No. X08 CV 02 0191697 S
May 18, 2006
MEMORANDUM OF DECISION RE MOTION FOR PARTIAL SUMMARY JUDGMENT REGARDING TIMING AND ALLOCATION ISSUES
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 agreement with 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 and Gulf Underwriters Insurance Company. This case, in large part, concerns Steadfast's liability for defense costs incurred in connection with the defense of Purdue in a large number of cases filed against Purdue throughout the country alleging injuries and damages resulting from the ingestion of its pharmaceutical product OxyContin (OxyContin cases).
On September 29, 2000, Steadfast issued a binder to Purdue providing insurance coverage (Binder). The Binder defines the "term" of the insurance agreement as "October 1, 2000 — October 1, 2001." The Binder references a coverage form that provides, in part, that "[t]his insurance applies to `bodily injury' and `property damage' only if . . . [t]he `bodily injury' or `property damage' did not occur after the end of the policy period . . ." A "supplemental reporting period endorsement" stated that it applied only to claims for damages resulting from bodily injury which "occurred before the end of the policy period." The coverage form also provides that Steadfast "will have the right and duty to defend any `suit' seeking damages."
Steadfast has moved for partial summary judgment seeking a declaration that: 1) Steadfast is not liable for the costs to defend lawsuits that allege bodily injury commencing after October 1, 2001, and 2) Steadfast is only liable for a pro rata share of the costs to defend lawsuits in which the complaint is ambiguous as to whether bodily injury commenced before or after October 1, 2001.
Purdue does not dispute Steadfast's first contention. It agrees that Steadfast does not have the duty to defend suits that expressly allege initial ingestion of OxyContin after October 1, 2001. See Purdue's Memorandum, p. 2, n. 2 ("Purdue does not argue now, and has never argued, that [Steadfast] must defend Underlying Actions that are not at least potentially covered under the [Steadfast] policy. Thus, to the extent that a limited number of complaints in the Underlying Actions expressly allege that a claimant first ingested OxyContin after the expiration of the [Steadfast] Policy's period, that is, after October 1, 2001, there would not be a potential for coverage under that claim for any allegedly ensuing `Bodily Injury.' Therefore, Purdue argues [sic] that [Steadfast] would not be required to defend such a claim"). See also Purdue's Memorandum, p. 10, n. 12 ("With regard to [claims alleging initial ingestion of OxyContin after October 1, 2001], Purdue agrees with [Steadfast] that [Steadfast] does not have a duty to defend these claims because there is no possibility that [Steadfast] could be held liable to pay indemnity for those claims in that they allege `bodily injury' that is entirely outside the [Steadfast] Policy's policy period.").
The only issue left to be resolved is whether Steadfast is only liable for a pro rata share of the costs of defending lawsuits in which the complaint is ambiguous as to whether bodily injury commenced before or after October 1, 2001.
Under Connecticut law the interpretation of an insurance agreement is based on the intent of the parties, that being the coverage the insured expected to receive coupled with the coverage the insurer expected to provide, as that intent is expressed by the language of the entire policy. Wentland v. American Equity Insurance Co., 267 Conn. 592, 600-01 (2004). The words of the policy are given their natural and ordinary meaning, and any ambiguity is resolved in favor of the insured. Id., 601. CT Page 11705
[T]he obligation of the insurer to defend does not depend on whether the injured party will successfully maintain a cause of action against the insured but on whether he has, in his complaint, stated facts which bring the injury within the coverage. If the latter situation prevails, the policy requires the insurer to defend, irrespective of the insured's ultimate liability . . . It necessarily follows that the insurer's duty to defend is measured by the allegations of the complaint . . . Hence, if the complaint sets forth a cause of action within the coverage of the policy, the insurer must defend . . . If an allegation of the complaint falls even possibly within the coverage, the insurance company must defend the insured. ". . . [I]t is the claim which determines the insurer's duty to defend; and it is irrelevant that the insurer may get information . . . which indicates, or even demonstrates, that the injury is not in fact covered."
Hartford Casualty Ins. Co. v. Litchfield Mutual Fire Ins. Co., 274 Conn. 457, 463-64 (2005). (Citations omitted, internal quotation marks omitted, emphasis in original.)
The pharmaceutical companies are . . . required . . . to bear the initial burden of producing evidence that the complaint permits proof that the alleged . . . injury occurred during the coverage period of the policy. The burden then shifts to the insurer to prove, by a preponderance of the evidence, that any such injury could not have occurred within the policy period.
Aetna Casualty Surety Co. v. Abbott Laboratories, Inc., 636 F.Sup. 546, 550-51 (D.Conn. 1986).
In asking the court to determine that it is only liable for a pro rata share of defense costs where the complaint is ambiguous as to when the injury first occurred, Steadfast relies on Security Ins. Co. of Hartford v. Lumbermens Mutual Casualty Co., 264 Conn. 688 (2003). That case involved a dispute over the proper allocation of defense costs in long latency asbestos claims that implicated multiple insurance policies. In 1996, more than 100 plaintiffs instituted suit against the insured for bodily injuries resulting from the inhalation of asbestos. The plaintiffs in the asbestos litigation did not allege the precise time that the alleged injuries occurred. The parties agreed, however, that the insured was potentially liable to the asbestos litigation plaintiffs for bodily injury during the period from March 16, 1951, through May 1, 1996. From March 16, 1951, through April 22, 1959, the insured had asbestos-related insurance coverage, but it either lost or destroyed the insurance policies. At the time of the litigation, the insured did not know who the insurers were for this period, and it had made no demand on any insurance carrier for this period to provide it with a defense or to pay any portion of the defense costs in the asbestos litigation. An insurer that issued policies for later periods sought a declaration that the insured was obligated to assume an equitable share of the cost of its defense proportionate to the lost policy period.
The Connecticut Supreme Court stated:
Asbestos related injury has spawned a vast number of lawsuits across the country seeking to allocate liability for injury, as well as a vast amount of secondary litigation, such as this case, seeking to determine whether and when asbestos manufacturers or sellers or their insurers must ultimately bear the costs of defending these suits and compensating asbestos victims . . . Two general approaches to the allocation of liability and defense costs in long latency loss claim cases have emerged: the pro rata and the joint and several methods of allocation. Under the pro rata method, the insured is liable for costs attributable to losses occurring during periods when it was uninsured, while under the joint and several method, all costs are allocated among insurers. We note that [n]o great difference in principle divides [pro rata and joint and several allocation]. Using either method, allocation will exist among the insurance companies on the risk . . . The real difference between [the methods] is in their treatment of periods of self-insurance.
Security Ins. Co. of Hartford v. Lumbermens Mutual Casualty Co., supra, 264 Conn. 701-02. (Citation omitted; internal quotation marks omitted.)
[I]t is reasonable to treat [the insured] as an insurer for those periods of time that it had no insurance coverage. Were we to adopt [the insured's] position on defense costs [an insured] which had insurance coverage for only one year out of 20 would be entitled to a complete defense of all asbestos actions the same as a manufacturer which had coverage for 20 years out of 20. Neither logic nor precedent support such a result.
* * *
[T]he joint and several liability approach provide[s] a disincentive to insured to obtain uninterrupted insurance coverage and would result in a windfall to those companies that had broken chains of insurance.
Security Ins. Co. of Hartford v. Lumbermens Mutual Casualty Co., supra, 264 Conn. 708-09. (Citations omitted; internal quotation marks omitted.)
[A]n insurer must bear the entire cost of defense when there is no reasonable means of prorating the cots of defense between the covered and the not-covered items . . . Thus, in the typical situation, suit will be brought as the result of a single accident, but only some of the damages sought will be covered under the insurance policy. In such cases, apportioning defense costs between the insured claim and the uninsured claim is very difficult. As a result, courts impose the full cost of defense on the insurer.
These considerations do not apply where defense costs can be readily apportioned. The duty to defend arises solely under contract. An insurer contracts to pay the entire cost of defending a claim which has arisen within the policy period. The insurer has not contracted to pay defense costs for occurrences which took place outside the policy period. Where the distinction can be readily made, the insured must pay its fair share for the defense of the non-covered risk . . .
Security Ins. Co. of Hartford v. Lumbermens Mutual Casualty Co., supra, 264 Conn. 712-13.
Purdue argues that Security does not apply and defense costs should not be allocated for three reasons: (1) the policy contains a claims series clause, with the effect that all claims arising from the same defect in the product or failure to warn would be deemed to have been brought at the time the first such claim was made and would all be covered by one policy; (2) there is no evidence that the OxyContin claims are "long latency loss claims," like those at issue in Security; and (3) insurance coverage for OxyContin claims was not available after the Steadfast policy period end date of October 1, 2001.
I CLAIMS SERIES CLAUSE
The policy issued by Steadfast to Purdue contains an endorsement that provides the following:
1. In consideration of premium charged, it is agreed that any "bodily injury" or "property damage" arising from any series of claims or "suits" as a result of a "common cause or condition" of "your products" or "your work," shall be deemed to be one "occurrence," regardless of the number of insureds, claims made or "suits" brought, or the number of persons or organizations making claims or bringing "suits." All claims or "suits" for damages from such "common cause or condition," shall be deemed to have been made at the time the first of those claims or "suits" is made against any insured.
2. Subject to the Products-Completed Operations Aggregate Limit of this policy, our liability for all damages arising out of an "occurrence" as described in paragraph 1 (above) shall not exceed the Each Occurrence Limit of liability as stated on the Declarations page of the policy.
3. The following definition applies: "Common Cause or Condition" means arising from the same or similar design error or defect, manufacturing defect, or failure by the insured to warn of the same or similar potential hazard in or of "your products" of "your work[.]"
Purdue argues that this "claims series clause" mandates that all OxyContin claims are to be deemed a single occurrence and are all deemed to have been brought on April 25, 2001, the date the first OxyContin claim was brought. It argues that the clause was added so that all claims brought arising from the same defect in the product or failure to warn would be covered by one policy. Because only one policy covers all OxyContin claims, Purdue argues, the defense costs should not be allocated.
This issue has caused the court at least as much difficulty as any issue raised in the more than twenty motions for summary or partial summary judgment filed in this case. The language of the claims series clause can certainly be read in Purdue's favor, i.e. that all claims or suits arising from the ingestion of OxyContin "shall be deemed to be one `occurrence'" and that occurrence took place in April 2001.
In addition, Purdue points to several documents which it contends show that Steadfast's personnel agreed with Purdue's interpretation. In Steadfast's own interpretation of the claim series clause provided as an underwriting "guideline" the following appeared:
The claims series endorsement is used to aggregate multiple claims arising out of a common cause or condition, creating one occurrence.
This endorsement is useful for manufacturing exposures where a similar defect can occur within the same product line, affecting many end users. It is intended to eliminate the issue of multiple policies responding to a situation involving a common cause or condition.
In 2001, after the first OxyContin case had been filed, Julie Stern of Steadfast, the main claims handler for the OxyContin cases, pointed out internally that the "claims series clause . . . should cause any OxyContin claims to fall within this policy as well."
In response, Steadfast contends that the claims series clause is designed and intended to limit an insured from seeking coverage under multiple policies issued by Steadfast, or its parent Zurich Insurance. Steadfast points out that the same underwriting guidelines state the claims series clause is designed to "avoid an old policy responding to a recent claim; to better handle long tail issues by having a more current policy respond."
The only case brought to this court's attention which deals with insurance policy language similar to the instant claims series clause is City of Sterling Heights v. United National Insurance Co., 03 72773 (E.D.Mich. Feb. 11, 2004). This court has read that decision carefully and finds it unhelpful in deciding this case.
While the language of the claims series clause can be read in the manner Purdue suggests, and this court is mindful of the rule that ambiguity in an insurance contract should be resolved in favor of the insured, the Purdue interpretation of the claim series clause is impossible to reconcile with Purdue's concession that Steadfast is not obligated to defend lawsuits that expressly allege initial ingestion after October 1, 2001. Because Purdue expressly states that there is no possibility Steadfast could be held liable to pay indemnity for these claims, it in effect concedes that not all OxyContin claims are covered by the one Steadfast policy. The claims series clause thus cannot be read to eliminate the requirement that bodily injury must occur within the policy period. It must be read as simply combining all claims, arising out of a common cause or condition, and alleging injury within the policy period, into one policy. See Scirex Corp. v. Federal Ins. Co., 313 F.3d 841, 852 (3d Cir. 2002) ("the accepted purpose of defining `an occurrence or event' is to limit liability"). Because Purdue concedes that not all of the OxyContin claims are covered by Steadfast's policy, its argument that there should be no allocation because only one policy covers all OxyContin claims is inconsistent with its otherwise expressed understanding of the agreement, and the court finds the argument is ultimately unpersuasive.
II APPLICABILITY OF SECURITY TO THIS CASE
Purdue argues that Security does not apply and defense costs should not be allocated because the claims involved here are not "long latency loss claims" to which courts have applied the "continuous trigger" of insurance coverage, as were the asbestos claims involved in Security. The continuous trigger theory is one approach used in environmental contamination cases in order to resolve the problem of fixing the date of an injurious occurrence in order to determine which of the several insurers in a company's history must bear the liability for environmental contamination. "Injuries [in these cases] usually evolve slowly, and thus it is difficult to define the date on which an occurrence triggers liability for insurance purposes. Many years may pass from the time a toxin enters the body until the time the toxin's presence manifests itself in the form of a disease." Owens-Illinois, Inc. v. United Ins. Co., 138 N.J. 437, 450 (1994) [(quoting " Developments in Law-Toxic Waste Litigation," 99 Harv. L. Rev. 1452, 1579 (1926)]. "The conceptual underpinning of the [continuous trigger] theory . . . is that injury occurs during each phase of environmental contamination-exposure, exposure in residence (defined as further progression of injury even after exposure has ceased), and manifestation of disease." Id., 451.
The trial court in Security applied the continuous trigger approach and found that "all asbestos related injury policies issued during the extended exposure period [were] triggered for coverage and all companies that issued such policies are responsible for defense costs related to the . . . asbestos litigation." Security Ins. Co. Of Hartford v. Lumbermens Mutual Casualty Co., supra, 264 Conn. 696-97. The Supreme Court then upheld the trial court's determination that defense costs should be prorated among the insurers with respect to periods covered by their respective policies and the insured with respect to periods for which the insured had lost or destroyed its policies or assumed the obligations of an insurer. Id., 699.
There is no contention that this case involves "long latency loss claims" or a "continuous trigger" situation. The court finds, however, that the reasoning of Security applies whenever multiple insurance policies are triggered and there is a reasonable means of prorating the cost of defense, such as time on the risk. This motion concerns complaints that do not allege a specific date of injury. These complaints fall possibly within the Steadfast policy coverage, but they also fall possibly within the policies of subsequent insurers or within periods of self-insurance. Although the reason multiple insurance policies are triggered in this case differs from the reason in Security, under the reasoning of Security, the defense cost should be allocated among the triggered policies and Steadfast should only be liable for a pro-rata share of the defense costs of the suits in which the complaint does not allege a specific date of injury.
III UNAVAILABILITY OF INSURANCE AFTER OCTOBER 1, 2001
Purdue argues that, even if Security applies, allocation is improper here because there was no insurance coverage available for OxyContin claims after the end date of Steadfast's policy. It submits an affidavit of Edward B. Mahony, its Executive Vice President and Chief Financial Officer, stating that the only products liability insurance that was available to Purdue after October 1, 2001 either contained an OxyContin exclusion or was "fronting policy" or "self-insurance." Mahony's affidavit states that Purdue ultimately purchased a policy from Kemper Insurance Companies for the policy period October 1, 2001 to October 1, 2002. The affidavit states, however, that the Kemper policy is a "fronting policy" and "provides no actual insurance coverage for OxyContin-related claims." It further states that "[d]espite Purdue's best efforts and those of its insurance broker . . . real insurance, with actual risk transfer as opposed to `fronting' coverage for the Underlying Actions was unavailable to Purdue after October 1, 2001."
Purdue notes that the trial court in Security did not hold the insured liable to contribute to the costs of defense for the time period after April 15, 1985 because asbestos-related injury coverage was specifically excluded from the general liability insurance policies issued to the insured after that date. See Security Ins. Co. Of Hartford v. Lumbermens Mutual Casualty Co., Superior Court, judicial district of New Britain, Docket No. CV 96 0475565 (July 12, 1999, Graham, J.). The court quoted from Stonewall Ins. Co. v. Asbestos Claims Management Corp., 73 F.3d 1178, 1204 (2d Cir. 1995), modified 85 F.3d 49 (2d Cir. 1996), which noted that "judges who have endorsed proration-to-the-insured have done so only to oblige a manufacturer to accept a proportionate share of a risk that it elected to assume, either by declining to purchase available insurance or by purchasing what turned out to be an insufficient amount of insurance. Thus, Justice O'Hern's opinion in Owens-Illinois explicitly contrasts its proration approach to `periods when coverage for a risk is not available.' [ Owens-Illinois, Inc. v. United Ins. Co., supra, 138 N.J. 479.] Similarly, Judge Wald endorsed proration-to-the-insured only ` prior to the time when such coverage could no longer be obtained.' [ Keene Corp. v. Ins. Co. of North America, 667 F.2d 1034, 1058 (D.C. Cir. 1981)] (emphasis in original)."
The count seeking a declaration that the insured must equitably contribute to the costs of defense because it was uninsured for the time period after April 15, 1985 was withdrawn in 2000 and was not relevant to the appeal. Security Ins. Co. of Hartford v. Lumbermens Mutual Casualty Co., supra, 264 Conn. 695 n. 10.
"When periods of no insurance reflect a decision by an actor to assume or retain a risk, as opposed to periods when coverage for a risk is not available, to expect the risk-bearer to share in the allocation is reasonable." Owens-Illinois, Inc. v. United Ins. Co., supra, 138 N.J. 479.
The exception to the pro-rata approach applied in the asbestos cases to the period after which insurance for asbestos claims was unavailable does not apply to this case. Because injuries arising from exposure to asbestos often take years to manifest, the companies that used or sold asbestos were finding themselves liable for injuries that manifested themselves many years after they ceased using or selling asbestos. The periods of no insurance on the part of the companies that used or sold asbestos did not reflect a decision by the companies to assume or retain a risk. Here, on the other hand, if real insurance was unavailable to Purdue after the expiration of Steadfast's policy, Purdue made a decision to assume or retain a risk by continuing to market and sell OxyContin despite having only a "fronting" policy. Purdue does not dispute that Steadfast is not liable for the costs of defending lawsuits in which the complaint expressly alleges initial ingestion after October 1, 2001. If, as Purdue asserts, it was essentially self-insured after that date, then by not withdrawing OxyContin from the market at this time, or taking other steps to eliminate the risk, Purdue effectively made a decision to assume the risk of defending any lawsuits arising out of its continued production of OxyContin. It is thus reasonable to require Purdue to share with Steadfast the defense cost for the lawsuits in which the complaint is ambiguous as to whether the injury commenced before or after October 1, 2001.
As to the lawsuits in which the complaint is ambiguous as to whether injury commenced before or after October 1, 2001, Steadfast's motion merely seeks a declaration that Steadfast is only liable for a pro rata share of defense costs. It does not address the issue of the amount of its pro rata share or the precise manner in which defense costs for these lawsuits should be allocated between Steadfast and subsequent insurers and/or Purdue for periods of self-insurance. This memorandum likewise does not address this issue.