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~· Ronald R. C rpe W31' ~uprame Court Clark
IN THE SUPREME COURT OF THE STATE OF WASHINGTON
EXPEDIA, INC., a Washington corporation; ) EXPEDIA, INC., a Delaware corporation; ) No. 88673-3 HOTELS.COM, L.P., a Texas limited liability ) partnership; HOTELS.COM, GP, LLC, a ) Texas limited liability company; HOTWIRE, ) INC., a Delaware corporation; ) TRAVELSCAPE, a Nevada limited liability ) company, ) ) Petitioners, ) ) v. ) EnBanc ) STEADFAST INSURANCE COMPANY, a ) Delaware corporation; ZURICH AMERICAN ) INSURANCE COMPANY, a New York ) corporation; ROYAL & SUN ALLIANCE, a ) foreign corporation; ARROWPOINT ) CAPITAL CORP., a Delaware corporation; ) ARROWOOD SURPLUS LINES ) INSURANCE COMPANY, a Delaware ) corporation; ARROWOOD INDEMNITY ) COMPANY, a Delaware corporation, ) ) Respondents. ) Filed JUL 0 3 2014 _____________________________)
MADSEN, C.J.-Petitioners seek adjudication of their summary judgment
motion concerning their insurers' duty to defend them in cases brought by local
taxing authorities. They further request a stay of discovery in the coverage action
that may prejudice them in the underlying litigation. No. 88673-3
We hold that the trial court erred by delaying adjudication of Zurich's 1
duty to defend Expedia. We accordingly vacate the trial court's August 20, 2012
order. We remand to the trial court to determine Zurich's duty to defend Expedia
in each of the 54 underlying cases subject to Expedia's motion. 2 The trial court is
further ordered to stay discovery in the coverage action until it can make a factual
determination as to which parts of discovery are potentially prejudicial to Expedia
in the underlying actions. All discovery logically related to the underlying claims
should be stayed until such claims are fully adjudicated.
FACTS AND PROCEDURAL HISTORY
Expedia has been subject to approximately 80 underlying lawsuits by
states, counties, and municipalities (collectively, taxing authorities) for
purportedly failing to collect the right amount of local occupancy taxes from its
hotel customers. Expedia tendered most of the suits to Zurich, although some
were tendered late. Zurich refused to defend Expedia on a number of grounds,
including late tender and that the underlying suits may be excluded from the
1 Following the parties' convention, we refer to respondent insurers collectively as "Zurich" because Zurich is most central to the facts of this case. Similarly, we refer to the petitioner insureds collectively as "Expedia." 2 See Clerk's Papers (CP) at 409-16 for a list ofthe 63 underlying cases tendered to Zurich. Zurich's summary judgment motion concerns 54 of those cases. The motion specifically seeks to enforce Zurich's duty to defend under the two policies ... with respect to 54 of the underlying actions, and seeks to hold Zurich accountable for its bad faith conduct and CPA [Consumer Protection Act, ch. 19.86 RCW,] violations. Expedia does not seek summary judgment against Zurich under the two policies at issue with respect to the City of Los Angeles, City of Chicago, City of Philadelphia, and Expedia v. City ofNew York Department of Finance actions. CP at 1908.
2 No. 88673-3
policies' coverage. The trial court has declined to make a determination of
Zurich's duty to defend Expedia, instead ordering discovery that Expedia claims
may be prejudicial to the underlying actions.
Expedia applies local occupancy tax rates to the discounted rate it
negotiates with hotels rather than the total price paid by the customer, including
fees. Whether this is the proper calculation for local occupancy taxes is central to
the underlying actions. Many taxing authorities have claimed that Expedia should
have applied the tax rate to the retail rate charged to customers rather than the net
rate paid to the hotels. The taxing authorities generally seek damages,
compensatory damages, or other monetary relief, although some seek equitable
relief such as the imposition of constructive trusts.
Expedia procured liability insurance from a number of insurers between
May 2006 and October 2009. Only two of the policies are still at issue: EOL
5329302-02, issued for the October 1, 2005 to October 1, 2006 policy period, and
EOL 5329302-03, issued for the October 1, 2006 to October 1, 2007 policy period.
The policies provide Expedia with coverage for any liability for "[d]amages
arising out of a negligent act or negligent omission ... in the conduct of Travel
Agency Operations." Clerk's Papers (CP) at 4147,4180. The policies further
specify that Zurich has a "duty to defend any Suit against [Expedia] seeking
Damages." !d. at 4147. Under the policies' definitions sections,
Damages means the monetary portion of any judgment, award or settlement provided .... Damages do not include:
3 No. 88673-3
1. Punitive, exemplary, or multiple damages; 2. Criminal or civil fines, penalties (statutory or otherwise), fees or sanctions; 3. Matters deemed uninsurable; 4. Any form of non-monetary; equitable or injunctive relief; or 5. Restitution, return or disgorgement of any fees, funds or profits.
!d. at 4152-53,4185. The policies require Expedia to notify Zurich "as soon as
practicable of an Occurrence, a negligent act or negligent omission or an offense."
!d. at 415 8, 4189. The policies also contain a number of exclusions, including
claims relating to the underpayment of applicable taxes and fraud. 3
By 2002, Expedia was aware that taxing authorities were questioning its
merchant model for collecting occupancy taxes. Expedia specifically disclosed
this potential problem to its shareholders in its 2002 and 2003 United States
Securities and Exchange Commission Form 10-K filings. The first case was filed
against Expedia on December 30, 2004. Expedia tendered the action to its
insurers on June 10, 2005. On June 23, 2005, the insurers denied coverage and
refused to provide a defense on a number of grounds, including that Expedia' s
actions were potentially willfully dishonest and thus excluded by specific policy
language.
In 2010 and 2011, Expedia tendered approximately 62 additional lawsuits
to its insurers, who again refused the tender. Expedia filed this action in
3 Expedia maintains that the policy exclusion for the underpayment of taxes does not apply to the situation at hand because Expedia has indisputably paid all of its own taxes. See id. at 1900-01. The taxes at issue here are owed by hotel occupants and collected by Expedia.
4 No. 88673-3
November 2010 against Zurich for declaratory judgment; insurance bad faith; and
a violation of Washington's Consumer Protection Act, chapter 19.86 RCW.
Zurich responded with a counterclaim for declaratory judgment that no coverage
exists and that there is no duty to defend or indemnify. Zurich also asserted
various defenses, including late tender, known loss, material misrepresentation,
and mistake.
Zurich moved for summary judgment, claiming that as a matter of law, the
lawsuits against Expedia do not seek damages on account of negligent acts or
omissions. Expedia moved for a CR 56( f) continuance in order to conduct
discovery concerning the meaning of the insurance contracts. Expedia specifically
sought depositions from the insurers' underwriters and claims handlers who were
likely to have information regarding the meaning of key policy terms at issue in
the summary judgment motions. Zurich agreed to the requested continuance and
produced four witnesses for deposition on underwriting and claims issues. Zurich
also sought discovery at this time.
The trial court denied Zurich's motion for summary judgment with respect
to Zurich American Insurance Company policy numbers EOL 5329302-02 and
EOL 5329302-03. Expedia then filed a motion for an order providing that Zurich
American Insurance Company had a duty to defend under the two remaining
policies because the underlying lawsuits contain one or more claims that are
potentially covered. The trial court declined to enter this order and instead entered
5 No. 88673~3
an order on March 2, 2012 denying Zurich American Insurance Company's
motion for summary judgment with respect to the two policies.
Expedia then filed a motion for summary judgment, seeking an
adjudication that Zurich has a duty to defend it. This motion was filed on
March 30, 2012 and has not yet been heard. Zurich moved for a CR 56(f)
continuance to seek discovery relating to, among other things, Zurich's alleged
late notice, misrepresentation, mistake, and known loss defenses. The trial court
granted the CR 56( f) motion and took Expedia's motion off the calendar. Expedia
subsequently provided some additional discovery to Zurich but declined to provide
other discovery on the grounds that the requested information is potentially
prejudicial to Expedia's interests in the underlying actions. Expedia then asked
the trial court to set a hearing date for its duty to defend motion while protecting it
from overlapping and potentially prejudicial discovery.
The trial court "agree[ d] with Expedia that there is a dangerous overlap
between the discovery seeking Expedia' s knowledge or intent regarding its
liability for the payment of the certain occupancy tax amounts." Report of
Proceedings (RP) (June 15, 2012) at 31. The court further noted that "[t]he
discovery that Expedia might be forced to give with regard[] to that issue could be
injurious to its interests" in the underlying cases. !d. The trial court, however,
ultimately declined to hear Expedia's duty to defend motion until discovery was
complete because it could not "conclude, as a matter of law, that this discovery is
6 No. 88673-3
not relevant to the [insurance] company's defenses." !d. at 31-32. On August 20,
2012, the trial court entered an order denying Expedia's motion to adjudicate its
summary judgment motion.
Expedia filed a motion for discretionary review in Division One of the
Court of Appeals. On March 11, 2013, the Court of Appeals denied discretionary
review of the trial court's August 20, 2012 order4 permitting Zurich to delay
adjudication ofExpedia's motion for summary judgment on the duty to defend.
Agreeing with the trial court, the Court of Appeals justified its denial on the basis
of the unique circumstances of the case, including Expedia's late tender. Expedia
then petitioned this court for discretionary review, which we granted. Expedia,
Inc. v. Steadfast Ins. Co., 177 Wn.2d 1020, 303 P.3d 1064 (2013).
ISSUES
Did the trial court err in delaying ruling on Zurich's duty to defend Expedia
from third-party lawsuits?
Did the trial court err in allowing discovery to proceed that was potentially
prejudicial to Expedia in third-party lawsuits?
4 While the August 20, 2012 order is the main trial court ruling at issue, Expedia also sought discretionary review of related trial court rulings. Zurich claims that the March 2, 20 12 order was not designated for review and thus the duty to defend issue is not properly before this court. Expedia's motion for discretionary review specifically designated the August 22, 2012 order "as well as all ancillary orders relating to the August 22, 2012 order." Pl./Pet'r's Mot. for Discretionary Review at 3. These trial court orders are in fact related and properly before this court. Furthermore, "we may consider orders not designated in the notice if review is 'demanded by the necessities of the case."' Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751, 763 n.6, 58 P.3d 276 (2002) (quoting RAP 2.4(a)).
7 No. 88673-3
STANDARD OF REVIEW
Legal issues affecting the scope of insurance coverage are reviewed de
novo. See Fluke Corp. v. Hartford Accident & Indem. Co., 145 Wn.2d 137, 143,
34 P .3d 809 (200 1). Language in an insurance policy is interpreted as a matter of
law, and construction of that language is reviewed de novo. Moeller v. Farmers
Ins. Co. of Wash., 173 Wn.2d 264,271,267 P.3d 998 (2011). Orders regulating
the timing and procedure of a case, such as orders related to discovery, generally
are reviewed for an abuse of discretion. See Cede!! v. Farmers Ins. Co. of Wash.,
176 Wn.2d 686, 695, 295 P.3d 239 (2013).
ANALYSIS
1. Duty to defend
This court has "long held that the duty to defend is different from and
broader than the duty to indemnify." Am. Best Food, Inc. v. Alea London, Ltd.,
168 Wn.2d 398, 404, 229 P.3d 693 (2010) (citing Safeco Ins. Co. ofAm. v. Butler,
118 Wn.2d 383, 392, 823 P.2d 499 (1992)). While the duty to indemnify exists
only ifthe policy covers the insured's liability, the duty to defend is triggered if
the insurance policy conceivably covers allegations in the complaint. I d. (citing
Woo v. Fireman's Fund Ins. Co., 161 Wn.2d 43, 53, 164 P.3d 454 (2007)). '"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."' Am. Best Food, 168 Wn.2d at 404-05 (internal quotation
8 88673-3 No.
marks omitted) (quoting Truck Ins. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751,
760, 58 P.3d 276 (2002)). Furthermore, exclusionary clauses in the insurance
contract '"are to be most strictly construed against the insurer."' !d. at 406
(quoting Phil Schroeder, Inc. v. Royal Globe Ins. Co., 99 Wn.2d 65, 68, 659 P.2d
509 (1983)).
It is a cornerstone of insurance law that an insurer may never put its own
interests ahead of its insured's. !d. at 405 (citing Mut. of Enumclaw Ins. Co. v.
T&G Constr., Inc., 165 Wn.2d 255, 269, 199 P.3d 376 (2008)). '"[T]he duty to
defend requires an insurer to give the insured the benefit of the doubt when
determining whether the insurance policy covers the allegations in the
complaint."' !d. at 412 (quoting Woo, 161 Wn.2d at 60). A court will construe an
ambiguous complaint liberally in favor oftriggering the duty to defend. Woo, 161
Wn.2d at 52 (quoting Truck Ins. Exch., 147 Wn.2d at 760). In Truck Insurance
Exchange, we held that "[ o]nee the duty to defend attaches, insurers may not
desert policyholders and allow them to incur substantial legal costs while waiting
for an indemnity determination." 147 Wn.2d at 761 (citing Kirk v. Mt. Airy Ins.
Co., 134 Wn.2d 558, 563, 951 P.2d 1124 (1998)). An insurer must accordingly
defend its insured until it is clear that a claim is not covered under the policy. Am.
Best Food, 168 Wn.2d at 405 (citing Truck Ins. Exch., 147 Wn.2d at 765).
The duty to defend generally is determined from the "eight corners" of the
insurance contract and the underlying complaint. There are two exceptions to this
9 No. 88673~3
rule, and both favor the insured. Woo, 161 Wn.2d at 53 (quoting Truck Ins. Exch.,
147 Wn.2d at 761). First, if coverage is not clear from the face ofthe complaint
but coverage could exist, the insurer must investigate and give the insured the
benefit of the doubt on the duty to defend. !d. Second, if the allegations in the
complaint conflict with facts known to the insurer or if the allegations arc
ambiguous, facts outside the complaint may be considered. !d. at 54. However,
these extrinsic facts may only be used to trigger the duty to defend; the insurer
may not rely on such facts to deny its defense duty. !d.
Washington law broadly views damages as '"sums of money"' owed when
a policyholder's "'acts or omissions affected adversely the rights of third parties."'
Boeing Co. v. Aetna Cas. & Sur. Co., 113 Wn.2d 869, 879, 784 P.2d 507 (1990)
(quoting U.S. Fid. & Guar. Co. v. Thomas Solvent Co., 683 F. Supp. 1139, 1168
(W.D. Mich. 1988)). Construing these insurance contracts liberally, as we must,
many of the underlying complaints appear to seek damages that could conceivably
be covered by the policies. The trial court appeared to recognize this, noting that
"there is under at least one conceivable theory a situation where Expedia could be
found to be liable under the underlying complaints, yet not have engaged in willful
misconduct." RP (Jan. 13, 20 12) at 82~83. The court also recognized that "given
that the cities do not have to prove intent, one of those theories, at least, would put
this more in the category of damages, rather than restitution." !d. at 81. Even so,
10 No. 88673-3
the court declined to adjudicate Expedia's motion for summary judgment and
instead stayed it pending further discovery.
It appears that the trial court erroneously conflated the duty to defend with
the duty to indemnify. Determining whether the duty to defend has been triggered
is a separate inquiry from whether an insurer may be relieved of its duty to defend
or indemnify due to a defense such as a claim of late tender by the insured. See
Nat'! Sur. Corp. v. Immunex Corp., 176 Wn.2d 872, 889, 297 P.3d 688 (2013). A
late tender defense to the duty to defend requires the insurer to prove that it was
"actually and substantially prejudiced" by the late tender. !d. at 890. Zurich
claims that Immunex stands for the proposition that discovery on the issue of
whether an insured's late notice has prejudiced the insurer is appropriate.
Accordingly, they assert that summary judgment on the duty to defend is
foreclosed in this case. This, however, is an incorrect reading of Immunex.
In Immunex, this court first resolved whether a determination of no
coverage applied retroactively to a reservation of rights defense. Only after
resolving this question did the court turn to the insurer's late tender defense and
address issues of actual prejudice. !d. at 878-80, 890-91. At most, Immunex
indicates that the actual prejudice question is relevant only to the late tender
defense and that actual prejudice caused by late tender may relieve the insurer of
the duty to pay the cost of defense incurred after the insurer obtains a judicial
declaration that it owes no duty to defend. Id. at 891.
11 No. 88673-3
Here, the trial court delayed adjudicating Zurich's motion for summary
judgment on its duty to defend because it believed that Zurich had a right to
discovery in order to help prove its defenses, including late tender. This was
incorrect. Instead, the trial court should have adjudicated the duty to defend issue.
Zurich could then attempt to prove its defenses, including prejudice from late
tender. In the meantime, however, Zurich should have been required to defend
Expedia if the court found that the duty to defend had been triggered. Unless
actual prejudice can be established by the insurer as a matter of law, an insurer's
allegations of prejudice cannot preclude a determination that the underlying claim
is conceivably covered.
2. Discovery
The trial court allowed Zurich discovery before it would hear Expedia's
summary judgment motion concerning Zurich's duty to defend. In support of its
argument that it should be permitted to discover and present extrinsic evidence
negating its duty to defend, Zurich primarily relies on Overton v. Consolidated
Insurance Co., 145 Wn.2d 417, 38 P.3d 322 (2002). In Overton, this court
considered extrinsic evidence that the insured was aware of pollution on his
property before purchasing the insurance policies in the course of determining that
there was no coverage. !d. at 429-31. The proposition for which Zurich cites
Overton is not stated in the majority opinion and is implicit only in the majority's
consideration of extrinsic evidence. Moreover, the opinion is not clear as to
12 88673-3 No.
whether the insured even objected to the insurer's reliance on extrinsic evidence.
See id.
Even if Overton is viewed as supporting Zurich's argument, the opinion
predates and conflicts with the extrinsic evidence rule as clarified in Truck
Insurance Exchange and its progeny. Truck Insurance Exchange is clear that the
duty to defend must be determined from the four corners of the complaint and the
four corners of the insurance policy. 147 Wn.2d at 761. The two exceptions to
this rule may be used only to trigger the duty to defend, not to foreclose it. Id.
It appears that no Washington courts have squarely considered the propriety
of allowing discovery in a duty to defend action that may prejudice the insured in
the underlying litigation. Expedia, however, cites two California cases which are
on point. 5 In Montrose Chemical Corp. of California v. Superior Court, the
California Supreme Court noted, "[t]o eliminate the risk of inconsistent factual
determinations that could prejudice the insured, a stay of the declaratory relief
action pending resolution of the third party suit is appropriate when the coverage
question turns on facts to be litigated in the underlying action." 6 Cal. 4th 287,
301, 24 Cal. Rptr. 2d 467 (1993). Two years later, the California Court of Appeal
5 Washington and California insurance law embrace many of the same basic principles. However, Washington law is even more restrictive than California as to what evidence an insurer may use to defeat a showing that the duty to defend has been triggered. California, unlike Washington, permits an insurer to rely on facts extrinsic to the complaint to defeat a defense duty. Compare Haskel, Inc. v. Superior Court, 33 Cal. App. 4th 963, 975, 39 Cal. Rptr. 2d 520 (1995), with Woo, 161 Wn.2d at 53. Even in California, the insurer must defend until those facts are developed and may not deny the duty to defend or delay adjudication of such a duty in order to pursue discovery to develop those facts. Haskel, 33 Cal. App. 4th at 976-77.
13 88673-3 No.
decided Haske!, Inc. v. Superior Court, 33 Cal. App. 4th 963, 975, 39 Cal. Rptr.
2d 520 (1995). The case presented an almost identical question to the discovery
issue in this case. !d. at 968.
Expedia urges us to follow Haskel's lead concerning discovery in duty to
defend actions. In that case, corporations brought a declaratory action against
their insurers to determine coverage. !d. at 971. They then filed a motion for
summary judgment. !d. at 972. The trial court ordered the motion to be taken off
the calendar and that the motion could not be refiled until the insureds complied
with the insurers' discovery requests. !d. at 973. The insureds then sought a writ
of mandate to vacate the order and stay all discovery that was logically related to
the underlying actions. !d.
The court concluded that Haskel was entitled to have its summary judgment
motion adjudicated concerning the duty to defend. If a showing of potential
coverage was made and the insurers did not produce undisputed evidence that
conclusively eliminated any possibility of coverage, the motion was to be granted.
The court also concluded that Haskel was entitled to a stay of prejudicial
discovery. !d. at 969. The court recognized that the trial court erred by
conditioning Haskel's right to have its summary judgment motion heard upon its
compliance with the insurer's discovery demands. !d. at 978.
We find Haske! persuasive and agree that an adjudication of the duty to
defend cannot be delayed by discovery. Here, the trial court erred by delaying
14 No. 88673-3
adjudication ofExpedia's summary judgment motion concerning the duty to
defend until Expedia complied with potentially prejudicial discovery.
CONCLUSION
We hold that the trial court erred by delaying adjudication of Zurich's duty
to defend Expedia. We accordingly vacate the trial court's August 20, 2012 order.
We remand to the trial court to determine Zurich's duty to defend Expedia in each
of the 54 underlying cases subject to Expedia's motion. The trial court is further
ordered to stay discovery in the coverage action until it can make a factual
determination as to which parts of discovery in the coverage action are potentially
prejudicial to Expedia in the underlying litigation. All discovery logically related
to the underlying claims should be stayed until such claims are fully adjudicated.
15 88673-3 No.
WE CONCUR: