Court Opinion

ID: 4706589
Source: CourtListenerOpinion
Date Created: 2021-07-26 22:41:50.907631+00
Date Added: 2024-06-11T08:06:37.551291
License: Public Domain

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       FILE
                
                IN CLERKS OFFICE
                                     
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                    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:

                                               16