has protected Immunex’s interests while it pursues that investigation.

The lawsuit[s] were tendered to [National Surety] for defense on October 3, 2006 . . . and that is the date from which [National Surety] is prepared to reimburse reasonable defense fees and costs. [National Surety] reserves the right to recoup the amounts paid in defense if it is determined by a court that there is no coverage or duty to defend and that [National Surety] is entitled to reimbursement. CP at 1074-75. ¶6 About the same time it issued its reservation of rights letter, National Surety filed a declaratory judgment action in King County Superior Court.

Immunex continued to be represented by its independent counsel in the average wholesale price litigation. After determining in April 2009 that National Surety had no duty to defend because the complaints did not allege claims arising out of discrimination, the trial court considered cross motions for

summary judgment on the issue of defense costs. The court concluded National Surety bore responsibility for these costs incurred until the April 2009 ruling under its reservation of rights defense, subject to setoff if it could prove prejudice from Immunex’s late tender at trial. The court denied National Surety’s motion for reconsideration and entered partial final judgment under CR 54(

b) to facilitate an appeal. Both parties appealed. ¶7 The Court of Appeals affirmed. Nat’l Sur. Corp. v. Immunex Corp., 162 Wn. App. 762, 256 P.3d 439 (2011). The Court of Appeals held National Surety was liable for defense costs incurred up until the April 2009 determination of no coverage, unless it could show prejudice from late notice. Id. at 780. Because fact issues remained on the question of prejudice, the appellate court affirmed the denial of National Surety’s

summary judgment motion. Id. at 782. We granted National Surety’s petition for review. Nat’l Sur. Corp. v. Immunex Corp., 173 Wn.2d 1006, 266 P.3d 880 (2012). II ANALYSIS ¶8 The first question to be answered is whether an insurer may recover defense costs incurred under a reservation of rights in the event a court ultimately determines no duty to defend is owed. In answering this question, it is useful to consider the nature of the duty to defend and the purposes of providing a defense under a reservation of rights. A.

Overview of the Duty To Defend ¶9 Both courts and the legislature have recognized that insurance contracts are imbued with public policy concerns. Or. Auto. Ins. Co. v. Salzberg, 85 Wn.2d 372, 376-77, 535 P.2d 816 (1975); RCW 48.01.030 (“The business of insurance is one affected by the public interest”). Indeed, [ijnsurance contracts are unique in nature and purpose. An insured does not enter an insurance contract seeking profit, but instead seeks security and peace of mind through protection against calamity.

The bargained-for peace of mind comes from the assurance that the insured will receive prompt payment of money in times of need. Love v. Fire Ins. Exch., 221 Cal. App. 3d 1136, 1148, 271 Cal. Rptr. 246 (1990) (citations omitted). Because security and peace of mind are principal benefits of insurance, insurers must fulfill their contractual obligations in good faith, “giving equal consideration in all matters to the insured’s interests.” Tank v. State Farm Fire & Cas.

Co., 105 Wn.2d 381, 386, 715 P.2d 1133 (1986). ¶10 The insurer’s duty to defend is separate from, and substantially broader than, its duty to indemnify. Truck Ins. Exch. v. VanPort Homes, Inc., 147 Wn.2d 751, 760, 58 P.3d 276 (2002) (citing Hayden v. Mut. of Enumclaw Ins. Co., 141 Wn.2d 55, 64, 1 P.3d 1167 (2000)). The duty to indemnify applies to claims that are actually covered, while the duty to defend “ ‘arises when a complaint against the insured, construed liberally, alleges facts which could, if proven, impose liability upon the insured within the policy’s coverage.’” Truck Ins.

Exch., 147 Wn.2d at 760 (quoting Unigard Ins. Co. v. Leven, 97 Wn. App. 417, 425, 983 P.2d 1155 (1999)); see also Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 53-54, 164 P.3d 454 (2007) (recognizing duty to defend when claims against the insured are conceivably covered). ¶11 “[I]f there is any reasonable

interpretation of the facts or the law that could result in coverage, the insurer must defend.” Am. Best Food, Inc. v. Alea London, Ltd., 168 Wn.2d 398, 405, 229 P.3d 693 (2010). Facts that are extrinsic to the pleadings, but readily available to the insurer, may give rise to the duty. Woo, 161 Wn.2d at 54. Although this duty to defend is broad, it is not triggered by claims that clearly fall outside the policy. Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 561, 951 P.2d 1124 (1998).

An insurer’s broad duty to defend against colorable claims tendered by the insured, particularly when the insurer elects to defend under a reservation of rights, is central to our decision. While the dissent focuses on National Surety’s contractual obligations, we have repeatedly held that the scope of an insurer’s duty to defend is broader than the terms of the policy. ¶12 When an insured is uncertain of its duty to defend, it may defend under a reservation of rights while seeking a declaratory judgment relieving it of its duty. Woo, 161 Wn.2d at 54 (citing Truck Ins. Exch., 147 Wn.2d at 761).

Because a reservation of rights defense is fraught with potential conflicts, it implicates an enhanced duty of good faith toward the insured. Tank, 105 Wn.2d at 383. But we have recognized that the risks of a reservation of rights defense are coupled with benefits: Although the insurer must bear the expense of defending the insured, by doing so under a reservation of rights and seeking a declaratory judgment, the insurer avoids breaching its duty to defend and incurring the potentially greater expense of defending itself from a claim of breach. Woo, 161 Wn.2d at 54.

Additionally, defending under a reservation of rights enables the insurer to protect its interests without facing claims of waiver or estoppel and to walk away from the defense once a court declares it owes no duty. ¶13 By insuring itself against potentially disastrous findings of breach, bad faith, waiver, and coverage by estoppel, an insurer unquestionably benefits from its decision to defend under a reservation of rights — even when, as here, a court later finds that it owes no duty to continue that defense.

The dissent’s conviction that National Surety was pressed into defending Immunex without receiving any benefit in return simply ignores the context in which this arrangement occurred. We are not dealing here with otter sanctuaries, marital property, or choice-of-forum rules. Instead, the insurance relationship — a relationship affected by the public interest — allows for situations such as this when an insurer makes a rational decision to protect itself against a greater downstream risk by undertaking certain costs.

Unjust enrichment is simply irrelevant because any “enrichment” of Immunex was more than matched by benefit to National Surety. Our understanding of the broad and reciprocal nature of an insurer’s duty to defend provides the proper context for answering the principal question in this case. B. May an Insurer Avoid Paying Defense Costs under a Reservation of Rights Defense by Asserting a Right to Recoupment? ¶14 National Surety contends the trial court erred in requiring it to reimburse Immunex for reasonable defense costs.

Here, as a matter of contract, the relevant policy imposed on National Surety “the right and duty to . . . defend any [i]nsured against any [s]uit, seeking damages . . . [t]o which Coverage B applies.” CP at 630-31 (emphasis omitted). National Surety was apparently unsure whether the complaints filed against Immunex in the average wholesale pricing litigation were covered under its policy.

In light of its contractual obligations, it chose to defend, subject to a reservation of rights as allowed under Tank and its progeny. ¶15 National Surety now contends it should not have to pay Immunex’s defense costs — despite its offer to defend subject to a reservation of rights — because the court later determined it had no duty to defend. See, e.g., Suppl.

Br. of Pet’r at 8 (arguing against imposing defense costs “now, after a determination of non-coverage”). ¶16 Recognizing that we have not considered this issue before, National Surety relies on the leading California decision allowing recoupment of defense costs, Buss v. Superior Court, 16 Cal. 4th 35, 939 P.2d 766, 65 Cal. Rptr. 2d 366 (1997). There, a complaint filed against the insured asserted 27 causes of action, only one of which (defamation) fell within coverage under its insurance policy with Transamerica Insurance Company.

Transamerica accepted the defense of the action as tendered but reserved its rights to reimbursement or an allocation of covered and noncovered claims. Id. at 42. Later, the insured and Transamerica entered into an agreement providing that the insured would reimburse Transamerica a proportionate amount as determined by a court. Id. ¶17 Eventually, the insured settled the claims against him for over $8 million. Transamerica had paid over $1 million in defense fees, only a small fraction of which was allocable to defending the defamation claim. Id.

The court first noted that in a “mixed” action involving covered and uncovered claims, the insurer’s contractual duty to defend extends only to the potentially covered claims, even though a prophylactic defense of the entire action is necessary to meaningfully defend the potentially covered claims. Id. at 48-49. The court held that an insurer may not seek reimbursement for defense costs as to claims that are at least potentially covered because it has bargained to bear those costs. Id. at 49.

In such a situation, the court reasoned that “the insurer may not proceed by means of a ‘reservation’ of its ‘right’ of reimbursement” because there is no such right to reserve. Id. at 50. Where claims are not even potentially covered, however, the court held that an insurer may seek to recover defense costs allocable solely to such claims. Id. at 52-53. ¶18 Similarly, Colorado courts have endorsed reimbursement in situations in which the insurer “believes ... it is under no obligation to defend” but defends under a reservation of rights to seek reimbursement. Hecla Mining Co. v. N.H. Ins.

Co., 811 P.2d 1083, 1089 (Colo. 1991). ¶19 A few other states have allowed recoupment with reasoning along these lines. See, e.g., Sec. Ins. Co. of Hartford v. Lumbermens Mut. Cas. Co., 264 Conn. 688, 826 A.2d 107, 125 (2003) (“Where the insurer defends the insured against an action that includes claims not even potentially covered by the insurance policy, a court will order reimbursement for the cost of defending the uncovered claims in order to prevent the insured from receiving a windfall.”); Jim Black & Assocs. v. Transcon. Ins. Co., 932 So. 2d 516, 518 (Fla. Dist. Ct.

App. 2006) (holding insurer entitled to reimbursement of defense costs where duty to defend never existed and the insurer sent a reservation of rights letter and appointed mutually agreeable defense counsel); Hebela v. Healthcare Ins. Co., 370 N.J. Super. 260, 851 A.2d 75, 86 (Ct. App. Div. 2004); see also United Nat’l Ins. Co. v.

SST Fitness Corp., 309 F.3d 914, 920 (6th Cir. 2002) (predicting Ohio would allow recoupment where there is no duty to defend if the insurer “1) timely and explicitly reserve[s] its right to recoup the costs; and 2) provide [s] specific and adequate notice of the possibility of reimbursement” and insured fails to object); Cincinnati Ins. Co. v. Grand Pointe, LLC, 501 F. Supp. 2d 1145, 1168 (E.D. Tenn. 2007) (predicting Tennessee law would permit reimbursement for defense costs if insurer reserves its right to recoupment and it is later determined insurer had no duty to defend); Ill. Union Ins. Co. v. NRI Constr.

Inc., 846 F. Supp. 2d 1366 (N.D. Ga. 2012) (predicting Georgia courts would permit reimbursement). ¶20 More recently, however, courts deciding in the first instance whether insurers can recover defense costs have generally concluded that they cannot. Their decisions provide valuable guidance. ¶21 In refusing to allocate costs between covered claims and uncovered claims in a “mixed” action, the Supreme Court of Wyoming held that “unless an agreement to the contrary is found in the policy, the insurer is liable for all of the costs of defending the action.” Shoshone First Bank v. Pac. Emp’rs Ins.

Co., 2 P.3d 510, 514 (Wyo. 2000). The court likened a reservation of rights to recoup costs to a unilateral modification of the coverage policy. Id. at 515-16. ¶22 Adopting similar reasoning, the Supreme Court of Illinois held that “[a]s a matter of public policy, we cannot condone an arrangement where an insurer can unilaterally modify its contract, through a reservation of rights, to allow for reimbursement of defense costs in the event a court later finds that the insurer owes no duty to defend.” Gen. Agents Ins. Co. of Am., Inc. v. Midwest Sporting Goods Co., 215 Ill. 2d 146, 828 N.E.2d 1092, 1102, 293 Ill.

Dec. 594 (2005).

Likewise, the Supreme Court of Pennsylvania reasoned: Where the insurance contract is silent about the insurer’s right to reimbursement of defense costs, permitting reimbursement for costs the insurer spent exercising its right and duty to defend potentially covered claims prior to a court’s determination of coverage ... would amount to a retroactive erosion of the broad duty to defend... by making the right and duty to defend contingent upon a court’s determination that a complaint alleged covered claims, and would therefore narrow Pennsylvania’s long-standing view that the duty to defend is broader than the duty to indemnify.

Am. & Foreign Ins. Co. v. Jerry’s Sport Ctr., Inc., 606 Pa. 584, 2 A.3d 526, 544 (2010). ¶23 Following this line of reasoning, courts have refused to allow reimbursement of defense costs based on a later determination of no coverage. See, e.g., Perdue Farms, Inc. v. Travelers Cas. & Sur. Co. of Am., 448 F.3d 252, 258-59 (4th Cir. 2006) (predicting Maryland law would not permit reimbursement of defense costs for noncovered claims); Capitol Indem. Corp. v. Blazer, 51F. Supp. 2d 1080, 1090 (D.

Nev. 1999) (holding that under Nevada law, reimbursement for defense costs is allowed only if an agreement between the parties provides for reimbursement); Med. Liab. Mut. Ins. Co. v. Alan Curtis Enters., Inc., 373 Ark. 525, 285 S.W.3d 233, 237 (2008) (holding that in the absence of statutory authority, insurer may not recoup defense fees under a unilateral reservation of rights); Shoshone First Bank, 2 P.3d at 513-14 (disallowing allocation of defense costs where the policy did not provide for recoupment).

Notably, a federal district court in Virginia recently predicted, albeit without much analysis, that Washington would disallow recoupment of defense costs incurred in defending uncovered claims. Zurich Am. Ins. Co. v. Pub. Storage, 743 F. Supp. 2d 548, 550-51 (E.D. Va. 2010). ¶24 By our decision today, this prediction proves accurate.

Disallowing reimbursement is most consistent with Washington cases regarding the duty to defend, which have squarely placed the risk of the defense decision on the insurer’s shoulders. ¶25 It is the insurer that decides whether to defend (with or without a reservation of rights) before any judicial determination of coverage. Providing a defense benefits the insurer by giving it the ability to monitor the defense and better limit its exposure.

When an insurer defends under a reservation of rights, it insulates itself from potential claims of breach and bad faith, which can lead to significant damages, including coverage by estoppel. Truck Ins. Exch., 147 Wn.2d at 761. In turn, the insured receives the benefit of a defense until a court declares none is owed. Conversely, when an insurer declines to defend altogether, it saves money on legal fees but assumes the risk it may have breached its duty to defend or committed bad faith.

See id.; Woo, 161 Wn.2d at 54. ¶26 We reject National Surety’s view that an insurer can have the best of both options: protection from claims of bad faith or breach without any responsibility for the costs of defense if a court later determines there is no duty to defend. This “all reward, no risk” proposition renders the defense portion of a reservation of rights defense illusory. The insured receives no greater benefit than if its insurer had refused to defend outright. ¶27 National Surety argues that we approved its win-win option for insurers in our decisions in Truck Insurance and Kirk.

In Truck Insurance, we described a reservation of rights defense while seeking a declaratory judgment as “a means by which the insurer avoids breaching its duty to defend while seeking to avoid waiver and estoppel.” 147 Wn.2d at 761. Quoting Kirk, we then observed that “ ‘[w]hen that course of action is taken, the insured receives the defense promised and, if coverage is found not to exist, the insurer will not be obligated to pay.’ ” Id. (quoting Kirk, 134 Wn.2d at 563 n.3).

National Surety relies on ambiguity in the phrase “will not be obligated to pay” as supporting its contention that an insurer need not pay for defense costs incurred before a court determination of no coverage. ¶28 Taken in context, the language in Kirk and Truck Insurance does not support National Surety’s view. After obtaining a declaration of noncoverage, an insurer “will not be obligated to pay” from that point forward. Any other rule would be at odds with our observation that under a reservation of rights defense, “the insured receives the defense promised” — at least until the determination of noncoverage.

Kirk, 134 Wn.2d at 563 n.3 (emphasis added). If there were any question after Kirk and Truck Insurance that a reservation of rights defense must be a real defense, there is no question after Woo that “the insurer must bear the expense of defending the insured.” Woo, 161 Wn.2d at 54. ¶29 If National Surety were allowed to recover defense costs, its “offer” to defend would serve solely to protect itself from claims of breach while placing the full risk of a determination of noncoverage on its insured. This provides no security to the insured.

As the Third Circuit Court of Appeals has explained: A rule permitting such recovery would be inconsistent with the legal principles that induce an insurer’s offer to defend under reservation of rights. Faced with uncertainty as to its duty to indemnify, an insurer offers a defense under reservation of rights to avoid the risks that an inept or lackadaisical defense of the underlying action may expose it to if it turns out there is a duty to indemnify. At the same time, the insurer wishes to preserve its right to contest the duty to indemnify if the defense is unsuccessful.

Thus, such an offer is made at least as much for the insurer’s own benefit as for the insured’s. If the insurer could recover defense costs, the insured would be required to pay for the insurer’s action in protecting itself against the estoppel to deny coverage that would be implied if it undertook the defense without reservation. Terra Nova Ins.

Co. v. 900 Bar, Inc., 887 F.2d 1213, 1219-20 (3d Cir. 1989) (footnote and citations omitted). ¶30 Additionally, allowing recoupment to be claimed in a reservation of rights letter would allow the insurer to impose a condition on its defense that was not bargained for. “The question as to whether there is a duty to defend an insured is a difficult one, but because that is the business of an insurance carrier, it is the insurance carrier’s duty to make that decision.

If an insurance carrier believes that no coverage exists, then it should deny its insured a defense at the beginning instead of defending and later attempting to recoup from its insured the costs of defending the underlying action. Where the insurance carrier is uncertain over insurance coverage for the underlying claim, the proper course is for the insurance carrier to tender a defense and seek a declaratory judgment as to coverage under the policy.

However, to allow the insurer to force the insured into choosing between seeking a defense under the policy, and run the potential risk of having to pay for this defense if it is subsequently determined that no duty to defend existed, or giving up all meritorious claims that a duty to defend exists, places the insured in the position of making a Hobson’s choice. Furthermore, endorsing such conduct is tantamount to allowing the insurer to extract a unilateral amendment to the insurance contract.

If this became common practice, the insurance industry might extract coercive arrangements from their insureds, destroying the concept of liability and litigation insurance.” Midwest Sporting Goods, 828 N.E.2d at 1102 (quoting Shoshone First Bank, 2 P.3d at 516). Forcing an insured to make this “Hobson’s choice” is inconsistent with our holding in Tank, which requires an insurer to give its insured’s interests equal consideration. See Tank, 105 Wn.2d at 385-86. ¶31 Disallowing recoupment in this instance does not leave insurers without options to protect their interests.

An insurer is not forced to undertake a defense if it believes the claims asserted against the insured are not covered at all. See id. at 391. Here, however, National Surety did choose to defend Immunex, following the reservation of rights approach our precedent allows. It cannot claim the benefits of doing so and simultaneously avoid the costs. ¶32 We hold that insurers may not seek to recoup defense costs incurred under a reservation of rights defense while the insurer’s duty to defend is uncertain.

Accordingly, National Surety may be held responsible for the reasonable defense costs incurred by its insured until the trial court determined National Surety had no duty to defend. ¶33 We next consider whether National Surety’s duty to defend may be excused because of Immunex’s untimely tender of the claims. C. Under What Circumstances Does an Insured’s Late Tender Relieve the Insurer of Its Duty To Defend? ¶34 National Surety argues it cannot be held to pay for defense costs when Immunex breached the policy by providing late notice of the underlying litigation. There are two components to its argument.

First, National Surety argues that no duty to defend arises until a claim is tendered, and therefore it cannot be responsible for defense costs incurred before this point. Second, it contends that Immunex’s late tender caused prejudice as a matter of law so that it is entitled to

summary judgment relieving it of any responsibility for defense costs. ¶35 In support of its argument that no duty to defend arose before tender, National Surety cites to Leven, 97 Wn. App. 417. There, this court noted that “an insurer’s duty to defend does not arise unless the insured specifically asks the insurer to undertake the defense of the action.” Id. at 426-27. National Surety interprets this language to mean that an insurer is exempt from paying pre-tender defense costs.

But Leven clearly states that an insured’s late tender in violation of the insurance contract does not relieve the insurer of its duty to defend unless it proves actual and substantial prejudice from late notice. Id. at 427. ¶36 Leven is consistent with our decision in Mutual of Enumclaw Insurance Co. v.

USF Insurance Co., 164 Wn.2d 411, 421, 191 P.3d 866 (2008), which recognized that “[t]he duties to defend and indemnify do not become legal obligations until a claim for defense or indemnity is tendered.” (Footnote omitted.) National Surety seems to interpret this statement to mean that it cannot be legally obligated to pay pre-tender defense costs. All that USF establishes, however, is that a “ ‘breach of the duty to defend cannot occur before tender.’ ” Id. (quoting Griffin v. Allstate Ins. Co., 108 Wn. App. 133, 141, 29 P.3d 777, 36 P.3d 552 (2001)).

In noting that the duty to defend is not a legal obligation until tender, the court was stating the rather obvious proposition that in terms of timing, the duty to defend or indemnify is not legally enforceable until the insured has apprised its insurer that it seeks its performance. Nothing in our opinion in USF suggests that pre-tender defense costs are not recoverable once tender has been made. ¶37 In fact, the duty to defend arises not at the moment of tender but upon the filing of a complaint alleging facts that could potentially require coverage. Truck Ins. Exch., 147 Wn.2d at 760.

As the Court of Appeals noted in Griffin, “Certainly breach of the duty to defend cannot occur before tender. The scope of a duty, however, is defined not by its breach, but by the contract.” 108 Wn. App. at 141. Accordingly, an insured can recover pre-tender fees and costs except where a late tender prejudiced the insurer. Id. at 139. ¶38 As in other contexts involving breach of policy provisions by the insured, the insurer must show that late notice actually and substantially prejudiced its interests before performance of its duties will be excused.

USF, 164 Wn.2d at 426. “Prejudice” means a damage or detriment to one’s legal claims. Black’s Law Dictionary 1299 (9th ed. 2009). In line with this definition, to establish prejudice an “insurer must prove that an insured’s breach of a notice provision had an identifiable and material detrimental effect on its ability to defend its interests.” USF, 164 Wn.2d at 430. This rule will require a different showing depending on the interest at stake. See id.

Several of the factors mistakenly seized upon by the dissent as free-floating “equitable considerations” are in fact relevant to a showing of actual and substantial prejudice. See dissent at 901 (failure to cooperate with the insurer or comply with policy terms), 902 (long delay). ¶39 National Surety insists that Immunex’s late tender caused prejudice as a matter of law.

In this regard, National Surety argues that “prejudice to the insurer is established as a matter of law when, as here, an insured selectively delays tender of a claim for years in order to control the defense and settlement of the claims without the consent of the insurer.” Br. of Resp’t/Cross-Appellant at 45-46. ¶40 It is possible a declaratory judgment might have been obtained much earlier had Immunex promptly tendered the defense. However, in its alternative motion for

summary judgment, National Surety asserted it was not liable for any defense costs. Simply showing that tender was late fails to establish, as a matter of law, that timely tender would have prevented incurring any defense costs. Indeed, the fact that National Surety offered to pay for Immunex’s defense cuts against this contention: it is clear that National Surety would have incurred some defense costs, regardless of the time of tender. Discovery remains to be conducted, and questions of prejudice generally involve disputed facts. See USF, 164 Wn.2d at 427 (“Whether or not late notice prejudiced an insurer is a question of fact, and it will seldom be decided as a matter of law”).

Summary judgment on the question of prejudice is inappropriate. Ill CONCLUSION ¶41 When an insurer undertakes to defend its insured under a reservation of rights, it must pay defense costs until it obtains a judicial declaration that it owes no duty to defend. It cannot unilaterally disavow its financial responsibility in a reservation of rights letter.

An insurer who owes a duty to defend may nonetheless be excused from its obligation to the extent it demonstrates actual and substantial prejudice flowing from its insured’s untimely tender of the claim. ¶42 We affirm the trial court’s orders requiring National Surety to reimburse Immunex for reasonable defense fees incurred before the determination of no coverage and denying

summary judgment on the late tender question. We remand for further proceedings consistent with this opinion. C. Johnson, Owens, and Fairhurst, JJ., and Chambers, J. Pro Tem., concur. Immunex Corporation merged with Amgen Corporation in 2002. We are aware of contrary dicta in Holly Mountain Resources, Ltd. v. Westport Insurance Corp., 130 Wn. App. 635, 652 n.8, 104 P.3d 725 (2005), which appears to support National Surety’s position.

There, the court posited that “[a] reservation of rights is a means by which the insurer conditionally defends its insured, subject to potential reimbursement by the insured upon later discovery that there was no duty to defend.” Id. We disaffirm this language in Holly Mountain in line with our holding. In doing so, we note that our state’s leading insurance law treatise refers to Holly Mountain’s suggestion that reimbursement is allowed under a unilateral reservation of rights as “erroneous [ ] ” and “wholly inconsistent” with the principles articulated in Tank. Thomas V.

Harris, Washington Insurance Law § 17.01, at 17-1, 17-2 (3d ed. 2010). It makes no difference that National Surety never actually paid any defense costs before the declaration of noncoverage on April 14, 2009. We agree with the Court of Appeals that this fact “cannot support a different result here than in a case where the insurer had already provided a defense.” Immunex, 162 Wn. App. at 777. Notably, National Surety’s reservation of rights letter recognized its need to establish prejudice before being excused from its duty to defend based on the untimely tender.

See, e.g., CP at 1067 (“[T]o the extent that breach of the policy conditions caused prejudice to [National Surety] — and it seems likely that [National Surety] has been prejudiced by the late notice — Immunex has forfeited coverage under the policies.”); CP at 1074 (“To the extent Immunex’s breach of those conditions has caused prejudice to [National Surety], the breach will result in a loss of coverage.”). National Surety argued Immunex forfeited its right to coverage by belatedly tendering the defense of the average wholesale pricing litigation. CP at 1170, 1177.

As already discussed, however, an insured’s breach of a policy provision does not result in a forfeiture unless, and then only to the extent that, the breach prejudices the insurer.