Selective Tender Rule Bars Contribution, Late Tender Rule Allows Subrogation

Mutual of Enumclaw Ins. Co. v. U.S.F. Ins. Co. (Wash. S. Ct., September 4, 2008).

The Washington Supreme Court decided that an insurer to which the insured did not tender its claim was not subject to contribution claims by other insurers, adopting the selective tender rule, but was subject to subrogation claims by those insurers, which obtained assignment of the insured’s rights, under the late tender rule.

A condominium homeowners’ association brought construction defect claims against developer Dally Homes in the spring of 2000. Dally tendered the claims to at least two of its insurers, Mutual of Enumclaw (MOE) and Commercial Underwriters Insurance Company (CUIC). Dally intentionally did not tender the claims to USF. MOE and CUIC agreed to fund a settlement with the homeowners’ association in January 2002. As part of the settlement, Dally assigned its rights against its other insurers to MOE and CUIC.

In February 2004, after completing contribution litigation against other insurers, MOE and CUIC discovered Dally’s USF policy. MOE and CUIC sued USF claiming subrogation and equitable contribution. Without distinguishing between the subrogation and contribution claims, the trial court granted summary judgment to USF under the “selective tender” rule, which states that, where an insured has not tendered a claim to an insurer, that insurer is excused from its duty to perform under the policy or to contribute to a settlement of the claim.

Like the trial court, the court of appeals did not distinguish between the subrogation and contribution claims. But the court of appeals reversed the trial court and held that the selective tender rule was incompatible with Washington’s “late tender” rule. The late tender rule states that, even where an insured fails to give an insurer timely notice of a claim, the insurer is not relieved of its obligations under the policy unless it can show actual and substantial prejudice. The court reasoned that the selective tender rule did not bar any of MOE and CUIC’s claims where they obtained assignment of the insured’s rights and could invoke the late tender rule.

Finding the distinction between the subrogation and contribution claims to be “critical,” the supreme court affirmed the court of appeals as to the subrogation claims but reversed as to the contribution claims.

First analyzing the equitable contribution claims, the court observed that contribution “is a right of the insurer and is independent of the rights of the insured.” The court adopted the selective tender rule, reasoning that it preserves the insured’s right not to tender to a particular insurer. An insured might exercise that right for various reasons, such as to avoid a premium increase or to preserve its policy limits for other claims. Distinguishing the late tender rule, the court held that “[t]he ‘late tender’ rule, which allows an insured to tender at any time (subject to prejudice analysis) is of no help to an insurer, who never had the right to tender at all.” (Emphasis in original.)

The court held that the late tender rule did apply to MOE and CUIC’s subrogation claims. Because MOE and CUIC obtained assignment of Dally’s rights, they could invoke the late tender rule in seeking subrogation against USF. USF argued that the late tender rule did not apply because it was prejudiced as a matter of law, but the court disagreed and stated that USF had “not shown how [the] delay specifically deprived it of the ability to put forth defenses to coverage or to contest the value of the damages, etc.”