Costco Wholesale Corp. v. Arrowood Indem. Co.

387 F.Supp.3d 1165

COSTCO WHOLESALE CORPORATION, Plaintiff,

v.ARROWOOD INDEMNITY COMPANY, Defendant.

NO. C17-1212RSL

United States District Court, W.D. Washington, at Seattle.

Signed March 25, 2019

Matthew J. Segal, Paul J. Lawrence, Nicholas William Brown, Pacifica Law Group LLP, Seattle, WA, for Plaintiff.

Alexander E. Potente, Clyde & Co. U.S. LLP, Seattle, WA, Curtis Darrow Parvin, Pro Hac Vice, Clyde & Co. U.S. LLP, Irvine, CA, James A. Taylor Meehan, Pro Hac Vice, Clyde & Co. U.S. LLP, San Francisco, CA, for Defendant.

ORDER REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT

Robert S. Lasnik, United States District Judge

This matter comes before the Court on the parties' cross-motions for summary judgment. Dkt. # 53 and # 65 (redacted versions of the motions are publicly available at Dkt. # 57 and # 62). Plaintiff alleges that defendant, the third layer excess insurer in an employment practices liability insurance tower, is obligated to pay losses plaintiff incurred in settling an employment discrimination class action and distributing the settlement funds. Plaintiff seeks a declaration that it is entitled to coverage and has asserted claims of breach of contract, bad faith, violations of the Washington Consumer Protection Act ("CPA"), and violations of the Insurance Fair Conduct Act ("IFCA"). Both parties request that judgment be entered in their favor.

Summary judgment is appropriate when, viewing the facts in the light most favorable to the nonmoving party, there is no genuine issue of material fact that would preclude the entry of judgment as a matter of law. The party seeking summary dismissal of the case "bears the initial responsibility of informing the district court of the basis for its motion" ( Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ) and "citing to particular parts of materials in the record" that show the absence of a genuine issue of material fact ( Fed. R. Civ. P. 56(c) ). Once the moving party has satisfied its burden, it is entitled to summary judgment if the non-moving party fails to designate "specific facts showing that there is a genuine issue for trial." Celotex Corp., 477 U.S. at 324, 106 S.Ct. 2548. The Court will "view the evidence in the light most favorable to the nonmoving party ... and draw all reasonable inferences in that party's favor." Krechman v. County of Riverside, 723 F.3d 1104, 1109 (9th Cir. 2013). Although the Court must reserve for the jury genuine issues regarding credibility, the weight of the evidence, and legitimate inferences, the "mere existence of a scintilla of evidence in support of the non-moving party's position will be insufficient" to avoid judgment. City of Pomona v. SQM N. Am. Corp., 750 F.3d 1036, 1049 (9th Cir. 2014) ; Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). Factual disputes whose resolution would not affect the outcome of the suit are irrelevant to the consideration of a motion for summary judgment. S. Cal. Darts Ass'n v. Zaffina, 762 F.3d 921, 925 (9th Cir. 2014). In other words, summary judgment should be granted where the nonmoving party fails to offer evidence from which a reasonable jury could return a verdict in its favor. FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509, 514 (9th Cir. 2010).

Having reviewed the memoranda, declarations, and exhibits submitted by the parties and having heard the arguments of counsel, the Court finds as follows:

BACKGROUND

In August 2004, a class action lawsuit was filed against Costco alleging gender discrimination in its promotion decisions. Costco had notified Arrowood's predecessor of a potential claim and promptly provided notice of the lawsuit when it was filed. In 2013, Costco notified Arrowood (and all of the other insurers in the insurance tower) that the parties were going to mediate the dispute and inquired if they planned to attend. Arrowood did not respond. All other insurers in the employment practices liability tower participated in the first round of mediation, including the insurer above Arrowood. As mediation progressed, Arrowood became aware that Costco had rejected an offer to settle the litigation in exchange for a lump-sum payment, instead preferring a process where each class member would prove her right to relief and her damages through individual litigation or arbitration. Arrowood offered no comments and asked no questions. Despite having made no independent effort to quantify or calculate Costco's overall exposure, Arrowood apparently assumed that Costco's total expenditures related to the lawsuit would be around $ 20 million based on the insured's July 26, 2013, estimate of its "Phase II" financial exposure. Dkt. # 54-4 at 2-4.¹ The estimated exposure was expressly limited in time and scope, however, and did not reflect known expenses such as Costco's and plaintiffs' costs and attorney's fees up to the time of settlement, the non-reversionary settlement amount, or the judgment and attorney's fees associated with the Sasaki trial.² By August 2013, Arrowood had (or would have had if it had made an effort to investigate Costco's claim) information showing that Costco's potential exposure exceeded the $ 35 million level at which Arrowood's excess policy would be triggered.

In October 2013, Costco agreed to settle the class action by making a non-reversionary payment of $ 8 million. Each class member would have the opportunity to challenge up to three promotion decisions in individual arbitration proceedings. Only economic damages and attorney's fees would be awarded to successful claimants in the arbitral proceedings, and the outcomes would be confidential. Costco would make an initial payment to cover anticipated administrative costs, but the remainder of the settlement fund would be paid out when the final arbitration award was entered.

Costco's liability to the class was fixed at $ 8 million regardless of how much the class members were awarded through arbitration. Costco neither sought nor obtained Arrowood's consent before entering into the settlement agreement.

The district court granted preliminary approval of the settlement on February 12, 2014. Approximately six weeks later, Arrowood closed its claim file with the following notation:

APPEARS CLAIM HAS SETTLED. It appears that the CLASS action has settled although the court approval has not been completely finalized. The exact amount of the settlement is unknown; however, we were never requested to attend a mediation or contribute to a settlement pool. The court order grant [sic] preliminary approval indicates that the named plaintiffs may bring an action in their own name outside of the class if they so choose.

As the expose [sic] of this claim appears to be contained within the underlying layers of coverage, I am closing this file. Linda Murray.

Dkt. # 58-20 at 2. At her deposition, Ms. Murray acknowledged that Costco had extended an open invitation to all of the insurers in the employment practices liability tower to attend the mediation. Dkt. # 63-1 at 304-05. Despite recognizing that the amount of the settlement was unknown, there is no indication that Ms. Murray attempted to calculate Costco's past and potential outlays before closing the claim file.

Final approval of the settlement agreement occurred in May 2014. Between July 2014 and July 2015, Costco sent Arrowood (and the other insurers) at least eleven communications mostly regarding the status of the Sasaki proceedings, but also notifying Arrowood of the number of claims to be arbitrated, progress in effectuating programmatic relief, and the resolution of an outstanding issue regarding the scope of the class. There is no indication that Costco provided Arrowood with any invoices or updated estimates regarding the cost of the arbitral proceedings as they progressed. Costco neither sought nor obtained Arrowood's consent before incurring post-settlement fees and costs. Arrowood did not respond to the communications from Costco.

In March 2017, Costco notified Arrowood that the underlying layers of coverage would soon be exhausted. By that time, Costco had incurred almost $ 32 million in fees and costs since the underlying lawsuit was filed (Dkt. # 56-2 at 26) and had completed approximately 60% of the post-settlement arbitrations. Arrowood issued revised coverage letters pointing out that Costco had not obtained Arrowood's consent to the claims-arbitration process, stating that the expenses related to the on-going arbitrations were unreasonable and did not constitute "Loss" under the policy, indicating that it was proceeding under a full reservation of its rights, and requesting additional information. This coverage suit was filed on July 25, 2017.

The underlying policy limits were exhausted in April 2018, and Arrowood began reimbursing Costco for its arbitration-related expenses, totaling $ 565,898.54.³ When the final arbitration award was entered, Costco requested and Arrowood paid the $ 7,945,000 balance of the settlement amount. Arrowood made all payments while reserving its right to recover the amounts paid if it prevails in this litigation.

DISCUSSION

A. Prior Consent

The Arrowood policy generally follows the form of the primary policy issued by AIG. The AIG policy provides that the insurers will pay "the Loss of" the insured, a term that is defined to include "Defense Costs." Dkt. # 58-2 at 4 and 6. "Defense Costs" mean the "reasonable and necessary fees, costs and expenses consented to by the Insurer ... resulting solely from the investigation, adjustment, defense and appeal of a Claim against the Insureds ...." Dkt. # 58-2 at 5 (emphasis added). The policy further provides:

The Insureds shall not admit or assume any liability, enter into any settlement agreement, stipulate to any judgment, or incur any Defense Costs without the prior written consent of the Insurer. Only those settlements, stipulated judgments and Defense Costs which have been consented to by the Insurer shall

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