Opinion
No. X08 CV 02 0191697 S
May 9, 2006
MEMORANDUM OF DECISIONS RE MOTIONS FOR SUMMARY JUDGMENT CONCERNING DUTY TO COOPERATE AND OTHER MATTERS (703.00, 729.00)
I. Background
In this complicated insurance coverage litigation the parties have filed seventeen motions and several additional cross-motions for partial summary judgment. In light of this month's scheduled trial date, the court has been faced with the task of evaluating the merits of each motion and determining as quickly as possible which, if any, should be granted on the basis of the pertinent law and undisputed facts. In order to reach as many of the motions as possible the court will dispense with all but a brief discussion of the factual and procedural background of the case and refers the reader, if necessary, to previous decisions in this case dated June 17, 2003, September 1 and 14, 2004, January 13, 2005 and November 29, 2005, several of which deal with earlier motions for summary judgment. The court will also not repeat the well known and accepted standard applied in resolving motions for summary judgment.
Steadfast Insurance Company (Steadfast) commenced this action in July 2001 seeking declaratory relief and monetary damages with respect to claims arising out of a general comprehensive liability insurance policy issued to The Purdue Frederick Company and associated entities (collectively Purdue). In 2002 Steadfast cited in as defendants "first layer excess liability insurers" American International Specialty Lines Insurance Company (AISLIC) and Gulf Underwriters Insurance Company (Gulf).
There are a multitude of controversies between Steadfast and Purdue and a somewhat lesser number involving AISLIC and Gulf. The most significant set of issues between Steadfast and Purdue arise from the question of who is responsible for payment of defense costs incurred defending Purdue in a large number of lawsuits seeking monetary damages for injuries allegedly caused by the ingestion of Purdue's pharmaceutical product OxyContin (OxyContin cases).
Purdue and Steadfast have been at loggerheads almost from the time the first OxyContin case was filed in April 2001. The Steadfast policy purportedly indemnifies Purdue for up to $2 million in judgments and settlements and provides, in addition, legal defense to Purdue until the $2 million in indemnity has been paid out, or exhausted. Steadfast contends that its indemnity limit has been exhausted and therefore its duty to defend Purdue has terminated. Steadfast also contends that Purdue's actions in hiring its own lawyers, refusing to accept the attorneys chosen by Steadfast and generally directing its own defense, among other things, have breached the insurance contract. Finally, Steadfast contends that many, if not all, the claims in the OxyContin cases are not covered by its policy. As a result, Steadfast has paid a very small portion of the defense costs of Purdue incurred in the OxyContin cases, costs which now amount to about $400 million. For its part, Purdue has asserted numerous counterclaims seeking, inter alia, a declaration that Steadfast has a duty to defend to OxyContin cases and that Steadfast has not acted in good faith and has committed unfair trade and insurance practices.
This memorandum of decision will dispose of two motions for partial summary judgment. Steadfast has moved for partial summary judgment declaring that Purdue has breached its duty to cooperate with Steadfast thereby depriving Steadfast of its right to settle the OxyContin cases. In turn, Purdue has moved for partial summary judgment seeking, inter alia, dismissal of Count III of Steadfast's Second Amended Complaint alleging Purdue's failure to cooperate was breach of the insurance contract. The remainder of Purdue's motion seeks to dismiss Counts IV and XIII which seek declarations that Purdue has breached the insurance contract by violating the "voluntary payments" clause and interfering with Steadfast's right to settle cases.
II. Steadfast Motion
The Steadfast motion is somewhat more focused, and the court will turn its consideration to that motion first. At the outset the Steadfast motion makes several points that are relatively unassailable. First, Steadfast's right to settle and its rights to obtain Purdue's cooperation are set forth in the language of the insurance policy (Policy).
No actual insurance policy was ever issued to Purdue. The parties appear to agree that relevant portions of the insurance agreement between Steadfast and Purdue are contained in the Binder issued and insurance coverage forms referenced therein.
The Policy states:
We (Steadfast) may at our discretion . . . settle any claim or suit that may result (seeking damages covered by the Policy.)
The Policy further states:
You [Purdue] . . . must . . . cooperate with us (Steadfast) in the investigation, settlement or defense of the claim or `suit.'
Second, Steadfast contends that the issue whether Purdue breached its duty of cooperation is not affected by the terms of the Special Claims Handling Instructions, a document separate from the Policy evidencing certain agreements between Steadfast and Purdue, nor by Purdue's claim that Steadfast has a conflict of interest. The court agrees.
Steadfast focuses the motion on its right to settle claims and cases against Purdue and how that right has been adversely affected (Steadfast would argue it has been rendered meaningless) by Purdue's refusal, to provide Steadfast with documents and information which would assist in evaluating the strengths or weaknesses of individual underlying OxyContin cases.
It is uncontested that Purdue has withheld evaluative information from Steadfast on the basis that such information was privileged or, based in large part on investigatory work on the underlying plaintiffs in the OxyContin cases, was protected by the attorney-work-product doctrine. It is also uncontested, for the purposes of this motion, that either the attorney-client privilege or the work-product doctrine applies to the withheld evaluative information and that the only manner in which Steadfast contends that Purdue breached its duty to cooperate in providing information is the failure to provide it with the evaluative information.
On September 7, 2005, in the context of a discovery motion, this court ruled, based largely on the Connecticut Supreme Court decision in Metropolitan Life Insurance Co. v. Aetna Casualty Surety Co., 249 Conn. 36 (1999), that the cooperation clause in the Steadfast policy was not a basis for overcoming the attorney-client privilege. Steadfast argues that because the issue now arises in the context of evaluating Purdue's cooperation, and for other reasons, the court should look again at its earlier decision and determine that under Metropolitan Life the protections of the privilege and work-product doctrine overcome the requirements of the cooperation clause only when the materials sought to be withheld relate to the coverage issues being litigated by the parties.
In Metropolitan Life, the plaintiff-insured was involved as a defendant in several hundred asbestos tort actions. The plaintiff-insured had settled its differences with Travelers, its primary insurer, and Travelers was actively defending the asbestos cases, but the plaintiff-insured was in an adversarial position with respect to coverage purportedly provided by several insurer's excess, including the named defendant, Aetna. These excess insurers did not assist in the defense of asbestos cases and further had denied liability coverage or reserved their rights to do so. The excess insurers, through discovery in the coverage litigation, sought documents relating to the defense and settlement of the asbestos cases by the plaintiff-insured. The trial court, over the objection of the plaintiff-insured founded on the attorney-client privilege, ordered disclosure primarily because of the existence of the cooperation clauses in the excess insurers' policies. The Connecticut Supreme Court reversed on the grounds that the excess insurers had not associated themselves with the plaintiff-insured in the defense of the underlying asbestos cases and the plaintiff-insured could reasonably have expected confidentiality of the information, at least until the excess insurers did get involved. Metropolitan Life, supra, 249 Conn. 59-60.
In its September 7, 2005 decision this court found that there have been serious disputes about coverage in the OxyContin cases between Steadfast and Purdue and their "positions . . . have been highly adversarial mirroring the position of the parties in Metropolitan Life." Memorandum, 2. As a result, this court denied a motion to compel made by Steadfast.
The court has not been persuaded that its position should change in the context of this summary judgment motion. First, to the extent the evaluative materials withheld by Purdue represent work product and not attorney-client communications this court believes that the holding in Metropolitan Life would still apply. While the Connecticut Supreme Court specifically stated that it did not reach the issue of attorney work product, 249 Conn. 41, n. 4; 249 Conn. 51, n. 17, the decision did rely heavily on Remington Arms Co. v. Liberty Mutual Insurance Co., 142 F.R.D. 408 (Del. 1992) (applying Connecticut law), a case which concluded that the cooperation clause did not requite disclosure of attorney work product. In addition, Metropolitan Life indicated that on remand the trial court could find certain documents not discoverable "because of the work-product doctrine." 249 Conn. 63, n. 36.
Second, this court does not agree with Steadfast's argument that the holding of Metrorolitan Life should only apply to documents relevant to the coverage dispute and other information withheld by Purdue is done so at the peril of breaching the cooperation clause. The argument is not without some rational basis, but it is not persuasive in the long run. A careful reading of Metropolitan Life reveals no hint that its holding should be so limited. In addition, there is no bright line between information relevant to the coverage claims and that which is not relevant. For instance, the evaluative information could be used by Steadfast either to establish that Purdue's policy of not settling the OxyContin cases was unreasonable or that the investigations conducted by Purdue were not worth the many millions of dollars spent on them, both of which are issues in this coverage case. It is also important to note that this same information was sought by Steadfast as relevant to the issues of this coverage case in its motion to compel decided last September.
The court determines there was no obligation on Purdue to turn over the evaluative materials to Steadfast and therefore Purdue's failure to make them available to Steadfast was not a breach of the duty of cooperation. Steadfast's motion for partial summary judgment is denied.
III. Purdue Motion
A. Count III. In the first part of its motion, which somewhat mirrors the Steadfast motion just discussed, Purdue seeks to dismiss Count III of Steadfast's Second Amended Complaint which requests a declaration that Purdue breached the cooperation clause and the possibly inconsistent remedies of a declaration that "Steadfast has no duty to defend or indemnify Purdue with respect to the . . . OxyContin [cases]" and a declaration that Steadfast has the right to access "all information related to the defense of the Oxycontin [cases]."
The significant elements of Purdue's motion are its contentions that it owed no duty of cooperation to Steadfast after Steadfast filed its First Amended Complaint in this action on November 1, 2001 because that pleading acted as a denial of coverage by Steadfast, and prior to that time there was no prejudice to Steadfast from any alleged lack of cooperation by Purdue.
Purdue asserts that an insured's duty to cooperate with its insurer terminates with the insurer's denial of coverage. Steadfast does not contest this point, and the court finds Purdue's assertion to be well-settled. See 22 Holmes' Appleman on Insurance 2d, § 138.10; Couch on Insurance 3d, §§ 199.63, 199.66; Haskell v. Eagle Indemnity Co., 108 Conn. 652, 658 (1929).
There is some authority for Purdue's position that Steadfast's decision to file its First Amended Complaint on November 1, 2001 seeking declarations that its policy did not provide insurance coverage for the OxyContin cases terminated Purdue's duty to cooperate. In LaFarge Corporation v. Hartford Casualty Insurance Co., 61 F.3d 389 (5th Cir. 1995) the court, applying a declaratory judgment action against its insured,
The First Amended Complaint sought, inter alia, declarations that Steadfast had no duty to defend or indemnify Purdue because Purdue had breached its duty to cooperate (Count III) because of the "known loss doctrine" (Count VI) because the OxyContin lawsuits represented "expected injury" (Count VIII). The complaint also sought damages for breach of contract (Count V) and a declaration of no duty to defend (Count XII).
it is clear that, once the insurer sues the insured and contests coverage, the insurer cannot rely on the cooperation clause to gain access to information that any other party to any other lawsuit would be required to obtain through ordinary discovery methods.
Id., 397-98. Interpreting New York law, the District Court for the Southern District of New York has held that the filing of a declaratory judgment action by an insurance company operated as a denial of a claim. Atlantic Mutual Insurance Co., v. Balfour Maclaine, 775 F.Sup. 101 (S.D.N.Y. 1991).
There is contrary authority. In Olin Corporation v. Insurance Co. of North America, 221 F.3d 307 (2d Cir. 2000) the court held that an insurer's declaratory judgment action requesting simply a declaration of rights without demanding a specific outcome was not a categorical denial of liability and that the determination of whether there was such a categorical denial was a question of fact. Id. 328-29. The Illinois Supreme Court has said in discussing a declaratory judgment action:
Here, insurers indicated their concerns about coverage, proceeded to evaluate insureds' claims under an express reservation of rights, and subsequently sought a declaratory judgment. By their conduct insurers have demonstrated no intent to abandon insureds. We conclude that on these facts, insurers'" denial" of coverage does not amount to a repudiation of the insurance contract.
Waste Management, Inc. v. International Surplus Lines Insurance Co., 144 Ill. 2d 178, 207, 579 N.E.2d 322 (1991).
In Safeco Insurance Co. of America v. Rogers, 968 S.W. 2d 256 (Mo.App. 1998), the insurer first declined coverage then informed its insured it would provide a defense to a claim of alleged sexual harassment by an employee of the insured, subject to a reservation of rights. The insured accepted the defense. Subsequently, the insurer commenced a declaratory judgment action seeking a declaration that its policy provided no coverage to the insured and there was no duty to defend the insured. Three days before trial the insured partially settled with the employee and the employee amended her claim on the day of trial to allege invasion of privacy. This amended claim was not forwarded to the insurer until after the trial. The trial court found that the insured had breached the cooperation clause by not forwarding the amended claim in a timely fashion. On appeal, the insured contended that the initial declination by the insurer coupled with the reservation of rights and declaratory judgment action, forfeited the insurer's rights to rely on the cooperation clause. The Missouri Court of Appeals held that by providing a defense which the insured accepted and when the insured knew of the insurer's position of non-coverage the insurer had not waived the cooperation clause Id., 258.
In this case Steadfast's actions have been a mixture of those which could readily be interpreted as declining coverage and refusing a defense and those which can be interpreted otherwise. In its First Amended Complaint, as noted, Steadfast seeks a declaratory judgment that it owes no coverage or duties to Purdue. While some of the requested declarations were couched in terms that were less definitive, for example, such relief should be granted "to the extent" that the OxyContin cases sought a certain type of relief, the declarations Steadfast requested concerning lack of coverage and no duty to defend were unequivocal and therefore nothing like the circumstances in Olin Corporation v. Insurance Co. of North America, supra. On the other hand, the First Amended Complaint reiterated what had been conveyed in an earlier reservation of rights letter; i.e. that Steadfast would provide a defense to Purdue in the OxyContin cases, subject to a reservation of rights. Purdue has been willing to accept this defense but only as long as Steadfast paid the attorneys chosen and controlled by Purdue. There are significant and unresolved issues over choice of counsel and defense tactics, and since 2002 Steadfast has paid for only a minute portion of the cost of defense despite this court's order over five months ago that a duty to defend on the part of Steadfast existed.
In this fact scenario the court cannot find, as a matter of law that Steadfast so categorically denied any responsibility to Purdue as to terminate Purdue's obligation to cooperate as of November 1, 2001. This question must be left to the fact finder.
In addition, the court holds that under Connecticut law, the utilization of the declaratory judgment procedure by Steadfast in this case, by itself, is not sufficient, as a matter of law, to find a waiver of rights under the cooperation clause occurred. As noted in an earlier decision, Connecticut cases have found the declaratory judgment statute, General Statutes § 52-29, and the concomitant Practice Book rules, §§ 17-54 through 17-58, serve a sound social purpose and are a practical and efficacious means to resolve disputes over insurance coverage. See Connecticut Savings Bank v. First National Bank Trust Co., 133 Conn. 403 (1947); St. Paul Fire Marine Insurance Co. v. Shernow, 22 Conn.App. 377 aff'd 222 Conn. 823 (1992).
B. Count XIII. In its Count XIII Steadfast seeks a declaration that it has the right to settle any OxyContin cases without the consent of Purdue. This claim is made based on the Policy language quoted in Section II of this memorandum. Purdue moves to dismiss this count on the ground that Steadfasts denied coverage through the filing of its First Amendment Complaint. For the reasons stated in Section III A of this decision the court cannot conclude, as a matter of law, that Steadfast's action was an unequivocal or categorical denial of coverage. Therefore, this portion of Purdue's motion is denied. C. Count IV. Count IV of the operative complaint seeks a declaration that Purdue violated the provision in the Policy which prohibits an insured from "voluntarily mak[ing] any payment, assum[ing] any obligation, or incur[ring] any expense, other than first aid, without [Steadfast's] consent" except at the insured's "own cost." Steadfast alleges that Purdue's payment of counsel fees in defense of the OxyContin cases are such prohibited voluntary payments. Purdue moves for summary judgment dismissing this count on the grounds that (1) its obligation to seek Steadfast's consent for payment terminated with the denial of coverage purportedly evinced by the First Amendment Complaint of November 1, 2001, (2) there was no prejudice to Steadfast by Purdue's retention and payment of defense counsel without Steadfast's consent because Purdue incurred no liability through judgments in or settlements of the OxyContin cases during the period up to November 1, 2001 and (3) the payments were not voluntary because Purdue was entitled to be defended.
The court rejects Purdue's first two arguments because they rely on the predicate that the First Amended Complaint was a categorical denial of coverage.
The third ground of Purdue's motion merits more consideration. In an earlier decision this court stated that the voluntary payments prohibition could not be interpreted to bar payment of defense counsel until the issue of whether Purdue had the right to select counsel was decided. Memorandum of Decision, December 9, 2004. That issue remains undecided. However, since then the court has determined that while the questions of coverage and counsel selection are being litigated, Steadfast has a duty to defend Purdue and to pay the reasonable costs of such defense. Memorandum of Decision, November 29, 2005. Under those circumstances the payment by Purdue of defense counsel fees in lieu of the failure of Steadfast to make payments cannot be a basis for a finding of a violation of the voluntary payments provision leading to a declaration that Steadfast has no obligation to pay counsel fees. The court concludes that if Steadfast has no obligation to pay the counsel fees that Purdue to date has been paying, that finding must be based on something other than the voluntary payments clause. The motion to dismiss Count IV is granted.