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ruling in case regarding reasonableness of counsel's fees that law firm need not turn over documents evidencing the work or services it performed, but must turn over "the underlying time sheets, time records, work-in-progress summaries, etc. that were used to create the invoices"
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CASE NO. C01-1815C
February 13, 2003
ORDER
This matter comes before the Court on plaintiffs Motion for Reconsideration of Partial Summary Judgment (Dkt. No. 140), and on the parties' Cross-Motions for Partial Summary Judgment on Bad Faith, Violation of the Consumer Protection Act, and Coverage by Estoppel (Dkt. Nos. 50, 113). For the reasons described below, plaintiffs motion for reconsideration is DENIED, plaintiffs motion for partial summary judgment is GRANTED in part and DENIED in part, and defendant's motion for partial summary judgment is DENTED.
I. BACKGROUND
The instant suit between Microsoft Corporation ("Microsoft") and Federal Insurance Company ("Federal") relates to the $96.885 million Microsoft paid to settle the Vizcaino, et al. v. Microsoft Corp., et al., No. 93-0178D, and Hughes, et al. v. Microsoft Corp., et al., No. 98-1646R (collectively, Vizcaino) class action lawsuits by former temporary workers. Prior to 1989, Microsoft supplemented its permanent workforce with "freelancers," who were either independent contractors or employees of third-party temporary agencies. Unlike Microsoft's permanent employees, Microsoft did not withhold taxes for these temporary workers or provide them with benefits under the Savings Plus Plan ("SPP") or Employee Stock Purchase Plan ("ESPP") programs. After Microsoft changed its treatment of the freelaneers for tax purposes, the Vizcaino plaintiffs asserted that they should have been offered the opportunity to participate in the SPP and ESPP benefit programs. They brought suit in 1992 and 1998 when Microsoft refused their request. After the Ninth Circuit reversed the District Court's grant of" summary judgment in favor of Microsoft, the parties ultimately reached a settlement of $96.885 million,
Federal issued to Microsoft the following three insurance policies: (1) Fiduciary Liability Policy with a $2 million per loss per policy year limit ("Fiduciary policy"); (2) a $1 million Commercial General Liability Insurance Policy, which provided Employee Benefit Programs Administration Error or Omissions Insurance ("EBL policy"); and (3) a $25 million Commercial Umbrella Liability Policy in excess of coverage of the EBL policy ("Excess policy"). The Excess policy was in effect for the same dates and provided coverage under the same terms as the EBL policy. The parties are in agreement that the Fiduciary policy is not at issue in the instant suit. Federal's motion for summary judgment at 5. n. 3.
II. MOTION FOR RECONSIDERATION
The Court ruled in an April 12, 2002 Order that the portion of the settlement sum devoted to the Vizcaino plaintiffs' claims under the ESPP was not covered by Microsoft's insurance policies with Federal. The EBL policy's basic statement of the scope of coverage required the claim to arise out of certain conduct of the insured that occurred in the "administration of employee benefit programs." Federal demonstrated that Microsoft's decision to exclude the independent contractors from the ESPP program was made by the company's president and chief financial officer. April 12 Order at 6. The Court concluded that this top-level executive decision to exclude all temporary workers from participating in the ESPP program was not an "administrative" task, and thus fell outside of the EBL policy's coverage. Id. at 7. The Court also denied Microsoft's motion for a Fed.R.Civ.P. 56(f) continuance to conduct discovery because this policy to exclude the freelancers was "so far removed from the day-to-day administration of the plan that discovery is exceedingly unlikely to reveal any evidence that would raise a triable issue regarding whether the executive-level decision falls within the policy's definition of `administration.'" Id. at 10.
On January 30, 2003, Microsoft filed the instant motion for reconsideration of the Court's April 12 Order due to newly discovered evidence. Under Local Civil Rule 7(h), motions for reconsideration are disfavored and must be brought within ten judicial days following the order to which it relates. Clearly not meeting this ten-day requirement, Microsoft argues that the Court should consider the motion pursuant to Fed.R.Civ.P. 54(b), which states that an order is subject to revision at anytime before the entry of judgment adjudicating all the claims. The Court notes that its ability to revisit an earlier order under Rule 54(b) does not mean that it should or must do so. 10 James W. Moore et al.,Moore's Federal Practice and Procedure, § 54.25(4) (3d ed. 1997).
Nonetheless, upon consideration of Microsoft's motion, the Court concludes that withdrawal or revision of its April 12 Order is unwarranted. Microsoft's newly discovered evidence consists of several Federal documents that essentially reflect that Federal employees considered the Excess policy to be "unusual," and that some thought at one time that the Vizcaino claim was covered by the EBL and Excess policies. Relying on Berg v. Hudesman, 115 Wn.2d 657, 801 P.2d 222 (1990), Microsoft argues that the Court should consider this new evidence in its evaluation of the parties' intent regarding the scope of coverage provided under the policies. Microsoft suggests that these documents reflect the parties' belief that the policies provided coverage for more than merely "ministerial" acts.
A court may consider extrinsic evidence "to show the situation of the parties and the circumstances under which the instrument was executed."Id. at 669. As the Berg court explained, extrinsic evidence is admissible "for the purpose of aiding in the interpretation of what is in the instrument, and not for the purpose of showing intention independent of the instrument. It is the duty of the court to declare the meaning of what is written, and not what was intended to be written." Id. (quotingJ.W. Seavey Hop Corp. v. Pollock, 20 Wn.2d 337, 348, 147 P.2d 310 (1944)). Under Washington law, if a contract is unambiguous, a court "must enforce it as written and may not modify it or create ambiguity where none exists." Panorama Village Condominium Owners Ass'n Board of Directors v. Allstate Ins. Co., 144 Wn.2d 130, 137, 26 P.3d 910 (2001).
This Court held that the meaning of "administration" "unambiguously encompasses only actions that could reasonably be expected to be carried out on a day-to-day basis by the Microsoft employees delegated to administer the company's benefit programs." April 12 Order at 7. Based on this finding, the Court concludes that it is inappropriate to consider extrinsic evidence with respect to the meaning of "administration." However, even if it were to consider extrinsic evidence, the Court finds that statements by Federal employees in the documents Microsoft attaches to its motion do not suggest that withdrawal of the April 12 Order is warranted. Accordingly, the Court denies Microsoft's motion for reconsideration.
III. CROSS-MOTIONS FOR PARTIAL SUMMARY JUDGMENT
Both parties now seek summary judgment on the issues of bad faith, violation of the Washington Consumer Protection Act ("CPA"), and coverage by estoppel. Microsoft argues that Federal failed to timely and adequately reserve its rights under the EBL policy (or Excess policy), misused communications with Microsoft's defense counsel for purposes of developing coverage defenses, and declined to retain adequate counsel for its defense of the Vizcaino suit. Microsoft states that these failures constitute bad faith and violation of the CPA, allegedly establish that Microsoft was prejudiced, and require that Federal be estopped from denying coverage. Federal argues on the other hand that summary judgment is warranted on these claims because its actions did not amount to bad faith or violation of the CPA, and Microsoft suffered no prejudice.
Summary judgment is appropriate if the pleadings, affidavits, depositions, and admissions on file demonstrate that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). Initially, it is the moving party's burden to establish that there is no genuine issue of material fact.British Airways Bd. v. Boeing Co., 585 F.2d 946, 951 (9th Cir. 1978). In determining whether a genuine issue of material fact exists, the court must view all evidence in the light most favorable to the non-moving party and draw all reasonable inferences in that party's favor. Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 248-50 (1986). Once the movant has met its initial burden, the burden then shifts to the non-moving party to show the court that there is in fact a genuine issue for trial. Id. at 250. "The nonmoving party must identify for the court specific facts, supported by evidence, affidavits, depositions, sworn or certified copies of documents, or other material contemplated by Rule 56(c), which articulate and illustrate the presence of a genuine issue requiring trial." 11 James W. Moore et at., Moore's Federal Practice and Procedure, § 56. 13(2) (3d ed. 1997).
1. Claim of Bad Faith
Under the duty of good faith, an insurer must deal fairly with the insured, "giving equal consideration in all matters to the insured's interests." Tank v. State Farm Fire Cas, Co., 105 Wn.2d 381, 385-86, 715 P.2d 1133 (1986). Actions for breach of an insurer's duty of good faith often involve wrongful refusal to defend, failure to settle a lawsuit within policy limits, or failure to conduct a reservation of rights defense. Id. at 386-87. In the instant case, Microsoft's claim against Federal relates to the last of these three types of bad faith suits.
In the event the insurer is unable to determine whether a loss is covered by the insurance policy, the appropriate course is to render a defense subject to a reservation of rights. Thomas v. Harris Washington Insurance Law § 17-1 (1995). A reservation of rights places the insured on notice that the insurer later may dispute whether it has a duty to defend or pay the claim. Id. The Tank Court stated that because of the "potential conflicts of interest between insurer and insured inherent in this type of defense," the insurer has an "enhanced obligation to its insured as part of" its duty of good faith." 105 Wn.2d at 387. The Tank Court outlined the following specific criteria the insurer must meet to satisfy its good faith obligations: (1) it must thoroughly investigate the insured's action; (2) retain competent defense counsel for the insured; (3) fully inform the insured regarding the reservation of rights defense along with all developments relevant to coverage and the status of the lawsuit; and (4) avoid engaging in any action that would suggest it is placing its own monetary interests before the insured's. Id. at 387-88.
Generally, whether an insurer acted in bad faith and whether those acts prejudiced the insured are both questions of fact. Safeco Ins. Co. v. Butler, 118 Wn.2d 383, 395, 823 P.2d 499 (1992). However, one Washington case relied on by Microsoft, Besel v. Viking Ins, Co. of Wisconsin (Besel I), 105 Wn, App. 463, 476-77, 21 P.3d 293 (2001), concluded as a matter of law that the insurer acted in bad faith due to its unexplained and frivolous actions in losing the claim file and failing to respond to the insured on several occasions. See also Anderson v. State Farm Mutual Ins, Co., 101 Wn. App. 323, 333, 2 P.3d 1029 (2000) (failure to disclose to insured possible UIM coverage constituted bad faith and a violation of the CPA as a matter of law).
Microsoft alleges in the instant case that Federal acted in bad faith primarily because its reservations of rights was both untimely and unspecific. Microsoft first informed Federal of a potential claim under the Fiduciary policy in a March 27, 1990 letter received by Federal on April 10, 1990. Carson Decl., Ex. A. Randy Walker, a Federal claims officer, called Microsoft's in-house counsel, Peter Miller, on April 11 to acknowledge receipt of that letter. Id. at Ex. B. In an April 24, 1990 letter, Federal again acknowledged receipt of the March 27 letter from Microsoft, discussed some of the terms of the Fiduciary policy, and stated at the end of the letter that it "expressly reserved[d] all rights under the policy and available at law to deny coverage and/or rescind the policy . . ." Id. at C. Federal asserts, and Microsoft does not argue otherwise, that this "notice of potential claim" did not trigger the requirements in Washington Administrative Code ("WAC") Title 284, which contains good faith standards for handling insurance claims.
Microsoft additionally alleges that Federal acted in bad faith by failing to retain adequate counsel for its defense and improperly using communications with defense counsel to prepare a coverage defense. Based on the Court's determination that Federal acted in bad faith by failing to appropriately reserve its rights, the Court finds it unnecessary to address these additional claims of" bad faith.
Federal"s obligation of good faith commenced on January 13, 1993, when it received notice of the Vizcaino complaint. Id. at D. Again, Isabel Rocha, a Federal claims examiner, responded by telephone on that day leaving a voice message acknowledging receipt of the claim. Id. In response to Microsoft's request for a defense under both the Fiduciary and EBL policies, Rocha stated in her voice message that she would examine coverage under the EBL policy, but indicated that the claim might be barred from coverage due to the policy's ERISA exclusion. Id.; Lawrence Decl., Ex. 12c. On January 18, 1993. Federal corresponded by letter to William Song of Davies, Roberts Reid asking him to represent Microsoft in its defense of the Vizcaino suit. Id. at E. After having the opportunity to review the materials she enclosed with the letter, Rocha requested that Song contact her "to discuss [his] preliminary thoughts on defense strategy, liability and damages." Id.
Federal issued a "Reservation of Rights" letter with respect to the Fiduciary policy on January 27, 1994. That letter summarized theVizcaino complaint and quoted several terms from the Fiduciary policy. Rocha stated in the letter that Federal agreed to provide a defense to Microsoft for a "covered wrongful act," but reserved its rights to disclaim coverage for any claims not qualifying as a "wrongful act." Id. at I. Although included in the letter was the definition of "wrongful act" as "any negligent act, error or omission in the administration of the plan," Federal did not address that coverage possibly was barred because Microsoft's actions did not constitute an administration of the plan. Further, the letter did not mention coverage under the EBL or Excess policies.
Federal's September 8, 1994 letter, however, purported to reserve its rights under all three policies. Id. at J. By this time an important development had occurred in the Vizcaino matter: U.S. District Judge Carolyn Dimmick dismissed all claims against Microsoft on July 6, 1994. The September letter restated that Federal reserved the right to disclaim coverage for any claims not qualifying as a wrongful act, as defined by the Fiduciary policy. With respect to the EBL policy, the letter quoted the coverage provision, which stated that the "claim must arise out of a negligent act, error or omission in the administration of employee benefit programs." Due to Judge Dimmick's conclusion that the Vizcaino claims subject to state law arose out of an employment contract with Microsoft rather than out of the administration of the plan, Rocha indicated that there would be no coverage for the state law claims. Nonetheless, if plaintiffs prevailed on appeal, Rocha stated that there was the potential for coverage. Finally, the letter stated that any reservation of rights attributable to the EBL policy also applied to the Excess policy.
On October 3, 1996, the Ninth Circuit reversed and remanded theVizcaino suit finding that the plaintiffs were entitled to benefits under both the SPP and ESPP programs. Subsequently, on January 13, 1997, Federal issued to Microsoft another letter reserving its rights under the EBL policy. Id. at K. That letter stated the following:
As both the District Court's and the Court of Appeals' opinions make clear, the plaintiffs' claims do not arise out of the day-to-day administration of the ESPP and/or the SPP but instead, arise out of the contractual employment agreements and the corporate and plan intentions not to provide benefits to the plaintiffs. As such, Federal reserves the right to deny coverage.Id. at 6. Federal issued several additional coverage position letters to Microsoft subsequent to this January 13, 1997 letter. See, e.g., May 4, 1998 letter (Id. at L); August 7, 1998 letter (Id. at M); November 20, 1998 letter (Id. at H); January 20, 1999 letter (Id. at O); February 22, 1999 letter (Id. at P); May 28, 1999 letter (Id. at Q); and July 20, 1999 letter (Id. at R).
Neither statutory nor judicial requirements establish a specific time period within which the insurer must issue a reservation of rights letter to the insured. Harris Washington Insurance Law § 17-2. However,Transamerica Ins. Group v. Chubb Son, Inc., 16 Wn, App. 247, 554 P.2d 1080 (1976), seems to express an outer limit for when a reservation of rights letter must be issued. Harris Washington Insurance Law § 17-2. By maintaining exclusive control of the defense for ten months without reserving its rights and then denying coverage, theTransamerica Court held that the insurer acted in bad faith and prejudiced the insured. It stated that "as a matter of law and in the absence of extraordinary circumstances, 10 months is too long a period for counsel for Federal to occupy the dual role." Id. at 252. This "dual role" relates to the insurer's functions of defending the insured in the lawsuit and simultaneously formulating a defense against the insured for coverage. Underwriters at Lloyds v. Denali Seafoods, Inc., 927 F.2d 469, 462 (9th Cir. 1991).
The specificity required in the reservation of rights letter is another issue that arises in the instant motions. The Tank Court indicated that the insurer has the obligation of "fully informing the insured . . . of the reservation of rights defense." 105 Wn.2d at 388. The court in Weber v. Biddle, 4 Wn. App. 519, 525. 483 P.2d 155 (1971). held that the insurer's reservation of rights letter was too general because it did not state the specific policy defenses upon which the insurer intended to rely. Microsoft also cites several cases from other jurisdictions to support its position that the reservation of rights letter must be specific. See, e.g., In re Lynch, 226 B.R. 813, 816 n. 7 (D. Vt. 1998) ("it is important that the insured know of each and every specific policy defense that is likely to be asserted . . ."); Cozzens v. Bazzani Bldg. Co., 456 F. Supp. 192, 200 (E.D. Mich. 1978) (reservation of rights letter was improper because it failed to explain "how and why, in [the insurer's] opinion, [the policy provisions] would operate to make [the insured's] claim fall outside the coverage provided under the policy.").
Federal disputes the persuasiveness of Transamerica because the insurer in that case "had not informed the insured at all that it was reserving its rights in any respect." Federal's opposition at 5. In contrast, Federal argues in the instant case that it gave Microsoft notice on several occasions that it was reserving its rights. Federal points to its first contacts with Microsoft on April 11 and April 24, 1990, before theVizcaino litigation commenced, and its voice mail on January 13, 1993, and letters on January 24, 1994, September 8, 1994, January 13, 1997, and beyond. In effect, Federal argues that Microsoft was aware from the outset that Federal was reserving its rights and would not cover any settlement of the Vizcaino claims. Federal's opposition at 18. Federal also relies on Ins. Co. of Penn. v. Highlands Ins. Co., 59 Wn. App. 782, 786, 801 P.2d 284 (1990), to argue that the delay and content of its reservation of rights did not constitute bad faith. The Highlands Court stated that "mistakes and clumsiness alone do not amount to bad faith," and that "[n]either denial of coverage because of a debatable coverage question nor delay, unaccompanied by an unfounded or frivolous reason, constitutes bad faith." 59 Wn. App. at 786-87. The insurer in that case was only under a duty to reimburse for attorney fees rather than to defend the insured. When the insured initially sought reimbursement, the insurer waited three weeks before sending the insured a letter with its position. The insurer began paying the attorney fees, but then two months later stated that it would no longer honor further claims. After another two months, the insurer paid a portion of a claim submitted by the insured, and then waited until all the other insurance companies had settled the issue of their exposures before paying the remaining amount.Id. at 784. The Highlands Court concluded that these circumstances did not give rise to a bad faith claim. Nonetheless, this case clearly is distinguishable from the instant one primarily because the insurer was not both defending the claim at the same time as evaluating coverage.
With respect to the content of its reservation of rights letters, Federal cites Hayden v. Mutual of Enumclaw, Inc. Co., 141 Wn.2d 55, 62, 1 P.3d 1167 (2000). That court found that under WAC 284-30-15 380, which requires insurers to specify the grounds for denying a claim, the insurer was not precluded from later raising additional defenses beyond those included in the initial reservation of rights letter. However, the court did not address the issue of preclusion in the context of a bad faith or estoppel action because the insured failed to assert those claims. Federal likewise relies on several California cases indicating that an insurer does not waive coverage defenses not stated in its initial denial letter. See, e.g., Waller v. Truck Ins. Exch., Inc., 11 Cal.4th 1, 31-35, 900 P.2d 619, 636-37 (1995). Nonetheless, these cases arise in the context of waiver rather than estoppel, which the Ninth Circuit has deemed are distinct doctrines. Underwriters at Lloyds. 927 F.2d at 462.
The Court finds that Federal's April 24, 1990 letter to Microsoft did not constitute an adequate reservations of rights. That letter included only the following general statement purporting to reserve its rights: "[Federal] expressly reserve[s] all rights under the policy and available at law to deny coverage and/or rescind the policy . . ." After Federal received notice of the Vizcaino complaint on January 13, 1993, Rocha on the same day responded by telephone indicating that coverage under the EBL policy might be barred due to the policy ERISA's exclusion. The Court likewise finds that this was not an adequate reservation of rights. Subsequent to this phone call, the parties are in agreement that Federal did not attempt to reserve its rights until January 27, 1994, a full year after Federal assumed the Vizcaino defense. Further, the sufficiency of this January 27. 1994 letter is highly questionable. Federal did not mention the EBL or Excess policies in the letter, and it did not address the possible defense that Microsoft's actions did not constitute an administration of the ESPP. In fact, Federal's September 8, 1994 letter was the first communication addressing the EBL and Excess policies. Although this letter mentioned that Judge Dimmick had determined that the Vizcaino claims did not arise out of the administration of the plan, Federal did not clearly adopt this as a defense to coverage until it issued its January 13, 1997 letter to Microsoft.
Federal cites State Farm Fire and Cas. Co. v. Jioras, 24 Cal.App.4th 1619, 1630 n. 12, 29 Cal.Rptr.2d 840 (1994), for the proposition that oral reservations of rights are adequate. The insurer in that case properly reserved its rights in writing for two individuals. Subsequently, the insurer accepted the defense for two additional individuals; however, it did not issue a reservation of rights letter to these two individuals, but merely told them that it would defend them under the same reservations of rights. The court stated the insurer fulfilled its obligations of properly reserving its rights. These facts clearly are distinguishable for those in the instant case.
Indeed, Microsoft asserts that the ERISA exclusion is irrelevant to the claims involving the ESPP, which is a non-ERISA plan.
A court should only make a finding of bad faith if the insurer acted without reasonable justification. Keller v. Allstate Ins. Co., 81 Wn. App. 624, 632, 915 P.2d 1140 (1996). Federal clearly had no reasonable justification for its delay in adequately reserving its rights. James Carson, the Federal claims examiner primarily responsible for Vizcaino, stated in his deposition that it was Federal's practice to send out reservation of rights letters within 30 to 45 days after receiving a claim. Carson Dep. at 18. He had no explanation for why there was a delay in issuing the January 1994 letter, or why it took even longer to issue a letter regarding the EBL policy. Id. at 46-48. Internal Federal documents likewise indicate that Federal employees were perplexed by the delay in issuing a reservation of rights letter. Erie Schall. a national office senior examiner, wrote the following to Rocha in a March 2, 1994 e-mail: "Please advise why the ROR [Reservation of Rights] was issued 1/27/94 when the first complaint was filed 12/92 and received by at least 1/93." Lawrence Decl., Ex. 22. During Rocha's deposition, when asked why she had not issued a reservation of rights letter by June 1993, she answered "I just didn't get to it." Rocha Dep. at 33.
The Court finds that there are no questions of fact regarding Federal's alleged breach of its duty delay (over a year) in issuing any reservation of rights letters, and even a longer delay (20 months) in issuing a letter addressing all the policies, the Court concludes that summary judgment in favor of Microsoft is appropriate on its claim that Federal acted in bad faith.
As indicated above, an insurer's good faith obligations likewise are imposed by statute (RCW 48.01.030); WAC regulations define specific acts that may constitute breaches of this good faith obligation. Microsoft argues that Federal breached several WAC provisions including the following: (1) WAC 284-30-330(3) (must adopt and implement standards for prompt investigation of claims); (2) WAC 284-30-370 (must complete investigation of claims within 30 days after notification, if reasonably possible); (3) WAG 284-30-360 (required to respond to insured within 10 working days); and (4) WAC 284-30-350 (required to disclose to first party claimants benefits, coverage, or other provisions of an insurance policy). Although none of these provisions specifically relate to reservation of rights, certainly Federal's actions suggest that its investigation of the Vizcaino claim violated WAC 284-30-370.
2. Prejudice
A claim for bad faith handling of an insurance claim sounds in tort, and thus an essential element of such an action is a showing that the insured suffered some harm. Butler, 118 Wn.2d at 389. In Transamerica, the court held that prejudice was conclusively presumed due to the insurer's bad faith actions. It held that presuming prejudice was necessary because "[t]he course cannot be rerun, no amount of evidence will prove what might have occurred if a different route had been taken. By its own actions, [the insurer] irrevocably fixed the course of events concerning the law suit for the first 10 months." 16 Wn. App. at 252. TheTransamerica Court concluded that the ten month delay in issuing a reservation of rights letter estopped the insurer from denying coverage because the insured had been deprived of the right to obtain its own counsel during this period, the insured lost the right to control the lawsuit, and a potential conflict of interest existed for the attorney who conducted the defense. Id. at 251-52. On the other hand, the court inR.A. Hanson, decided a year prior to Transamerica, held that prejudice only would be presumed "in extreme cases . . ., as where the insurer claims noncoverage after judgment and surrender of all rights of appeal, making actual proof of prejudice impossible." 16 Wn. App. at 252. The insurer in R.A. Hanson withdrew its defense two and one-half months after agreeing to defend without reserving its rights.
Although these two cases suggest that prejudice is presumed only in extreme cases, a later Washington case, Safeco Ins. Co. v. Butler, explained that any case in which the insurer acts in bad faith is an "extreme case" within the meaning of R.A. Hanson. 118 Wn.2d at 391. See also Besel v. Viking Ins. Co. (Besel II), 146 Wn.2d 730, 737 (2002) ("The principles in Butler do not depend on how an insurer acted in bad faith. Rather, the principles apply whenever an insurer acts in bad faith."). However, the Butler Court held that a finding of bad faith created a rebuttable presumption of prejudice, rather than a conclusive presumption as suggested in Transamerica. Id. at 390. Once the insured establishes bad faith, a rebuttable presumption of prejudice "shifts the burden to the insurer to prove its acts did not prejudice the insured. The shifting of the burden ameliorates the difficulty insureds have in showing that a particular act resulted in prejudice." Id. at 392. Washington courts now impose a rebuttable presumption of prejudice in cases in which the insured meets its burden of establishing bad faith.Kirk v. Mt. Airy Ins. Co., 134 Wn.2d 558, 562-63. Accordingly, the Court finds in the instant case that Federal's bad faith creates a rebuttable presumption of prejudice.
In reference to Transamerica, the Ninth Circuit recommended inUnderwriters at Lloyds v. Denali Seafoods. Inc., 927 F.2d 459, 463 n. 5 (9th Cir. 1991), that Washington courts should consider adopting a rebuttable presumption of prejudice standard rather than conclusively presuming prejudice.
Microsoft alleges in its papers that it was actually prejudiced by Federal's bad faith actions. First, it alleges that it would have taken coverage issues into account in its litigation strategy. As an example, Microsoft suggests that it would not have submitted in the Vizcaino litigation the declaration of' Raymond Ferguson, a Microsoft lawyer, who stated that Microsoft officials specifically directed that the ESPP not be extended to temporary workers, had it known of Federal's coverage defenses. Microsoft's opposition at 6. Second, Microsoft suggests that it would have expended greater resources for the litigation, rather than being limited to Federal's litigation guidelines. Third, Microsoft indicates it would have insisted on pursuing litigation more aggressively than Federal encouraged. For instance, it suggests that it would have investigated the potential damages involved in the claim earlier, which might have allowed it to pursue an earlier and less expensive settlement. Finally, Microsoft states it would have retained additional counsel, which might have affected the outcome.
Federal on the other hand argues that, regardless of whether it acted in bad faith, Microsoft suffered no prejudice largely because Microsoft played a significant role in directing the litigation. For example, Federal states that Microsoft was familiar with Song and approved his appointment as counsel and, although refusing to pay attorney fees, Federal permitted Microsoft to associate in the defense other law firms of Microsoft's choosing. Federal's motion at 4. Relying on numerous Song billing statements, which indicate that he kept in constant contact with Microsoft's in-house benefits attorney, Federal also suggests that Microsoft's in-house counsel directed the litigation. Federal's opposition at 10 (citing Lawrence Decl., Ex. 94). Federal argues that it did not lock Microsoft into any defense strategy. Rather, in 1990 when Microsoft first responded by letter to the Vizcaino plaintiffs' allegations, Microsoft adopted the theory that the employment agreements t he freelancers entered into governed the dispute, which is what it argued throughout the dispute. Federal's opposition at 17 (citing Carson Decl., Ex A).
The Court notes that a finding that the insurer's bad faith prejudiced the insured is particularly appropriate in cases in which the insurer maintained exclusive control of the litigation. See Transamerica, 16 Wn. App. at 251-52; 14 R. Anderson, Couch Cyclopedia of Insurance Law § 51:80 (2d ed. 1965).
Further, Federal asserts that Microsoft never missed an opportunity to settle the Vizcaino case on more favorable terms. Federal's motion at 3. Microsoft clearly controlled settlement discussions in 1999. For example, Federal expressed concern in a March 19, 1999 letter that Microsoft made a $13.65 million settlement offer without Federal's knowledge or consent. Carson Decl., vol. II, Ex. YY. In response, Microsoft stated the following in a June 25, 1999 letter:
We do not agree, and have never agreed, with Chubb's analysis of its coverages under its policies, and have never assumed that Chubb is willing to contribute to the balance of its limits under the fiduciary, EBL and excess policies toward settlement of the Vizcaino claims . . . We intend to continue settlement negotiations with the plaintiffs if it appears in Microsoft's best interest to do so, and reserve our rights to pursue reimbursement from Chubb.
Carson Decl., Ex. S. In addition to demonstrating that Microsoft controlled the settlement process, Federal relies on this language to suggest that Microsoft suffered no prejudice because it never believed Federal would agree to indemnify the Vizcaino claim.
Microsoft argues, on the other hand, that Federal takes this letter out of context. Microsoft contends that Ellen Cooper, the author, only was referring to Microsoft's beliefs during settlement negotiations in the late 1990s, and that her statements were unrelated to previous stages of the Vizcaino litigation. Microsoft's opposition at 24.
Although the Court has concluded that Federal's bad faith actions lead to a rebuttable presumption that Microsoft was prejudiced, Federal has presented evidence suggesting that Microsoft in fact suffered no prejudice. Accordingly, the Court finds that a genuine issue of material fact exists with regard to whether Microsoft actually was prejudiced. As a consequence, it is inappropriate to decide whether Microsoft is entitled to the remedy of estoppel.
3. CPA Claim
To prevail in a CPA action, a plaintiff must show the following: (1) an unfair or deceptive act or practice, (2) in trade or commerce, (3) that impacts the public interest, (4) which causes injury to the party in his business or property, and (5) which injury is causally linked to the unfair or deceptive act. Industrial Indem. Co. v. Kallevig, 114 Wn.2d 907, 920-21 (1990). As stated in note 3, supra, Microsoft alleges that Federal violated several WAC provisions. Because a genuine issue of material fact exists with respect to whether Microsoft was prejudiced by Federal's actions, the Court finds that summary judgment is inappropriate for Microsoft's CPA claim.
single violation of a WAC 284-30 provision satisfies the first three elements of this five-part Besel I, 105 Wn. App. at 482-83.
IV. CONCLUSION
Microsoft's motion for reconsideration is DENIED, Microsoft's motion for partial summary judgment is GRANTED in part and DENIED in part, and Federal's motion for partial summary judgment is DENIED.