T-Mobile USA, Inc. v. Steadfast Insurance Company et al

MOTION for Partial Summary Judgment

W.D. Wash.October 6, 2016

PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 THE HONORABLE ROBERT S. LASNIK UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE T-MOBILE USA, INC., Plaintiff, v. STEADFAST INSURANCE COMPANY and ZURICH AMERICAN INSURANCE COMPANY, Defendants. No. 2:15-cv-01622-RSL PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT NOTE ON MOTION CALENDAR: October 28, 2016 Oral Argument Requested Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 1 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 1 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 I. INTRODUCTION Plaintiff T-Mobile USA, Inc. (“Plaintiff” or “T-Mobile”) moves for partial summary judgment on the two core legal issues before the Court in this matter: (1) whether T-Mobile’s claims are covered; and (2) whether, as a matter of law, the various exclusions and legal arguments relied upon by Defendants Steadfast Insurance Company and Zurich American Insurance Company (hereafter jointly referred to as “Zurich”) to exclude or limit T-Mobile’s coverage apply to T-Mobile’s claim. This case relates to T-Mobile’s claim for coverage relating to a $90 million “Consumer Redress Fund” established pursuant to the August 2014 settlement of an FTC lawsuit first filed against T-Mobile in July of 2014 (“FTC Action”), as well as the defense costs incurred in defending that litigation. The factual issues regarding T-Mobile’s right to coverage are all undisputed: the FTC filed its complaint against T-Mobile on July 1, 2014 (“Complaint”);1 the Complaint alleged violations of 15 U.S.C. § 45(a); the 2014 Zurich policy at issue (“Policy”)2 was in place at the time the FTC filed the Complaint and ran from January 1, 2014 through January 1, 2015; the Policy expressly provided coverage for the very type of “Consumer Redress Fund” established to settle the FTC Action; the subsequent settlement between the FTC and T-Mobile was memorialized in the form of a Stipulated Order for Permanent Injunction and Monetary Judgment (“Consent Order”)3 entered by Judge Robart within that same policy period; the Consent Order obligated T-Mobile to pay $90 million into that Consumer Redress Fund; and T- Mobile did in fact pay those funds. There is also no dispute that T-Mobile incurred defense costs in the defense of the claims asserted by the FTC. Both the settlement payments and the defense costs are covered under the relevant language of the Policy as a result. 1 Exhibit 1 to the Declaration of Kelly H. Sheridan in Support of Plaintiff T-Mobile’s Motion for Partial Summary Judgment (all Exhibits are attached to Mr. Sheridan’s Declaration). 2 Exhibit 2 (the relevant provisions of the Policy are highlighted). 3 Exhibit 3. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 2 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 2 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 T-Mobile’s motion seeks two rulings from the Court. First, T-Mobile seeks a partial summary judgment ruling confirming that it has made an initial showing of coverage such that the burden of demonstrating an exclusion or sublimit in the Policy applies shifts to Zurich. Second, T-Mobile seeks a ruling confirming that, as a matter of law, several exclusions and legal arguments relied upon by Zurich do not operate to bar or otherwise limit T-Mobile’s claim for coverage. T-Mobile’s motion does not request that the Court resolve any disputed factual issues (the Court does not need to in order to grant this motion),4 nor does it seek a ruling with regard to T-Mobile’s claims for common law bad faith, violation of the Washington Insurance Fair Conduct Act, or violation of the Washington Consumer Protection Act. II. STATEMENT OF FACTS T-Mobile provides the foregoing statement of facts primarily by way of background. As noted above, T-Mobile’s motion seeks rulings regarding whether certain provisions of the Policy apply as a matter of law, and to the extent any of the foregoing facts are reasonably subject to dispute, T-Mobile’s motion does not expressly rely on them. A. Third Parties “Cram” Unauthorized Charges onto the Bills of T-Mobile’s Customers via Unauthorized Use of or Access to T-Mobile’s Systems. As detailed in the FTC’s Complaint, the issue of “cramming” generally relates to the practices of third-party content providers “cramming” unauthorized charges onto the bills of the customers of various cellular service providers, including T-Mobile. Specifically, many of these customers agreed to various data “subscriptions” under which certain types of data were delivered 4 T-Mobile’s Motion does not seek summary judgment on various factual issues such as: (1) whether Zurich’s misinterpretation of the relevant policy language and failure to perform an adequate investigation before summarily denying coverage constituted bad faith under Washington law; (2) whether that bad faith estops Zurich from asserting any policy defenses to coverage in a manner consistent with this Court’s prior rulings; and (3) even if it does not, disputed factual issues surrounding Zurich’s potential defenses noted below. T-Mobile instead seeks a ruling from the Court that Zurich’s primary defenses do not apply as a matter of law. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 3 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 3 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 to their phone through premium text messaging services (also known as “Premium SMS Services”), such as custom ringtones, celebrity news, or sports scores. Consumers subscribed to Premium SMS Services through two types of entities not directly affiliated with T-Mobile – “content providers” and “aggregators.” Content providers supplied the actual data to subscribers while aggregators entered the charges at issue relating to the Premium SMS Services via T-Mobile’s billing system: (1) by accessing T-Mobile’s billing system via a specific application protocol interface (“API”); and (2) passing through charges to T-Mobile’s customers by way of “short codes” – unique customer codes that these vendors were only authorized to use if they followed the double opt-in process noted below. Importantly, cellular providers only granted the content providers and aggregators limited access to the API and short codes and expressly conditioned that limited access on the providers’ agreement to follow certain protocols designed to ensure that T-Mobile’s customers had actually subscribed to the services at issue. Both aggregators and content providers were explicitly required by contract to validate all such subscriptions through what is commonly referred to as a “double opt-in” authorization procedure. The double opt-in authorization procedure required customers to provide two independent indications of authorization for the purchase, such as the input of the customer’s mobile telephone number combined with a separate transmission of acceptance, such as through texting “yes” or entering a unique PIN on a web interface. Unfortunately, various content providers and aggregators engaged in intentional conduct aimed at circumventing T-Mobile’s system security (and that of other cell service providers) to secure unauthorized disclosure of both “Personal Information”5 (the customer-specific short codes, telephone numbers, etc.) and “Unauthorized Access” to or “Unauthorized Use” of T- Mobile’s API. This conduct allowed the providers to misuse the API and short codes and bill 5 The bolded phrases or terms noted herein are terms defined in the Policy. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 4 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 4 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 unauthorized charges to T-Mobile customer accounts. The extent of this conduct became fully known in 2014 after a series of government reports established exactly how content providers and aggregators circumvented these security systems. See Exhibit 4 (Sen. Comm. on Commerce, Science and Transportation, Cramming on Mobile Phone Bills: A Review of Consumer Protection Practices and Gaps (July 30, 2014)); Exhibit 5 (Federal Trade Commission, Mobile Cramming: An FTC Staff Report (July 23, 2014)). The FTC initially sued many of these third-party content providers and aggregators directly, perhaps the most egregious of which were the former officers of a company named Mobile Messenger that operated as both a content provider and an aggregator. All told, at least ten federal cases were filed against Mobile Messenger and/or its officers and various criminal cases have been initiated against Mobile Messenger’s former officers, including an FTC action against Mobile Messenger’s former VP of sales, CEO, COO, and VP of “Compliance and Consumer Protection” filed in July, 2014.6 That action was stayed pending the outcome of criminal proceedings filed by the U.S. Attorney’s Office for the Southern District of New York against Mobile Messenger’s former officers charging them with conspiracy to commit and commission of wire fraud, mail fraud, and money laundering.7 The same defendants were also named in a civil class action brought in July, 2014 in the U.S. District Court for the Western District of Washington. 6 Federal Trade Commission v. MDK Media, Inc., Central District of California Case No. 2:14-cv-05099- JFW-MRW. See also Cullan v. M-Qube, Inc. et al., District of Nebraska Case No. 8:13-cv-00172-TDT; Geier v. M-Qube, Inc. et al., Western District of Washington Case No. 2:13-cv-00354-TSZ; Sobota v. Mobile Messenger Global, Inc., et al., Northern District of Illinois Case No. 1:13-cv-01305; Fields, et al. v. Wise Media, LLC et al., Northern District of California Case No. 3:12-cv-05160-WHA; Skuro v. Mobile Messenger Americas, Inc., et al., Central District of California Case No. 2:11-cv-00409-JFW-AJW; Cohen v. T-Mobile USA, Inc., et al., Eastern District of New York Case No. 1:10-cv-02913-JG-SMG; Gray v. Mobile Messenger Americas, Inc., Southern District of Florida Case No. 0:08-cv-61089-CMA; Jiran et al. v. AT&T Mobility, LLC et al., Northern District of California Case No. 4:08-cv-00013-CW. 7 United States v. Wedd, et al., Southern District of New York Case No. 1:15-cr-00616-KBF (September 9, 2015 Sealed Indictment). Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 5 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 5 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 The criminal indictment indicated that Mobile Messenger’s officers participated in a scheme to defraud both T-Mobile and its customers through “auto-subscrib[ing]” consumers to premium SMS services after Mobile Messenger employees created a computer program that generated text messages mimicking the double opt-in verifications.8 Mobile Messenger’s former officers subsequently provided large batches of customers’ Personal Information (“hundreds of thousands”) – including consumer phone numbers and short codes – that were run through T- Mobile’s API in return for cash payments from various parties unaffiliated with T-Mobile.9 For example, the complaint specifically alleged that Mobile Messenger’s officers provided tens of thousands of T-Mobile customer short codes and phone numbers without T-Mobile’s knowledge or consent as part of this scheme. 10 Significantly, Mobile Messenger itself asserted cramming- related allegations against its own former officers in an ongoing arbitration alleging that its former officers “devised a scheme to reap, on behalf of himself and his friends who he places as officers of the respondent companies, personal financial benefits from Mobile Messenger’s contracts with respondent content providers [such as T-Mobile].”11 In short, it is beyond dispute that various third-party providers participated in the cramming scheme outlined above – a scheme relating to the Telecommunication Services provided by T- Mobile and based on the unauthorized disclosure of both Personal Information (the customer- specific short codes and telephone numbers associated with the T-Mobile customers at issue) and Unauthorized Access to or Unauthorized Use of T-Mobile’s API to bill through the charges at issue to these T-Mobile customers. The FTC issued a series of Civil Investigative Demands 8 Id. at 7. 9 Id. at 8-10. 10 United States v. Miao, Southern District of New York Case No. 1:15-cr-00628 (May 26, 2015 Sealed Complaint). 11 Mobile Messenger U.S., Inc. v. MDK Media, et al., JAMS County of Los Angeles Arbitration No. 1220047411 (December 16, 2013 Claimant’s Arbitration Claims and Relief Sought at 5). Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 6 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 6 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 (“CIDs”) to T-Mobile for records relating to these third-party actors in 2012 and 2013. T-Mobile produced documents relating to customer subscriptions, complaints, and refunds for each of the content providers and aggregators in response. In early 2014, the FTC began pursuing investigations of cellular services providers directly, including T-Mobile. After providing a draft complaint to T-Mobile in early 2014, the FTC eventually filed suit against T-Mobile in July of 2014 (“FTC Action”). See Exhibit 1. Importantly for reasons that will become clear below, the FTC’s Complaint specifically alleged violations of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a) and more generally alleged that T-Mobile had violated the statute by charging “consumers for other services offered by third-party merchants,” including the “Third-party Subscriptions” outlined above. Id. at ¶¶ 8-9; 37-44. B. T-Mobile’s Long-Standing Relationship with Zurich and the Structure of the Zurich U.S. Policy at Issue. To protect itself against liability resulting from alleged errors or omissions in the provisions of cellular services to its customers, T-Mobile and its parent (Deutsche Telekom AG) began purchasing a series of interrelated insurance policies from Zurich in August of 2010 that continued in an uninterrupted fashion through the policy year at issue in this case, 2014. Declaration of Lisa Bauer in Support of Plaintiff T-Mobile USA, Inc.’s Motion for Partial Summary Judgment at ¶ 3. The earliest such errors and omissions policy that T-Mobile is currently aware of incepted on August 8, 2010. Id. T-Mobile’s 2014 Zurich Policy provided broad coverage for the type of Loss at issue: • Insuring Agreement A of the policy, entitled “INFORMATION TECHNOLOGY AND INTERNET LIABILITY” provided coverage for “all Loss for which the Insureds become legally obligated to pay on account of any Claim for a Technology Wrongful Act or a Media Wrongful Act taking place on or after the Retroactive Date for this Insuring Agreement, as stated in Item 4 of the Declarations, and prior to the end of the Policy Period, if such Claim is first made against the Insureds during the Policy Period . . . .” Exhibit 2 at I.A. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 7 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 7 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 • In addition to the broad coverage provided by Insuring Agreement A, Insuring Agreement C also indicated that Zurich was obligated to cover “all Loss for which the which the Insureds become legally obligated to pay on account of any Claim for a Security Wrongful Act or a Privacy Wrongful Act taking place on or after the Retroactive Date for this Insuring Agreement, as stated in Item 4 of the Declarations, and prior to the end of the Policy Period, if such Claim is first made against the Insureds during the Policy Period . . . .” Exhibit 2 at I.A. • The Policy defined both a Technology Wrongful Act12 and a Media Wrongful Act13 broadly enough to encompass the allegations in the FTC Action, including allegedly wrongful acts arising from T-Mobile’s provision of cellular services, a fact that Zurich did not dispute at the time it denied coverage as set below and has never contested during this case. • The Policy defined “Claim” to include “a civil proceeding against any Insured for damages, injunctive relief, or declaratory relief commenced by the service upon the Insured of a complaint, or similar pleading . . .” exactly like the Complaint served on T- Mobile in July of 2014 that signaled the initiation of the FTC Action. Exhibit 2 at IV.C (emphasis added). • Endorsement No. 6 modified the Policy’s definition of “Loss” to confirm that Zurich was obligated to pay “the total amount which the Insureds become legally obligated to pay on account of each Claim and for all Claims in each Policy Period . . . made against them for Wrongful Acts for which coverage applies, including but not limited to”: o “judgments” o “settlements” o “Defense Costs” 12 The Policy defined a Technology Wrongful Act as “any act, error, omission, misstatement, misleading statement, neglect, or breach of duty actually or allegedly committed or attempted by an Insured, or by someone for whom the Insured is legally responsible, in connection with the Insured’s rendering or failure to render Technology Services to others, including the Insured’s unintentional breach of a contract to render such services to others, or the failure of the Insured’s Technology Products to perform the function or serve the purpose intended.” Exhibit 2 at IV.LL. Both Technology Services and Technology Products are defined sufficiently broadly to encompass T-Mobile’s PSMS services and/or T-Mobile’s network. See Exhibit 2 at IV.JJ. and IV.KK. 13 The Policy defined a Media Wrongful Act as “any act, error, omission, misstatement, misleading statement, neglect, or breach of duty actually or allegedly committed or attempted by an Insured, or by someone for whom the Insured is legally responsible, in connection with the Insured’s rendering or failure to render Media Services,” including but not limited to six enumerated categories of conduct. Exhibit 2 at IV.R. As above, Media Services is defined broadly enough to encompass the provision of PSMS content over T-Mobile’s network. See Exhibit 2 at IV.Q. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 8 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 8 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 o “with respect to Insuring Agreement C., civil fines, sanctions, or penalties imposed pursuant to Privacy Regulations,” and o Again, separate and apart from the coverage for fines and penalties provided under Insuring Agreement C, “Consumer Redress Funds to the extent such civil fines, sanctions, or penalties are insurable under the laws of any state or jurisdiction most favorable to the Insured,” including, “without limitation any state or jurisdiction where: (a) such damages, civil fines, sanctions or penalties were awarded or imposed; (b) any Wrongful Act underlying the Claim took place; (c) either the Underwriter or any Insured is incorporated, has its principal place of business or resides; or (d) this Policy was issued or became effective. Exhibit 2 at Endorsement 6.II.O.3. • The Policy defined Consumer Redress Funds as “any sum of money the Insured is legally required to deposit in a fund for the payment of consumer claims due to a settlement of, or an adverse judgment in, a Regulatory Proceeding.” Exhibit 2 at IV.F. • Thus, T-Mobile’s Defense Costs are clearly covered under the Policy, as is the $90 million settlement agreed to by T-Mobile, regardless of whether those payments (payments resulting from the final judgment entered by Judge Robart) are considered to be a “settlement,” “judgment,” or a Consumer Redress Fund. • Accepting (for purposes of argument only and as addressed further below) Zurich’s position that settlement is only potentially covered if it qualifies as a Consumer Redress Fund, the relevant question for determining whether that fund is covered is whether that fund was created in “settlement” of a Regulatory Proceeding as that phrase was defined under the Policy. • The Policy definition Regulatory Proceeding included: o 1. a formal investigation of an Insured by an administrative or regulatory agency or similar governmental body concerning a Privacy Event; or o 2. an administrative adjudicative proceeding against an Insured by an administrative or regulatory agency or similar governmental body for a Privacy Wrongful Act or a Security Wrongful Act, including an appeal thereof, commenced by the Insured’s Receipt of a subpoena, investigative demand, complaint or similar document. Exhibit 2 at IV.EE (emphasis added). • The FTC Action clearly qualified as a Regulatory Proceeding under both prongs of this definition. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 9 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 9 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 o First, the FTC Action was a formal investigation concerning a Privacy Event commenced by T-Mobile’s receipt of a “complaint.”  The Policy defined a Privacy Event in two different ways, both of which qualify for coverage here: • “an unauthorized disclosure or loss of” either “Personal Information” or “corporate information” in the control of T-Mobile or one of its “Service Provider[s],”14 such as the consumer phone numbers, short codes, and API-related access information at issue. Exhibit 2 at IV.X.1. • or any “violation of any Privacy Regulation,” a phrase defined within the Policy to include the exact type of claim asserted by the FTC here. Specifically, the Policy’s definition of Privacy Regulation indicated: o “Privacy Regulations means any of the following statutes . . . Section 5(a) of the Federal Trade Commission Act (15 U.S.C. 45(a)) . . . .” Exhibit 2 at 8, the very same statute relied upon by the FTC in the FTC Action. o Second, the FTC Action also qualifies as an adjudicative proceeding against an insured involving a Privacy Wrongful Act or a Security Wrongful Act.  The Policy defined a Privacy Wrongful Act as “any actual or alleged act, error, omission, neglect or breach of duty by an Insured, someone for whom the Company is legally responsible, or a Service Provider, that results in a Privacy Event.” Exhibit 2 at IV.AA.  The Policy defined a Security Wrongful Act as “any actual or alleged act, error, omission, neglect or breach of duty by an Insured, someone for whom the Company is legally responsible, or a Service Provider, which causes a breach of the Company’s Network Security that results in . . . the Unauthorized Access or Unauthorized Use of the Company’s Computer System.” Exhibit 2 at IV.FF.2.  Again, the conduct underlying FTC Action related to unauthorized access to or use of T-Mobile’s systems by content providers to cram unauthorized charges onto T-Mobile customer accounts. 14 Service Provider is defined as “a business the Company [T-Mobile] does not own, operate, or control, but that the Company hires for a fee pursuant to a written contract to perform services related to the conduct of the Company’s business . . . .” Exhibit 2 at IV.GG. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 10 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 10 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Thus, even accepting for purposes of argument Zurich’s position that the settlement is only covered if it is a Consumer Redress Fund, the relevant question that Zurich should have confirmed when investigating T-Mobile’s claim for coverage was whether the FTC Action was a Regulatory Proceeding. That, in turn, required Zurich to investigate whether the claims alleged in the FTC Action arose from an underlying a scheme committed by the third-party content providers and aggregators at issue that related to the unauthorized disclosure of Personal Information (the customer-specific short codes and telephone numbers associated with the T-Mobile customers at issue) or Unauthorized Access to or Unauthorized Use of T-Mobile’s API to bill through the charges at issue that led to either an “investigation” or an “adjudicative proceeding” by a regulatory agency such as the FTC, including the settlement of that Regulatory Proceeding through T-Mobile’s payment into a covered Consumer Redress Fund. It quite obviously did. Unfortunately, as explained below, Zurich failed to perform a reasonable investigation or reasonably interpret the Policy before summarily denying coverage. C. Zurich’s Failure to Investigate T-Mobile’s Claim Before Summarily Denying Coverage. T-Mobile tendered the FTC Action in August of 2014. While not the focus of the legal issues raised by this Motion, Zurich’s own claims handling notes confirm that Zurich’s entire “investigation” of that claim is set forth in less than four pages of heavily redacted notes from Zurich’s claims file attached hereto as Exhibit 6. Those claim notes confirm that: • The initial claims handler assigned to the claim, Richard Nacchio, acknowledged the claim on August 8, 2014. • While completely redacted, Zurich has confirmed that the next entry in the claim notes reflects a conversation between Mr. Nacchio and outside counsel representing Zurich International, not any analysis of the Policy or T-Mobile’s claim for coverage competed by Mr. Nacchio himself. • The next entry authored by Mr. Nacchio occurred on August 18, 2014 and consisted of two lines indicating: (1) he sent a “potential denial under” the Zurich U.S. Policy to his Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 11 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 11 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 supervisor “for review/approval”; and (2) Zurich’s “denial based upon the FTC exclusion in Endorsement No. 10 of the Policy.” The claim notes do not reflect any further analysis of the Policy, any analysis of the Complaint, or any attempt whatsoever to reach out to T- Mobile to confirm the nature of the allegations raised against T-Mobile or the facts underlying those allegations. • The claim notes indicate that Mr. Nacchio’s supervisor, Mr. Brown, reviewed and approved the denial letter on August 29, 2014 and did so without conducting any additional investigation of T-Mobile’s claim. • Mr. Nacchio issued a letter denying coverage outright that same day. Exhibit 6 at 3-4. A copy of Zurich’s letter denying coverage (“Denial Letter”) is attached as Exhibit 7. That letter set forth four primary bases for denying coverage, all of which were incorrect. First, echoing Mr. Nacchio’s comment in the claim notes that he was denying coverage based upon the “FTC exclusion in Endorsement No. 10 of the Policy,” Zurich took the position that T-Mobile’s claim for coverage was barred by Exclusions G and H to the Policy because the claim involved alleged “violations[s] of the Federal Trade Commission Act” and “consumer fraud.” Exhibit 7 at 4. Exclusion G generally excludes from coverage claims “based upon, arising out of, or attributable to any actual or alleged deceptive or unfair trade practice, consumer fraud, false or deceptive advertising or misrepresentation.” Exhibit 2 at V.G. Similarly, Exclusion H also begins by excluding from coverage any claims relating to “consumer fraud or other violation of the Federal Trade Commission Act . . . .” Exhibit 2 at V.H. As noted above, however, the modified version of Exclusion H set forth in Endorsement No. 10 to the Policy goes on to state that this exclusion “shall not apply to” “Regulatory Proceedings that may constitute a violation of Section 5(a) of the Federal Trade Commission Act (15 U.S.C. 45(a)), including a Consumer Redress Fund established in resolving such a Regulatory Proceeding . . . .” Exhibit 2 at Endorsement 10.H.(1) (emphasis added). To be clear, it appears that Mr. Nacchio based his denial on an incorrect interpretation of Endorsement No. 10, an interpretation that failed to account for Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 12 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 12 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 the bring-back of coverage in Exclusion H clearly and unequivocally indicating that the exclusion “shall not apply to” the very type of claim alleged in the FTC Action. Second, Zurich took the position that a sub-section of Exclusion B to the Policy barred T- Mobile’s claim for coverage. Exhibit 7 at 7-8. Exclusion B provides, in pertinent part, that the Policy does not apply to any Claim or Privacy Event “based upon, arising out of or attributable to”: 2. any act, error, omission, Wrongful Act, fact, circumstance occurring prior to (i) the inception date of this Policy, (ii) the inception date of the first policy in an uninterrupted series of errors and omissions or privacy and security liability insurance policies continuously issued by the Underwriter to the Company of which this Policy is a renewal, whichever inception date is earlier, or (iii) the Retroactive Date shown in Item 4 of the Declarations, if on or before such earlier inception date or Retroactive Date the Insured knew or could have reasonably foreseen that such Wrongful Act, fact, circumstance or situation would give rise to a Claim or Privacy Event.” Exhibit 2 at V.B. In other words, Zurich appeared to take the position that T-Mobile’s claim was barred because it arose out of conduct that predated the inception date of the 2014 Policy. Like his faulty reading of Exclusion H, however, it appears that Mr. Nacchio failed to review the complete language of Exclusion B, including the language of that clause confirming that the Policy provided coverage for alleged prior Wrongful Conduct as long as that conduct did not predate the earliest date of the first policy issued by Zurich (again 2010) or the Retroactive Date set forth in the Policy – policy language indicating that T-Mobile had actually purchased “full” retroactive coverage for all prior acts for the reasons explained in detail below. Third, despite the fact that its policy expressly covered the very type of claim raised by the FTC Action and the very type of Consumer Redress Fund employed to settle that litigation, Zurich wrongly contended that the fund was not covered because it represented the alleged “disgorgement of ill-gotten gains” and was not a Loss for that reason. Exhibit 7 at 7. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 13 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 13 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Fourth, and perhaps most importantly, Zurich’s denial letter did not in any way explain why the FTC Action was allegedly not a covered “Regulatory Proceeding,” including any analysis of whether the claims at issue related to a Privacy Event, a Privacy Wrongful Act or a Security Wrongful Act. Zurich’s letter instead wrongfully concluded that the FTC Action did not qualify as a Regulatory Proceeding without any analysis whatsoever, instead stating without elaboration that the FTC Action “is neither a formal investigation concerning a Privacy Event nor an administrative adjudicative proceeding concerning a Privacy Wrongful Act or Security Wrongful Act.” Exhibit 7 at 5-6. D. The Settlement of the FTC Action. Given Zurich’s complete abdication of its coverage obligations, T-Mobile engaged in settlement discussions with the FTC in late 2014 to resolve its liability. T-Mobile and the FTC entered into a formal agreement to settle the FTC’s claims on December 19, 2014, and Judge Robart subsequently entered the Consent Order on December 22, 2014. Exhibit 3. That Order included a section entitled “Consumer Redress” that obligated T-Mobile to provide no less than $90 million in payments to consumers, the FCC, the FTC, and various other governmental entities. Id. at 10-17. T-Mobile subsequently certified its compliance with the terms of Judge Robart’s Order in a letter to FTC Bureau of Consumer Protection Associate Director James A. Kohm, confirming that T-Mobile had: (1) issued $8,529,158.71 in consumer refunds; (2) made payments to other government entities totaling $22.5M; (3) provided further customer balance reductions of at least $37.5M; and (4) wired the FTC the remaining $21,470,841.29 balance on October 9, 2015. Exhibit 8 at 1-5. The FTC did not contest T-Mobile’s compliance with Judge Robart’s Order and there is no dispute that T-Mobile made these payments as a result.15 15 T-Mobile has provided Zurich with copies of all check and wire transfer documents associated with these payments. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 14 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 14 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 E. T-Mobile Requests that Zurich Reconsider its Summary Denial of Coverage in the Spring of 2015. T-Mobile subsequently contacted Zurich in the spring of 2015, asked it to re-evaluate its coverage position, and volunteered to provide Zurich with additional information in the form of the settlement memorandum prepared by the firm that defended the FTC Action, Davis Wright Tremaine (“Memo”) in the hope that providing that information would cause Zurich to reconsider its improper denial of coverage. The Settlement Memo set out all of the facts and history of the case reasonably necessary for Zurich to determine that T-Mobile’s claim was covered, including factual information confirming that the FTC Action related to a Privacy Event, a Privacy Wrongful Act, and a Security Wrongful Act. T-Mobile provided the Memo to Zurich in March of 2015. See Exhibit 9 at STEAD 000039-40. Zurich did not timely respond further to clarify its coverage position in light of the information in the Memo. When T-Mobile subsequently asked Zurich why it had not responded five weeks later, the new claims examiner assigned to T-Mobile’s claim, Ms. Constance DeSena, responded by claiming she had reviewed the Memo but was still “in the process of completing” her “analysis” of the Memo and would “try to get a response to” T-Mobile “as soon as possible.” Id. Unfortunately, when Zurich finally provided a substantive response on May 29, 2015 – more than two and a half months after T-Mobile first provided the settlement Memo and well outside the thirty-day response period required by Washington law – Zurich simply stood on its prior denial without further explanation, indicating: Zurich has now completed its review of the November 20, 2014 settlement assessment memorandum prepared by David [sic] Wright, which you remitted to us for review and consideration. Please be advised that nothing contained within the memorandum causes Zurich to alter or modify its prior coverage position with respect to this matter, and that Zurich retains the position set forth in its coverage position letter of August 29, 2014. Id. at STEAD 000038. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 15 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 15 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Tellingly, the claim file notes later produced by Zurich do not contain a single entry relating to Ms. DeSena’s alleged review or analysis. See Exhibit 6 at 1. Indeed, there are no entries in the claim notes produced by Zurich after February 5, 2015, a full month and a half before T-Mobile even provided the Memo to Zurich. Id. Ms. DeSena’s apparent misrepresentations obviously provide additional compelling evidence of Zurich’s bad faith. Faced with this course of conduct, T-Mobile felt that it had no choice but to pursue litigation to obtain the insurance coverage that it had bargained for under the Policy and subsequently initiated this case. The parties are currently engaged in discovery in advance of the fact discovery cutoff at the end of November with a trial date set for March of next year. III. ARGUMENT AND AUTHORITY A. The Policy Covers the Defense and Settlement of the FTC Action. The rules governing this Court’s interpretation of the Policy under Washington law are clear: (1) “the Court must liberally construe the policy in favor of finding coverage”; and (2) once T-Mobile shows that its claim falls within a grant of coverage like Insuring Agreement A or C (again, based on a liberal interpretation of those clauses), Zurich has the burden of proving an exclusion to coverage applies. RSUI Indem. Co. v. Vision One, LLC, No. 08-cv-1386-RSL, 2009 WL 5125411, at *3 (W.D. Wash. Dec. 18, 2009); Mutual of Enumclaw Ins. Co. v. T & G Constr., Inc., 165 Wn.2d 255, 268, 199 P.3d 376 (2008) (insurer bears the burden of proving that an exclusion applies”). That is the case because “coverage exclusions are contrary to the fundamental protective purpose of insurance and will not be extended beyond their clear and unequivocal meaning; they are strictly construed against the insurer.” RSUI Indem. Co., 2009 WL 5125411 at *3 (citing Stuart v. Am. States Ins. Co., 134 Wn.2d 814, 818–19, 953 P.2d 462 (1998)). Any policy ambiguity, including ambiguity about the reach of such exclusions or the applicability of policy sublimits, must be construed in favor of the insured and coverage as a result. See, e.g., Haney v. State Farm Ins. Co., 52 Wn. App. 395, 396, 760 P.2d 950 (1988) (potential contradiction Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 16 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 16 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 between applicability of $100,000 “per person” and $300,000 “per accident” limits rendered them ambiguous). As indicated above, T-Mobile’s claim for coverage is based on the plain language of the Policy and the self-evident proposition that the FTC Action – a lawsuit and investigation initiated by service upon T-Mobile of a “complaint” during the relevant policy period and prosecuted by the federal agency that resulted in a settlement and judgment in the form of formal consent decree establishing an expressly covered Consumer Redress Fund – is a covered Claim. For the reasons detailed above, the FTC Action and resultant settlement both meet the Policy’s definition of Loss and fall squarely within the language of Insuring Agreement A and, to the extent necessary, Insuring Agreement C. For example, applying Insuring Agreement A, there is no reasonable basis for disputing the fact that the Claim alleged in the FTC Action arises from an alleged “error or omission” or “breach of duty actually or allegedly committed by an Insured (T- Mobile) or by someone for whom the Insured is legally responsible” (such as the aggregators or content providers) “in connection with Insured’s rendering . . . of Technology Services,” a term expressly defined to include “Telecommunication Services” like the cellular services at issue in the FTC Action. See Exhibit 7 (denial letter) at 3-4; Exhibit 2 (Policy) at IV.KK-MM (definitions of Technology Services, Telecommunication Services, and Technology Wrongful Act). Similarly, the FTC Action also qualifies for coverage under Insuring Agreement C, as the underlying wrongful conduct of the aggregators and content providers qualifies as both a Security Wrongful Act and a Privacy Wrongful Act and otherwise relates to a Privacy Event for the reasons detailed above, including the indisputable fact that the definition of Privacy Event sent forth in the Policy expressly defines that phrase to include claims arising under “Section 5(a) of the Federal Trade Commission Act (15 U.S.C. 45(a)),” the very same statute relied upon by the FCT here. T-Mobile has demonstrated a right to coverage under the Policy for both its Defense Costs and the settlement payments at issue as a result. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 17 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 17 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 B. Zurich’s Arguments against Coverage Fail as a Matter of Law. 1. Exclusions G & H Do Not Bar Coverage. Zurich contends that Exclusions G and H generally bar coverage for the FTC Action because the FTC Action related to allegations of consumer fraud or unfair trade practices. Exhibit 7 at 4. This position fails for two reasons. First, Zurich’s reading of these exclusions ignores the bring-back coverage provided by Exclusion H for the very type of FTC claims at issue in this case. Again, Endorsement No. 10 restricts Exclusion H by confirming that it “shall not apply to” “a Regulatory Proceeding that may constitute a violation of Section 5(a) of the Federal Trade Commission Act (15 U.S.C. 45(a)), including a Consumer Redress Fund established in resolving such a Regulatory Proceeding . . .” Exhibit 2 at Endorsement 10.H.(1) (emphasis added). Second, to the extent Zurich contends that Exclusion G more generally excludes coverage for claims “based upon, arising out of, or attributable to any actual or alleged deceptive or unfair trade practice, consumer fraud, false or deceptive advertising or misrepresentation,” that position is also contradicted by the more specific bring-back of coverage provided by Exclusion H. There is simply no way to reconcile the bring-back coverage for FTC claims and Consumer Redress Funds set forth in Exclusion H with any argument that Exclusion G more generally excludes coverage for this type of Claim and Loss, as doing so would render that coverage and the policy’s references to FTC-related Consumer Redress Funds a nullity. 2. Exclusion B’s Prior Notice Exclusion Does Not Bar Coverage. Zurich argues that Exclusion B bars coverage because T-Mobile allegedly possessed knowledge of some of the underlying Wrongful Acts of the aggregators and content providers predating the inception date of the policy based on the earlier CIDs and related contact with government agencies and customers about cramming issues before 2014. See Exhibit 7 at 7-8. That position fails as a matter of law for two reasons. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 18 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 18 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 First, Zurich’s argument contradicts the language of the Insuring Agreements at issue and precedent interpreting the type of claims-made coverage at issue here. It is well settled that “claims made and reported” insurance like the Policy provides coverage for claims reported to the insurer during the policy period without regard to when the underlying conduct giving rise to the claim occurred. Am. Cont’l Ins. Co. v. Steen, 151 Wn.2d 512, 517, 91 P.3d 864 (2004) (“claims- made policies generally provide coverage for claims which the insurer receives notice of during the policy period regardless of when the damage occurred”); In re Feature Realty Litig., 468 F. Supp. 2d 1287, 1295 n.2 (E.D. Wash. 2006) (a “claims made policy is one whereby the carrier agrees to assume liability for any errors, including those made prior to the inception of the policy as long as a claim is made during the policy period”). The language of both Insuring Agreements at issue expressly confirm this fact. For example, Insuring Agreement C provides: [T]he Underwriter shall pay on behalf of the Insureds all Loss for which the Insureds become legally obligated to pay on account of any Claim for a Security Wrongful Act or a Privacy Wrongful Act taking place on or after the Retroactive Date for this Insuring Agreement, as stated in Item 4 of the Declarations, and prior to the end of the Policy Period . . . . provided such Privacy Wrongful Act, Privacy Event or a Security Wrongful Act first occurs on or after the applicable Retroactive Date shown in Item 4 of the Declarations . . . and before the end of the Policy Period. Exhibit 2 at I.C. (emphasis added). The Policy’s Retroactive Date as listed on Item 4 of the Policy’s Declarations page provides that the Policy covers “Full Prior Acts.” Accordingly, the Policy clearly and unequivocally provides coverage for Claims made during the policy period even if they arise from a covered Wrongful Act (e.g., a Privacy Wrongful Act, Privacy Event or a Security Wrongful Act) that occurred before that policy period. Indeed, the Policy makes it clear that all such prior Wrongful Acts are covered (regardless of when they occurred) by confirming that T-Mobile purchased “Full Prior Acts” retroactive coverage. Second, Zurich’s argument contradicts the actual language of Exclusion B. Specifically, while Zurich argues that Exclusion B allegedly bars coverage because the FTC Action allegedly Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 19 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 19 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 relates back to Wrongful Acts predating the Policy’s inception date of January 1, 2014, Exclusion B only excludes coverage for actual “Claim or any Privacy Event . . . based on, arising out of or attributable to: . . . 2. any act, error, omission, Wrongful Act, fact, circumstance or situation occurring prior to (i) the inception date of this Policy, (ii) the inception date of the first policy in an uninterrupted series of errors and omissions or privacy and security liability insurance policies continuously issued by the Underwriter to the Company of which this Policy is a renewal, whichever inception date is earlier, or (iii) the Retroactive Date shown in Item 4 of the Declarations, if on or before such earlier inception date or Retroactive Date the Insured knew or could have reasonably foreseen that such Wrongful Act, fact, circumstance or situation would give rise to a Claim or Privacy Event. Exhibit 2 at V.B.2. (emphasis added). Unless the Court deems this language to be ambiguous, the only reasonable construction of it confirms that Exclusion B: (1) Only applies to Wrongful Conduct “occurring prior to” a specific trigger date; (2) That trigger date is the earliest date of either: (a) the Policy inception date (January 1, 2014); (b) the policy inception date of the first such policy issued by Zurich (again, August 8, 2010); or (c) the Retroactive Date set forth in the Policy (“Full Prior Acts,” meaning full coverage for all prior acts); (3) Would only bar coverage if T-Mobile either “knew or could have reasonably foreseen” “on or before” that trigger date that Wrongful Acts that occurred before the date “would give rise to a Claim or Privacy Event.” Again, the “earlier” date for purposes of assessing whether T-Mobile had knowledge of a potential claim – “the Retroactive Date” listed in the Policy (again coverage for “Full Prior Acts”) – confirms that T-Mobile purchased coverage for any Claim actually asserted against T-Mobile during the 2014 policy period even if the underlying Wrongful Acts alleged occurred years earlier. There is simply no other reasonable way to interpret Zurich’s agreement to provide T- Mobile retroactive coverage for “Full Prior Acts.” Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 20 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 20 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Even if T-Mobile had not clearly purchased “Full” coverage for all prior Wrongful Acts (and it did), the second relevant “earlier” date for purposes of assessing the knowledge held by T- Mobile is August 8, 2010, the policy inception date for the earliest known policy issued by Zurich. While Zurich has frequently cited to T-Mobile’s actions in responding to the CIDs in 2012 and 2013 as a basis for asserting that T-Mobile had knowledge of a Wrongful Act before 2014, even assuming that allegation in Zurich’s favor, there is no basis for the claim that T-Mobile could have foreseen the FTC Action all the way back in August of 2010 as a result of what occurred in 2012 or 2013. Zurich’s reliance on Exclusion B fails as a matter of law as a result. 3. Zurich’s “No Loss” Arguments Fails as a Matter of Law. Zurich claims that the underlying settlement and Defense Costs at issue are not covered because they are purely restitutionary in nature – a position that counsel for Zurich has indicated is based on the holding in Level 3 Communications v. Federal Insurance Company, 272 F.3d 908 (7th Cir. 2001) – is meritless for two reasons. First, that position flies in the face of the express coverage grant for Consumer Redress Funds set forth in the Policy. That phrase is defined as “any sum of money the Insured is legally required to deposit in a fund for the payment of consumer claims due to a settlement of, or an adverse judgment in, a Regulatory Proceeding.” Exhibit 2 at IV. F. (emphasis added). Thus, by the very definition, every Consumer Redress Fund necessarily involves the establishment of a fund to pay amounts to consumers that they allege should have never been charged by the underlying business – allegedly “ill-gotten gains” secured by that business. Indeed, that is why such funds are called “consumer redress funds” – they are established to provide “redress” for consumer claims regarding allegedly improper charges. To allow Zurich to sell coverage for such funds but then effectively read that coverage out of the policy after the fact based on the position that the monies included in such funds are restitutionary would render that coverage a nullity. Indeed, Endorsement 6’s amended definition of Loss confirms both that such amounts are Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 21 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 21 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 insurable and that Zurich is not even allowed to contest T-Mobile’s determination of that issue. Exhibit 2 at Endorsement 6.II.O.16 Second, Zurich’s position ignores the fact that, like numerous other courts,17 this District squarely rejected the reasoning of Level 3 a full nine years ago in Virginia Mason Med. Ctr. v. Executive Risk Indemnity Inc., No. 07-cv-0636-MJP, 2007 WL 3473683 (W.D. Wash. 2007) (confirming that a settlement payment made to resolve claims arising from alleged wrongful conduct “constitutes a covered Loss under the Policy”), a decision affirmed by the Ninth Circuit, 331 Fed. Appx. 473 (9th Cir. 2009). In Virginia Mason, Judge Pechman: (a) reasoned that “[d]isallowing coverage” for the settlement “on the grounds that the funds were wrongfully gained would render nonsensical the Policy’s explicit coverage for settlements resulting from a wrongful act” – a rejection of the very argument made by Zurich; (b) squarely rejected the reasoning of Level 3 – that settlement payments arising out of allegedly wrongful conduct could be deemed restitutionary in nature at the settlement stage before any final determination of liability; and (c) also rejected Level 3’s premise that Washington law would allow “vague public policy” arguments regarding the alleged uninsurability of moneys “wrongfully obtained” to void insurance coverage. Virginia Mason, 2007 WL 3473683 at *7-11. Zurich’s “no loss” theory fails under the prior reasoning of this Court as a result. 16 “Loss shall include: . . . 3. Consumer Redress Funds to the extent such damages, civil fines, sanctions, or penalties are insurable under the laws of any state or jurisdiction most favorable to the Insured including without limitation any state or jurisdiction where: (a) such damages, civil fines, sanctions or penalties were awarded or imposed; (b) any Wrongful Act underlying the Claim took place; (c) either the Underwriter or any Insured is incorporated, has its principal place of business or resides; or (d) this Policy was issued or became effective. If the Insured determines in good faith that such damages, civil fines, sanctions or penalties are insurable, the Underwriter shall not challenge such determination unless required to do so as a matter of public policy.” Id. (emphasis added). 17 See, e.g., Genzyme Corp. v. Federal Ins. Co., 622 F.3d 62, 70-71 (10th Cir. 2010); Virginia Mason Med. Ctr. v. Executive Risk Indem., Inc., 331 Fed. Appx 473, 474 (9th Cir. 2009) (affirming district court’s conclusion that underlying settlement was covered “loss” under insurance policy); Liss v. Fed. Ins. Co., No L-1845-01, 2006 WL 2844468, at *5 (N.J. Super. Ct. A.D. Oct. 6, 2006) (expressly rejecting Level 3). Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 22 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 22 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4. The $5 million Sublimit does Not Apply to T-Mobile’s Claim under Insuring Agreement A. Even though its own Denial Letter confirms that it analyzed T-Mobile’s claim for Regulatory Proceeding coverage under Insuring Agreement A, Zurich has taken the position that the Policy’s $5 million sublimit applicable to Insuring Agreement C applies to that claim. T- Mobile respectfully submits that the Court should reject that position for at least three reasons. First, both the general structure and the language of the Policy makes it clear that the $5 million sublimit only applies to claims for coverage under Insuring Agreement C. The Policy’s declarations page indicates that the $5 million sublimit falls under Insuring Agreement C only, as it is listed in a separate, un-numbered row directly below Insuring Agreement C. Similarly, while Insuring Agreement C expressly references that sublimit, Insuring Agreement A does not contain any reference whatsoever to the sublimit (as one would expect given the $150 million limit for that coverage grant set forth in the declarations page). The Policy’s only additional references to the $5 million sublimit both confirm that it only applies to Insuring Agreement C. See Exhibit 2 at VI.A. (setting forth the applicable limits of liability under each insuring agreement before referencing the $5 million sublimit as the “maximum liability of the Underwriter under Insuring Agreement C”) (emphasis added); Endorsement 6.II.O.2 (referencing $5 million sublimit as applying “solely with respect to Insuring Agreement C.” in the Policy’s revised definition of Loss (emphasis added)). In short, Zurich’s position that the $5 million sublimit applies to Insuring Agreement A contradicts Zurich’s own policy language and the structure of the Policy drafted by Zurich itself. Second, even assuming that T-Mobile’s claim for coverage for the Consumer Redress Fund at issue only qualified for coverage under Insuring Agreement C and that Zurich had not contradictorily analyzed that claim under Insuring Agreement A, the relevant Policy language confirms that the $5 million sublimit does not actually apply to Loss other than “civil fines, sanctions, or penalties,” including the Consumer Redress Funds and the Defense Costs at issue in this case. Specifically, the controlling definition of Loss set out in Endorsement No. 6: (1) first Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 23 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 23 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 defines Loss “as the total amount which the Insureds become legally obligated to pay on account of each Claim . . . including but not limited to damages, judgments, pre-judgment and post- judgment interest, settlements and Defense Costs” without any reference to the $5 million sublimit; (2) calls out three specific sub-categories of covered Loss: (a) “punitive, exemplary damages, or multiple damages,” (b) “civil fines, sanctions, or penalties,” (c) “Consumer Redress Funds”; and (3) critically, only refers to the $5 million sublimit in a single one of those three categories: “civil fines, sanctions, or penalties . . . .”18 Exhibit 2 at Endorsement No. 6 II. (emphasis added). To be clear, the plain language of the Policy’s definition of Loss does not indicate that the sublimit actually applies to T-Mobile’s claim for reimbursement of Defense Costs or the Consumer Redress Fund at issue. Summary judgment is appropriate on the issue as a result. Third, it is well settled that any ambiguity regarding the meaning and scope of the $5 million sublimit must be construed in favor of coverage. Holden v. Farmers Ins. Co. of Wash., 169 Wn.2d 750, 753-57, 239 P.3d 344 (2010) (policy ambiguity on question of whether policy limits included sales tax construed in favor of insured); Haney, 52 Wn. App. at 396-98 (potential contradiction between applicability of $100,000 “per person” and $300,000 “per accident” limits rendered them ambiguous requiring liberal construction in favor of insured, especially where there was “no language making the per accident limit subject to the per person limit”). That is especially the case where (like here) a claim potentially qualifies for coverage under two different coverage sections, only one of which contains a sublimit. Mark Andy, Inc. v. Hartford Fire Ins. Co., 233 F.3d 1090, 1092 (8th Cir. 2000) (declining to apply flood losses sublimit where “the insurance policy is ambiguous” as to whether the flood sublimit applied to more general “business- 18 “2. solely with respect to Insuring Agreement C., civil fines, sanctions, or penalties imposed pursuant to Privacy Regulations or resulting from a Regulatory Proceeding, provided that the Underwriter’s maximum aggregate liability for all such civil fines, sanctions, or penalties shall be subject to a sublimit of five million dollars $5,000,000 . . .” Id. (emphasis added). Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 24 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 24 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 interruption losses caused by a flood,” as “it is axiomatic that ambiguous provisions in an insurance policy are construed against the insurer”). At best, Zurich’s claim that the Insuring Agreement C sublimit Applies here to a claim that it itself analyzed under Insuring Agreement A only serves to confirm that ambiguity exists on that issue. That ambiguity must be construed in favor of coverage and the Court should rule that the sublimit does not apply here as result. IV. CONCLUSION For the reasons set forth above, T-Mobile respectfully requests that the Court grant its Motion and enter a partial summary judgment ruling that: (1) the Policy covers the defense and settlement of the FTC Action in the first instance; (2) Zurich’s arguments against coverage fail as a matter of law, including specifically that: (a) Exclusions G and H to the Policy do not bar coverage; (b) Exclusion B does not bar coverage; (c) the defense and settlement of the FTC Action is a covered “loss” under the Policy; and (d) the Policy’s $5 million sublimit does not apply to T-Mobile’s claim for coverage under Insuring Agreement A. A proposed order granting the relief requested is submitted herewith. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 25 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 25 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 DATED this 6th day of October, 2016. s/ Michael A. Moore Michael A. Moore, WSBA No. 27047 Kelly H. Sheridan, WSBA No. 44746 CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, WA 98154-1051 Tel: (206) 625-8600 Fax: (206) 625-0900 Email: mmoore@corrcronin.com ksheridan@corrcronin.com Attorneys for Plaintiff T-Mobile USA, Inc. Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 26 of 27 PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 26 No. 2:15-cv-01622-RSL CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, Washington 98154-1051 Tel (206) 625-8600 Fax (206) 625-0900 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 CERTIFICATE OF SERVICE I hereby certify that on October 6, 2016, I electronically filed the foregoing with the Clerk of the Court using the CM/ECF system, which will send notification of such filing to the following: Susan Koehler Sullivan Robert A. Meyers Sedgwick LLP 520 Pike Street, Suite 2200 Seattle, WA 98101 Email: susan.sullivan@sedgwicklaw.com bob.meyers@sedgwicklaw.com Attorneys for Defendants s/ Michael A. Moore Michael A. Moore, WSBA No. 27047 CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, WA 98154-1051 Telephone: 206-625-8600 Fax: 206-625-0900 Fax Email: mmoore@corrcronin.com Case 2:15-cv-01622-RSL Document 22 Filed 10/06/16 Page 27 of 27 ORDER GRANTING PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 1 No. 2:15-cv-01622-RSL 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 THE HONORABLE ROBERT S. LASNIK UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE T-MOBILE USA, INC., Plaintiff, v. STEADFAST INSURANCE COMPANY and ZURICH AMERICAN INSURANCE COMPANY, Defendants. No. 2:15-cv-01622-RSL ORDER GRANTING PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT (PROPOSED) THIS MATTER having come on regularly for hearing before the undersigned Judge on Plaintiff T-Mobile’s Motion for Partial Summary Judgment (“Plaintiff’s Motion for Partial Summary Judgment”), and the Court having reviewed all filings and record submitted in connection with Plaintiff’s Motion for Partial Summary Judgment; now, therefore, it is hereby: ORDERED that Plaintiff’s Motion for Partial Summary Judgment is GRANTED. The Court finds as a matter of law that: (1) the Zurich insurance policy at issue in this litigation (the “Policy”) covers the defense and settlement of the FTC Action in the first instance; (2) Defendants’ arguments against coverage fail as a matter of law, including specifically that: (a) Case 2:15-cv-01622-RSL Document 22-1 Filed 10/06/16 Page 1 of 2 ORDER GRANTING PLAINTIFF T-MOBILE USA, INC.’S MOTION FOR PARTIAL SUMMARY JUDGMENT – 2 No. 2:15-cv-01622-RSL 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 Exclusions G and H to the Policy do not bar coverage; (b) Exclusion B does not bar coverage; (c) the defense and settlement of the FTC Action is a covered “loss” under the Policy; and (d) the Policy’s $5 million sublimit does not apply to T-Mobile’s claim for coverage under Insuring Agreement A. DATED this _____ day of _____________________, 2016. HONORABLE ROBERT S. LASNIK United States District Judge Presented By: s/ Michael A. Moore Michael A. Moore, WSBA No. 27047 Kelly H. Sheridan, WSBA No. 44746 CORR CRONIN MICHELSON BAUMGARDNER FOGG & MOORE LLP 1001 Fourth Avenue, Suite 3900 Seattle, WA 98154-1051 Telephone: 206-625-8600 Fax: 206-625-0900 Email: mmoore@corrcronin.com ksheridan@corrcronin.com Attorneys for Plaintiff Case 2:15-cv-01622-RSL Document 22-1 Filed 10/06/16 Page 2 of 2