Colony National Insurance Company v. Sorenson Medical, Inc. et al

Filing 92

MEMORANDUM OPINION & ORDER: It is ordered that Sorenson's motion for leave to file supplemental counterclaims against Colony National 87 is GRANTED. The supplemental counterclaims tendered with that motion [87-1] be and are hereby DEEMED FILED CONCURRENTLY HEREWITH. Signed by Judge William O. Bertelsman on 07/25/2013.(TED)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
AT COVINGTON

CIVIL ACTION NO. 2010-74 (WOB)
COLONY NATIONAL INS.
CO.
VS.

PLAINTIFF

MEMORANDUM OPINION AND ORDER

SORENSON MEDICAL,
INC., ET AL.

DEFENDANTS

This is a declaratory judgment action concerning
insurance coverage for product liability and related claims
brought against defendants1 in separate lawsuits.

The full

facts of this matter have been set forth in a prior opinion
of this Court, and this Memorandum Opinion and Order
assumes familiarity therewith.

See Doc. 76.

This matter is presently before the Court on
Sorenson’s motion for leave to file supplemental
counterclaims against Colony National.

(Doc. 87).

The

Court concludes that oral argument is unnecessary to the
resolution of this motion.

1

Although there are disputes as to which of the individual
entities are “insureds” under the policies in question, for
present purposes the Court will simply refer to defendants
collectively as “Sorenson.”

Factual Background
A brief factual overview and update provides the
backdrop for the pending motion.
Colony National, Sorenson’s excess insurance carrier,
filed this declaratory judgment action on April 2, 2010,
seeking a declaration that it owed no duty to defend or
indemnify Sorenson in relation to claims filed against
Sorenson involving its manufacture and sale of certain pain
pumps which were implanted in the shoulder joints of
patients following surgery.

(Doc. 1).

Shortly before

filing this case, Colony had paid, under a reservation of
rights, approximately $3.5 million to help fund settlements
in several of the pain pump cases pending in this Court.
On December 12, 2011, this Court issued its coverage
decision, holding, as relevant here:


Colony was estopped from asserting the defense of
rescission and/or had waived the right to assert it;
and



The Cornett, Morgan, Voges, and Wera claims are
not covered under the policies because they do not
satisfy the “claims made and reported” requirement.
Further, they do not count towards the erosion of
the underlying policy limits, and Colony is not
estopped from asserting this defense.

(Doc. 76).

2

Eight days after the Court issued this opinion,
counsel for Colony sent Sorenson’s counsel a letter,
stating that:


Given the total amount of the settlements and
fees incurred in connection with the Cornett,
Morgan, Voges, and Wera claims -– which this Court
held were not covered -– Sorenson “must reimburse
Colony the approximately 4.375 million that Colony
has advanced to date, and incur an additional $2.68
million in defense and indemnity obligations [under
the Year One policy] before any duty on the part of
Colony is triggered;” (Doc. 87-2 at 3);2 and



Claims made and reported under the Year Two
primary policy are covered (if at all) under that
policy and are subject to a $250,000 per claim
deductible. Thus, “in addition to demonstrating
that they have funded the uninsured gap recognized
by the Court, the Sorenson entities must establish
that both the $10 million underlying limits and the
$250,000 per claim deductible have been in
connection with the [Year Two] claims before the
Colony [excess] policy is potentially triggered.”
(Id.).

Counsel for Sorenson responded, in pertinent part,
that:




2

It disagreed with Colony’s calculation of the
uninsured “gap” in coverage because some of the
settlement monies for the four uncovered claims came
from sources other than the primary carrier (Doc.
87-3 at 3);
Even if Colony had some right of reimbursement
for funds it advanced for Year One claims which this
Court ultimately held were not covered (which
Sorenson disputes), such a right does not alter
Colony’s obligation to cover Year Two claims. That
is, “Sorenson expects Colony to assume its defense
upon the exhaustion of the [primary] Year Two

The parties refer to these amounts as the “uninsured gap.”
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policy, whether or not the Year One gap has been
funded.” (Id.).
Colony replied that the parties would have to “agree
to disagree” with regard to “whether those advanced sums
will be available to Colony as a setoff in connection with
any claims covered under the [Year Two] policy . . .”
(Doc. 87-4 at 1).
On November 14, 2012, a federal court in Utah hearing
a dispute between Sorenson and its primary carrier held
that Sorenson was entitled to coverage for Year Two claims
under its Year Two primary policy, thereby leaving the
Colony Year Two excess policy in play once the underlying
Year One limits were exhausted.
On March 28-29, 2013, United States Magistrate Judge
J. Gregory Wehrman held a settlement conference in this
matter, in advance of which the primary carrier tendered
its Year Two policy limits, subject to its right to further
litigate the Utah coverage dispute.

Upon being informed by

Sorenson of this fact, Colony responded by email on March
27, the day before the settlement conference:
As concerns the duty to indemnify, Colony remains
prepared to fund [Year Two] claims against its
insureds, subject to the prior reservations, in excess
of the per claim SIR, in excess of the [primary]
policy, and in excess of the $4.2 advance/set-off that
Colony has already paid. . . I understand that we are
not in agreement on all aspects of these issues, but
those continue to be our positions.
4

(Doc. 87-5 at 1) (bold added).
Sorenson asserted that Colony had no right to
reimbursement under Utah law and, even if it did, such a
right arising under the Year One policy would not excuse
Colony’s performance of its contractual obligations under
the Year Two policy.

(Doc. 88-4).

Sorenson thus demanded

that Colony settle all remaining claims, since the
underlying policy limits and deductibles would have been
exhausted by the outstanding settlement offers.

Colony

refused, however, stating that its reimbursement claim was
subject to Kentucky, rather than Utah, law and was thus
valid.

(Doc. 88-5).

Colony further stated that,

regardless of which state’s law was applied, Colony had a
contractual right of set-off because Sorenson breached its
contractual obligation to fund claims within its
deductibles.

(Id.).

On April 29, 2013, the Sorenson defendants filed the
present motion for leave to file supplemental counterclaims
for declaratory relief, breach of contract, and bad faith
in relation to Colony’s conditioning payment under the Year
Two policy on Sorenson’s reimbursement of amounts Colony
paid on Year One claims.
motion.

(Doc. 87).

(Doc. 88).

5

Colony opposes this

Analysis
Fed. R. Civ. P. 13(e) provides that the “court may
permit a party to file a supplemental pleading asserting a
counterclaim that matured or was acquired by the party
after serving an earlier pleading.”
“A supplemental pleading is different from an amended
pleading because an amended pleading relates to matters
which occurred prior to the filing of the original pleading
and entirely replaces such pleading; a supplemental
pleading addresses events occurring subsequent to the
initial pleading and adds to such pleading.”

Princesse

D’Isenbourg et Cie. Ltd. v. Caviar, Civil Action No. 3:0929-DCR, 2012 WL 258567, at *1 (E.D. Ky. Jan. 27, 2012)
(internal quotations and citation omitted).
Whether to grant a motion to file a supplemental
pleading is within the discretion of the Court, and the
Court may consider the same factors that apply to motions
filed pursuant to Rule 15(a), such as undue delay, bad
faith, or dilatory motive.

Id.

Colony opposes Sorenson’s motion on two grounds: undue
delay and futility.

6

A.

Undue Delay

Colony argues that Sorenson has been on notice of
Colony’s position as to reimbursement since December 29,
2011, just after this Court issued its coverage opinion and
when Colony sent Sorenson’s counsel a letter setting forth
its position that reimbursement was a pre-condition to
Colony paying any further amounts under its policies.

This

argument is unavailing.
First, Sorenson’s claims for breach of contract and
bad faith relating to Colony’s refusal to provide coverage
for Year Two claims could not accrue until it was
determined that: (1) the underlying policy limits of the
primary policy could be exhausted; (2) those limits
actually were exhausted; and (3) upon such exhaustion,
Colony refused to provide coverage for Year Two claims
presented to it by Sorenson.
The first of these contingencies turned on the Utah
litigation in which the Court held that the primary carrier
had improperly taken the position that certain Year Two
claims “related back” and fell within coverage of the
underlying Year One policy.

This did not occur until the

Utah Court issued its decision on November 14, 2012.
Notably, had the Utah Court ruled to the contrary, the
result would have been that the limits of the underlying
7

Year Two policy would never have been exhausted, and
Colony’s excess Year Two policy would never be triggered.
In that scenario, the claims that Sorenson now seeks to
assert would not exist.
Second, even with this ruling in hand, Sorenson was
not in a position to tender Year Two claims to Colony until
the underlying Year Two limits were exhausted.

This did

not occur until the March 2013 mediation when the primary
carrier tendered its policy limits and settlement offers
were made that exceeded those limits.
It was only upon such exhaustion that Colony actually
refused excess coverage under its Year Two policy on the
grounds discussed herein.

Sorenson then promptly filed the

present motion to file its counterclaims arising out of
that denial.

Colony’s assertion of “undue delay” is thus

unpersuasive.
B.

Futility

Colony’s second argument is futility, i.e., that the
proposed supplemental counterclaims fail on their merits
because Colony is entitled to reimbursement of the amounts
it paid in settlement of claims that this Court later held
not to be covered.
Colony’s first assertion in support of this position
is that the proposed counterclaims are governed by Kentucky
8

law.

(Doc. 88 at 5) (“While Utah law governs the

rescission and policy claims, Kentucky law governs the
equitable rights and remedies arising out of the settlement
of the Kentucky pain pump cases.”).

This assertion is

clearly incorrect.
Sorenson’s proposed counterclaims do not arise out the
“settlement” of the pain pump cases; they arise out of
Colony’s refusal to provide coverage for those settlements
under its Year Two excess policy.

This is nothing more

than a garden-variety breach of contract claim arising out
of the insurance policy itself, which all parties
previously agreed is governed by Utah law.

See Doc. 76 at

16.3
Under Utah law, “an insurer’s right to reimbursement
from an insured must be expressly provided in an insurance
policy before it can be enforced.”

U.S. Fidelity and

Guarantee Co. v. U.S. Sports Specialty Ass’n, 270 P.3d 464,
468 (Utah 2012).

There is no such express provision in the

Colony policies, and Sorenson’s counterclaims are thus not
futile on this ground.

3

Travelers Prop. Cas. Co. of Am. v. Hillerich & Bradsby
Co., Inc., 598 F.3d 257 (6th Cir. 2010), in which the Sixth
Circuit predicted how Kentucky courts would answer the
reimbursement question, is thus inapplicable.
9

Second, Colony erroneously asserts that it has a
contractual basis for reimbursement based on Sorenson’s
failure to pay deductibles under the primary policy for
several claims.

As Sorenson notes, it was the primary

carrier that construed these claims – wrongfully, as the
Utah Court held -- as “relating back” and falling only
within the Year One primary policy, which carried no
deductible.
Finally, Colony quotes language from the underlying
primary policy that provides for reimbursement.

Of course,

Colony is not a party to that policy, and any right to
reimbursement held by the primary carrier does not inure to
Colony’s benefit where its own policy –- a separate
contract with Sorenson -– contains no such language.
Sorenson’s motion to file the proposed supplemental
counterclaims is thus not flawed for either undue delay or
futility, and the Court will thus permit the counterclaims
to be filed.

Therefore, having reviewed this matter, and the Court
being sufficiently advised,
IT IS ORDERED that Sorenson’s motion for leave to file
supplemental counterclaims against Colony National (Doc.
87) be, and is hereby, GRANTED.
10

The supplemental

counterclaims tendered with that motion (Doc. 87-1) be, and
are hereby, DEEMED FILED CONCURRENTLY HEREWITH.

This 25th day of July, 2013.

11