# FILE IN CLERKS OFFICE This 

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### C rpe W31'**~uprame** Court Clark IN THE SUPREME COURT OF THE STATE OFWASHINGTON EXPEDIA, INC., a Washington corporation; ) EXPEDIA, INC., a Delaware corporation; ) 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. ) ) STEADFASTINSURANCE COMPANY, a ) Delaware corporation; ZURICHAMERICAN ) INSURANCE COMPANY, aNew York ) corporation; ROYAL & SUNALLIANCE, a ) foreign corporation; ARROWPOINT ) CAPITAL CORP., a Delaware corporation; ) ARROWOOD SURPLUS LINES ) INSURANCE COMPANY, a Delaware ) corporation; ARROWOOD INDEMNITY ) COMPANY, a Delaware corporation, ) ) Respondents. )



## _____________________________ ) No. 88673-3

EnBanc

Filed 

## JUL 032014

MADSEN, C.J.-Petitioners seek adjudication oftheir summaryjudgment motion concerning their insurers' duty to defend them in cases broughtby local taxing authorities. They further request a stay ofdiscovery in the coverage action that may prejudicethem in the underlying litigation.No. 88673-3
We hold thatthe trial court erred by delaying adjudication ofZurich's 1 duty to defend Expedia. We accordingly vacate the trial court's August 20, 2012 order. We remand to the trial courtto determine Zurich's duty to defend Expedia in each ofthe 

### 54 underlying cases subjectto Expedia's motion. 2 The trial court is further ordered to stay discovery in the coverage action until itcan make a factual determination as to whichparts ofdiscovery are potentially prejudicial to Expedia in the underlying actions. All discovery logically relatedto the underlying claims should be stayed until such claims are fully adjudicated. FACTS AND PROCEDURAL HISTORY Expediahas been subjectto approximately 80 underlying lawsuits by states, counties, and municipalities (collectively, taxing authorities) for purportedly failing to collectthe right amount oflocal occupancytaxes from its hotel customers. Expediatendered most ofthe suits to Zurich, although some
were tendered late. Zurich refused to defend Expediaon a number ofgrounds, including late tender and thatthe underlying suits may be excluded from the
1Following the parties' convention, we refer to respondent insurers collectively as "Zurich" because Zurich is most central to the facts ofthis 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 summaryjudgmentmotion concerns 54 ofthose cases. The motion specifically seeks to enforce Zurich's duty to defend under the two policies
... with respect to 54 ofthe 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 summaryjudgment 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 of New YorkDepartment of Finance actions. CP at 1908. 

### 2No. 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 beprejudicialto the underlying actions. Expedia applies local occupancy tax rates to the discounted rate it negotiates with hotels rather than the total pricepaidby the customer, including fees. Whether this is the proper calculation for local occupancy taxes is central to the underlying actions. Many taxing authorities have claimedthat 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 othermonetary relief, although some seek equitable reliefsuch as the imposition ofconstructive trusts. Expediaprocured liability insurance from a number ofinsurers between May 2006 and October 2009. Only two ofthe 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 policyperiod. The policies provideExpediawith coverage for any liability for "[d]amages arising out ofanegligent act or negligent omission
... in the conduct ofTravel Agency Operations." Clerk's Papers (CP) at 4147,4180. Thepolicies further specify that Zurich has a "dutyto defend any Suit against [Expedia] seeking Damages." 

### !d. at 4147. Underthe policies' definitions sections, Damages means the monetary portion ofanyjudgment, award or settlementprovided
....Damages do not include:


### 3No. 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 ofnon-monetary; equitable or injunctive relief; or 5. Restitution, return or disgorgement ofany fees, funds or profits. 

### !d. at 4152-53,4185. Thepolicies require Expediato notify Zurich "as soon as practicable ofan Occurrence, a negligent act or negligent omission or an offense." 

### !d. at 4158, 4189. Thepolicies also contain a number ofexclusions, including claims relating to the underpayment ofapplicable taxes and fraud.3 By 2002, Expediawas aware thattaxing authorities were questioning its merchant model for collecting occupancytaxes. Expedia specifically disclosed this potential problem to its shareholders in its 2002 and 2003 United States Securities and Exchange CommissionForm 10-K filings. The first case was filed against Expedia on December 30, 2004. Expediatendered the action to its insurers on June 10, 2005. OnJune 23, 2005, the insurers denied coverage and refused to provide a defense on a number ofgrounds, including that Expedia's actions werepotentially willfully dishonest andthus excludedby specificpolicy language. In 2010 and 2011, Expediatendered approximately 62 additional lawsuits to its insurers, who again refused the tender. Expedia filed this action in

3 Expediamaintains that the policy exclusionfor the underpayment oftaxes does not apply to the situation at hand because Expediahas indisputablypaid all ofits owntaxes. 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 againstZurich for declaratoryjudgment; insurance bad faith; and
aviolation ofWashington's Consumer Protection Act, chapter 19.86 RCW. Zurich responded with a counterclaim for declaratoryjudgmentthat no coverage exists and thatthere is no duty to defend or indemnify. Zurich also asserted various defenses, including late tender, known loss, material misrepresentation, and mistake. Zurich moved for summaryjudgment, claiming that as a matter oflaw, the lawsuits against Expedia do not seek damages on account ofnegligent acts or omissions. Expedia moved for a CR 56(f) 

### continuance in orderto conduct discovery concerning the meaning ofthe insurance contracts. Expedia specifically sought depositions from the insurers' underwriters and claims handlers who were likely to have information regarding the meaning ofkey policy terms at issue in the summaryjudgmentmotions. 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 summaryjudgmentwith respect to Zurich American Insurance Company policy numbers EOL 5329302-02 and EOL 5329302-03. Expediathen filed a motion for an orderproviding 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 enterthis order and instead entered



### 5No.**88673~3**



### an order on March 2, 2012 denying ZurichAmerican Insurance Company's motion for summaryjudgmentwith respect to the two policies. Expediathen filed a motion for summaryjudgment, seeking an adjudication thatZurich has a duty to defend it. This motion was filed on March 30, 2012 and has not yetbeen heard. Zurich moved for a CR 56(f) continuance to seek discovery relating to, among otherthings, Zurich's alleged late notice, misrepresentation, mistake, and known loss defenses. The trial court granted the CR 56(f) motion and tookExpedia's motion offthe calendar. Expedia subsequently provided some additional discovery to Zurich but declinedto provide other discovery on the grounds thatthe requested information is potentially prejudicial to Expedia's interests in the underlying actions. Expediathen asked the trial court to set ahearing date for its duty to defend motion while protecting it from overlapping and potentiallyprejudicial discovery. The trial court "agree[d] with Expediathat there is a dangerous overlap between the discovery seeking Expedia'sknowledge or intentregarding its liability for the payment ofthe 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. Thetrial court, however, ultimately declined to hear Expedia's duty to defend motion until discovery was complete because it couldnot "conclude, as a matter oflaw, thatthis discovery is



### 6No. 88673-3

notrelevant to the [insurance] company's defenses." 

### !d. at 31-32. On August 20, 2012, the trial court entered an order denying Expedia's motionto adjudicate its summaryjudgmentmotion. Expedia filed a motion for discretionary review in Division One ofthe Court ofAppeals. OnMarch 11, 2013, the Court ofAppeals denied discretionary review ofthe trial court's August 20, 2012 order4permitting Zurich to delay adjudication ofExpedia's motion for summaryjudgmenton the duty to defend. Agreeing with the trial court, the Court ofAppealsjustified its denial on the basis ofthe unique circumstances ofthe case, including Expedia's late tender. Expedia then petitionedthis court for discretionaryreview, which we granted. Expedia, Inc. v. SteadfastIns. Co., 177 Wn.2d 1020, 303 P.3d 1064 (2013). ISSUES Didthe trial court err in delaying ruling onZurich's duty to defend Expedia from third-party lawsuits? Didthe trial court err in allowing discovery to proceedthatwas 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 ofrelated 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 inthe notice ifreview is 'demandedby the necessities ofthe case."' TruckIns. Exch. v. Vanport Homes, Inc., 147 Wn.2d 751, 763 n.6, 58 P.3d 276 (2002) (quoting RAP 2.4(a)).


### 7No. 88673-3
STANDARD OF REVIEW Legal issues affecting the scope ofinsurance coverage are reviewed de
novo. 

### See Fluke Corp. v. HartfordAccident & 

### 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 ofthat language is reviewed de novo. 

### Moeller v. Farmers Ins. Co. ofWash., 173 Wn.2d 264,271,267 P.3d 998 (2011). Orders regulating the timing andprocedure ofa case, such as orders related to discovery, generally
are reviewed for an abuse ofdiscretion. 

### See Cede!! v. FarmersIns. Co. ofWash., 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. BestFood, Inc. v. AleaLondon, Ltd., 168 Wn.2d 398, 404, 229 P.3d 693 (2010) (citing 

### Safeco Ins. Co. of Am. v. Butler, 118 Wn.2d 383, 392, 823 P.2d499 (1992)). While the duty to indemnify exists only ifthepolicy 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 FundIns. Co., 161 Wn.2d 43, 53, 164 P.3d 454 (2007)). '"The duty to defend arises when a complaint againstthe insured, construed liberally, alleges facts which could, ifproven, impose liability upon the insuredwithinthe policy's coverage."' 

### Am. BestFood, 168 Wn.2d at 404-05 (internal quotation



### 8No. 88673-3
marks omitted) (quoting TruckIns. Exch. v. VanportHomes, Inc., 147 Wn.2d 751, 760, 58 P.3d 276 (2002)). Furthermore, exclusionary clauses inthe insurance contract '"areto be most strictly construed againstthe insurer."'!d. at406 (quotingPhilSchroeder, Inc. 

### v. Royal Globe Ins. Co., 99 Wn.2d 65, 68, 659 P.2d 509 (1983)). It is a cornerstone ofinsurance lawthat an insurer may neverput its own interests ahead ofits insured's. !d. at 405 (citing Mut. of EnumclawIns. Co. v. T&G Constr., Inc., 165 Wn.2d 255, 269, 199 P.3d 376 (2008)). '"[T]he duty to defend requires an insurerto give the insured the benefit ofthe doubt when determining whetherthe 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 oftriggeringthe duty to defend. Woo, 161 Wn.2d at 52 (quoting TruckIns. Exch., 147 Wn.2d at 760). In TruckInsurance Exchange, we held that "[o]neethe 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. AiryIns. 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 underthe policy. Am. BestFood, 168 Wn.2d at 405 (citing TruckIns. Exch., 147 Wn.2d at 765). The duty to defend generally is determined from the "eight corners" ofthe insurance contract and the underlying complaint. There are two exceptions to this



### 9No.**88673~3** 

### rule, and both favor the insured. Woo, 

### 161 Wn.2d at 53 (quoting TruckIns. Exch., 

### 147 Wn.2d at 761). First, ifcoverage is not clear from the face ofthe complaint but coverage could exist, the insurer must investigate and give the insured the benefit ofthe doubt on the duty to defend. !d. 

### Second, ifthe allegations in the complaint conflictwith facts known to the insurer or ifthe 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 ofmoney"' owed when
apolicyholder's "'acts or omissions affected adversely the rights ofthirdparties."' 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 ofthe underlying complaints appear to seek damages that could conceivably be covered by the policies. The trial court appeared to recognize this, notingthat "there is under at least one conceivable theory a situation where Expedia could be found to be liable underthe underlying complaints, yet nothave 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 ofthose theories, at least, would put this more in the category ofdamages, rather than restitution." !d. 

### at 81. Even so,



### 10No. 88673-3
the court declined to adjudicate Expedia's motion for summaryjudgment and instead stayed it pending further discovery. It appears thatthe trial court erroneously conflated the duty to defend with the duty to indemnify. Determining whetherthe duty to defend has been triggered is a separate inquiry from whether an insurer may be relieved ofits duty to defend
or indemnify due to a defense such as a claim oflate 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 substantiallyprejudiced" by the late tender. 

### !d. at 890. Zurich claims that

### Immunex stands for theproposition that discovery on the issue of whether an insured's late notice has prejudiced the insurer is appropriate. Accordingly, they assertthat summaryjudgment on the duty to defend is foreclosed in this case. This, however, is an incorrectreading of

### Immunex. In

### Immunex, this court first resolved whether a determination ofno coverage applied retroactively to a reservation ofrights defense. Only after resolving this question did the courtturnto the insurer's late tender defense and address issues ofactual prejudice. 

### !d. at 878-80, 890-91. Atmost, 

### Immunex indicates that the actual prejudice question is relevant only to the late tender defense and that actual prejudice causedby late tender may relieve the insurer of the duty to paythe cost ofdefense incurred after the insurer obtains ajudicial declaration that it owes no duty to defend. 

### Id. at 891.



### 11No. 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 aright 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 beenrequired to defend Expedia ifthe court found thatthe duty to defend had been triggered. Unless actual prejudice can be established by the insurer as a matter oflaw, an insurer's allegations ofprejudice cannotpreclude a determination thatthe underlying claim is conceivably covered. 2. Discovery The trial court allowed Zurich discovery before it would hear Expedia's summaryjudgmentmotion concerning Zurich's duty to defend. In support ofits argument that it should be permittedto discover and present extrinsic evidence negating its duty to defend, Zurichprimarily relies on Overton v. Consolidated Insurance Co., 145 Wn.2d 417, 38 P.3d 322 (2002). In Overton, this court considered extrinsic evidence thatthe insured was aware ofpollution on his property before purchasingthe insurance policies in the course ofdetermining 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 ofextrinsic evidence. Moreover, the opinion is not clear as to

12No. 88673-3
whether the insured even objectedto the insurer's reliance on extrinsic evidence. See id. Even ifOverton is viewed as supporting Zurich's argument, the opinion predates and conflicts with the extrinsic evidencerule as clarified in Truck Insurance Exchange and its progeny. TruckInsurance Exchange is clearthat the duty to defend mustbe determined from the four corners ofthe complaint and the four corners ofthe insurance policy. 147 Wn.2d at 761. Thetwo exceptions to this rule may be used only to trigger the duty to defend, notto foreclose it. 

### Id. It appears that no Washington courts have squarely consideredthe propriety ofallowing discovery in a duty to defend actionthat mayprejudice the insured in the underlying litigation. Expedia, however, cites two Californiacases which are
onpoint. 5 InMontrose Chemical Corp. of California v. Superior Court, the California Supreme Court noted, "[t]o eliminate therisk ofinconsistent factual determinations that could prejudicethe insured, a stay ofthe declaratory relief action pending resolution ofthe third party suit is appropriate whenthe coverage question turns on facts to be litigated in the underlying action." 6 Cal. 4th 287, 301, 24 Cal. Rptr. 2d467 (1993). Two years later, the California Court ofAppeal

5 Washington and California insurance law embrace many ofthe 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 beentriggered. California, unlike Washington, permits an insurer to rely on facts extrinsic to the complaintto 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 ofsuch a duty in orderto pursue discovery to develop those facts. Haskel, 33 Cal. App. 4th at 976-77. 

### 13

### No. 88673-3 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. Expediaurges 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 summaryjudgment. 

### !d. at 972. The trial court ordered the motion to be taken off the calendar and thatthe motion could not be refiled until the insureds complied with the insurers' discovery requests. 

### !d. at 973. The insureds then sought awrit ofmandate to vacate the order and stay all discovery that was logically related to the underlying actions. 

### !d. The court concluded that Haskel was entitledto have its summaryjudgment motion adjudicated concerning the duty to defend. Ifa showing ofpotential coverage was made and the insurers did not produce undisputed evidence that conclusively eliminated any possibility ofcoverage, the motion was to be granted. The court also concludedthat Haskel was entitled to a stay ofprejudicial discovery. 

### !d. at 969. The court recognized thatthetrial court erred by conditioning Haskel's right to have its summaryjudgmentmotion heard upon its compliance withthe insurer's discovery demands. 

### !d. at 978. We find Haske! 

### persuasive and agree that an adjudication ofthe duty to defend cannot be delayed by discovery. Here, the trial court erred by delaying

14No. 88673-3 adjudication ofExpedia's summaryjudgmentmotion concerning the duty to defend until Expedia compliedwithpotentiallyprejudicial discovery. CONCLUSION Weholdthatthe trial court erredby delaying adjudication ofZurich'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 ofthe 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 ofdiscovery in the coverage action arepotentially prejudicial to Expediain the underlying litigation. All discovery logically related to the underlying claims should be stayeduntil such claims are fully adjudicated.



### 15No. 88673-3

WE CONCUR:



### 16