 FILE
  IN CLERKS OFFICE
                                                            This opinion was filed for record
                                                            at 9)•, <20 g ro on .:ru l'f 3. 2o t'1


                                                                 ~·
                                                                 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
No. 88673-3


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
No. 88673-3


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
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.

       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
No. 88673-3




WE CONCUR:




              16
