Microsoft Corp.’s captive insurer has lost its bid to recover $175 million in costs the software maker said it incurred in 2013 to replace memory chips that a manufacturer failed to deliver because of a fire at the chipmaker’s plant in China.

Cypress Insurance Co., the Arizona captive insurer of Microsoft, had sought to recoup $175 million related to business interruption after a fire at the SK Hynix manufacturing complex in Wuxi, China forced a halt in the production of memory chips for its Xbox One.

However, on March 28, a jury in the U.S. District Court for the Western District of Washington voted in favor of the chipmaker, SK Hynix, a California company with the plant in China.

Cypress’ sole insured is Microsoft Corp., headquartered in Redmond, Wash., and its subsidiaries.

Microsoft claimed the suspension of production was a breach of the contract it has had with SK Hynix since 2004 and that this breach negatively affected the launch of its video gaming console, the Xbox One, in 2013. The giant software firm said it was “forced to secure alternate chip sourcing at a higher price to support its shipment requirements.” The company cited having to charter cargo planes, buy substitute chips and pay additional staff to launch Xbox on schedule.

Cypress paid $150,000 policy benefits to Microsoft and sought to recover those costs plus legal fees and interest from SK Hynix.

SK Hynix countered that Cypress failed to state a cause of action for which it was responsible, arguing that the suspension of production was “excused by impossibility, impracticability, and/or frustration of purposes through no fault” of SK Hynix.

The manufacturer said that to the extent that Cypress or Microsoft suffered any damages because of the fire, the damages were “proximately caused by persons, entities, and/or factors or events other than SK Hynix and for which SK Hynix is not responsible.”

Captive Taxes

Cypress recently ran into some trouble with regulators in Microsoft’s home state of Washington.

Last August, Cypress paid $573,905 in unpaid premium taxes and $302,915 in interest and penalties to settle a complaint by Washington state Insurance Commissioner Mike Kreidler, who last May ordered Cypress to stop transacting insurance in the state without a license and to pay the taxes on its premiums.

According to Kreidler’s office, from 2008 through 2018, Cypress collected more than $91 million in premium from Microsoft and its companies. State law requires insurance companies to pay a 2 percent tax based on their written premiums.

Before 2008, Microsoft’s purchasing practices complied with state insurance laws, according to the insurance regulator.

Kreidler took similar action against the captive for Costco Wholesale Corp. The insurer, NW Re Limited, of Phoenix, paid $3.6 million in unpaid premium taxes, penalties, interest and a fine last month in settling with Kreidler’s office.

*This story ran previously in our sister publication Insurance Journal.