The Charter Oak Fire Insurance Company et al v. American Capital, Ltd. et al
Filing
546
Redacted Amended MEMORANDUM OPINION of February 17, 2016. Signed by Judge Deborah K. Chasanow on 3/3/2016. (sat, Chambers)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND
:
THE CHARTER OAK FIRE COMPANY,
et al.
v.
:
:
Civil Action No. DKC 09-0100
:
AMERICAN CAPITAL, LTD., et al.
:
AMENDED MEMORANDUM OPINION
Presently pending and ready for review in this insurance
coverage dispute are: (1) a motion for summary judgment filed by
Plaintiffs Charter Oak Fire Insurance Company (“Charter Oak”)
and Travelers Property Casualty Company of America (“Travelers”)
(ECF No. 510); (2) a cross-motion for summary judgment filed by
Defendants
American
Capital,
Ltd.
(“American
Capital”)
and
Scientific Protein Laboratories LLC (“SPL”) (ECF No. 514); and
(3)
motions
to
seal
filed
by
Charter
Oak
and
Travelers
(collectively, the “Plaintiffs”) (ECF Nos. 524; 525; 526).
The
issues have been fully briefed, and the court now rules, no
hearing being deemed necessary.
Local Rule 105.6.
For the
following reasons, both motions for summary judgment will be
granted in part and denied in part.
will be granted.
Plaintiffs’ motions to seal
I.
Background
A.
Factual Background
Numerous
facts.
prior
opinions
contain
some
recitation
of
the
(See ECF Nos. 42; 64; 77; 92; 170; 184; 267; 378; 492).
However, because the record is now more thoroughly developed, a
recitation
of
facts
is
required.
Additional
facts
will
be
discussed in the analysis section.
This
insurance
coverage
dispute
involves
two
insurance
company Plaintiffs and an investment fund, Defendant American
Capital.
a
company
In August 2006, American Capital made an investment in
called
SPL
(ECF No. 510-1, at 15).
Acquisition.
Acquisition
Corp.
(“SPL
Acquisition”).1
Defendant SPL is entirely owned by SPL
(ECF No. 510-5, at 29).
Although American Capital
did not own any stock in Defendant SPL, it did own a majority
non-voting
interest
in
the
which owned Defendant SPL.
holding
company,
SPL
Acquisition,
(ECF Nos. 514-108; 514-109; 514-
110).
Beginning in 2008, American Capital and SPL (collectively,
the
“Defendants”),
became
involved
in
more
than
pertaining to an allegedly defective drug, heparin.
100
suits
The heparin
complaints generally alleged that SPL and/or American Capital
sold contaminated heparin.
11).
(See, e.g., ECF Nos. 514-10; 514-
The heparin was provided to SPL by Changzhou SPL Co.
1
SPL Acquisition was previously named “SPL Holdings.”
2
(“Changzhou”), a Chinese joint venture between SPL and a Chinese
company that has been producing heparin since 2004.
510-1,
at
11;
complaints
510-4,
mentioned
at
3;
510-5,
Changzhou,
American Capital and SPL.
and
at
56).
some
(ECF Nos.
Some
focused
solely
and
(“Baxter”),
a
March
2008,
company
to
Baxter
which
SPL
(Id. at 21).
Healthcare
(See ECF
sold
Between
Corporation
heparin,
recalled their heparin products in the United States.
510-4, at 7).
on
These complaints allege injuries during
the 2006, 2007, and 2008 policy periods.
January
the
The complaints all generally assert
that the contaminated heparin was distributed by SPL.
No. 514-1, at 21-23).
of
and
SPL
(ECF No.
The allegedly contaminated heparin was produced
in 2006 and 2007.
(Id.).
American Capital first purchased liability insurance from
Plaintiffs in June 2006.
It purchased a primary policy from
Charter Oak each year through the 2008-2009 coverage year as
well as an “umbrella policy” from Travelers each year.
510-1, at 12).
American Capital was the named insured in each
of these policies.
13;
510-14).
(ECF No. 510-9; 510-10; 510-11; 510-12; 510-
The
policies
insured
American
Capital,
“‘executive officers,’ [] directors,” and stockholders.
ECF
No.
covered,
510-9,
for
(ECF No.
at
a
87).
limited
In
addition,
time
period,
the
primary
“[a]ny
its
(E.g.,
policies
organization
[American Capital] newly acquire[s] or form[s], other than a
3
partnership,
joint
venture
or
limited
liability
company,
and
over which [American Capital] maintain[s] ownership or majority
interest . . . if there is no other similar insurance available
to that organization.”
(Id. at 88).
Other relevant provisions
include:
“No person or organization is an insured with respect to
the conduct of any current or past partnership, joint
venture or limited liability company that is not shown as
a Named Insured.” (Id. at 89).
“No insured will, except at that insured’s own cost,
voluntarily make a payment, assume any obligation, or
incur any expense, other than for first aid, without
[Traveler’s] consent.” (Id. at 90).
An exclusion for injuries “for which the insured is
obligated to pay damages by reason of the assumption of
liability in a contract or agreement” unless liability
would have existed “in the absence of the contract or
agreement.” (Id. at 81).
In February 2008, SPL Acquisition purchased multiple liability
insurance
policies
Plaintiffs.
On
from
insurance
companies
other
than
(ECF No. 510-1, at 17).
August
12,
2008,
American
Capital
provided
Travelers
with notice of the underlying heparin lawsuits, but did not
formally request that Travelers defend the suits.
510-1,
at
opened
a
19;
claim
510-40).
for
the
Travelers
heparin
acknowledged
lawsuits.
(ECF
(ECF Nos.
receipt
No.
and
514-8).
Travelers also attempted to obtain more information about the
heparin lawsuits and a possible defense, but American Capital
did not provide the requested information.
510-49; 510-50).
(ECF Nos. 510-48;
When American Capital ultimately responded to
4
Travelers, it noted that it was hoping to be dismissed from the
underlying suits and “prefer[ed] not to allocate resources at
this
time
Travelers.
to
discussing
those
(ECF No. 510-47).
coverage
issues”
raised
by
On November 24, 2008, following
some back and forth between Travelers and American Capital, the
two parties agreed that, if a request for defense was made,
November 24, 2008 would be the date from which costs would be
covered by Travelers.
On
December
12,
(ECF Nos. 510-1, at 22; 510-54, at 6).
2008,
Travelers
sent
a
letter
to
American
Capital’s attorney memorializing the agreement, stating that:
Travelers, [American Capital], and SPL
agree that Monday, November 24, 2008, shall
be the tender date for the Heparin Lawsuits
. . . if (or when) [American Capital]
decides to tender such Heparin Lawsuits on
its and/or SPL’s behalf to Travelers for
possible
defense
and
indemnity
and
if
Travelers
agrees
or
it
ultimately
is
determined that Travelers has a duty to
defend any such suits.
In such event,
Travelers agrees that it will not assert
that costs incurred on or after November 24,
2008 in defending the Heparin Lawsuits are
not covered since the suits were not
tendered until after November 24, 2008, and
in exchange, [American Capital] and SPL
agree that they will not seek reimbursement
of defense costs incurred prior to November
24, 2008.
(ECF No. 510-54, at 13).
Throughout
late
2008,
American
Capital
and
SPL
were
involved in negotiations for a Confidential Settlement and CostSharing Agreement (“Agreement”) with Baxter, which was finalized
5
on December 2, 2008.
(ECF No. 510-57).
Travelers did not
consent to the Agreement, which was provided to Travelers on
December 29.
(ECF No. 514-1, at 33).
The Agreement functioned,
in part, as a joint defense agreement specifying that Kirkland &
Ellis,
LLP
“shall
undertake
to
jointly
represent
and
defend
[American Capital, SPL, and Baxter] in the Heparin Litigation,”
and Dechert, LLP “shall undertake to jointly represent [American
Capital,
SPL,
and
Baxter]
as
special
settlement
counsel
to
explore and, if possible, effectuate settlements of the claims .
. . in the Heparin Litigation.”
(ECF No. 510-57 ¶ 3.1).
The
Agreement also specified that costs occurring after December 2,
including legal fees, “costs of settlements of claims and/or
lawsuits in the Heparin Litigation” and “costs of satisfying
final,
non-appealable
compensatory
damages
awarded” in the heparin lawsuits were “joint costs.”
(Id. ¶
5.1(b)).
judgments
for
The Agreement specified that Baxter was responsible
for the first $20 million in joint costs and SPL was responsible
for the next $15 million.
(Id. ¶¶ 5.3(i)-(ii)).
On January 14, 2009, American Capital and SPL requested
that Travelers provide a “coverage determination . . . apropos
of [the] tender date agreement.”
(ECF No. 510-54, at 20).
Two
days later, Travelers sent a letter to American Capital denying
coverage (ECF No. 514-5) and filed this suit for declaratory
judgment.
Travelers
contends
that
6
the
first
time
American
Capital and SPL “expressly requested” that Travelers defend the
heparin lawsuits was in an email on February 17, 2009.
(ECF
Nos. 510-1, at 25; 510-61).
B.
Procedural History
Plaintiffs commenced this action by filing a complaint on
January 16, 2009.
(ECF No. 1).
Eventually, a Second Amended
Complaint was filed on March 29, 2011.
(ECF No. 67).
Second Amended Complaint contains four counts:
Insurance
Contracts
against
American
The
Rescission of
Capital
(Count
I);
Reformation due to Mutual Mistake (Count II), Reformation due to
Unilateral
Mistake
(Count
III),
and
Declaratory
Relief
concerning the duty to defend or indemnify as to all Defendants
(Count
IV).
contains
The
fourteen
Third
Amended
counts:
Counterclaim
Declaratory
(ECF
Judgment
No.
380)
that
the
unilateral rescission of policies was without legal basis as to
Charter Oak regarding the 2006 primary policy (Count I), as to
Travelers regarding the 2006 umbrella policy (Count II), as to
Charter Oak regarding the 2007 primary policy (Count III), as to
Travelers regarding the 2007 umbrella policy (Count IV), as to
Charter Oak regarding the 2008 primary policy (Count V), and as
to
Travelers
regarding
the
2008
umbrella
policy
(Count
VI),
Breach of contract against Charter Oak concerning its duty to
defend with regard to the 2007 primary policy
(Count VII),
against Travelers with regard to the 2007 umbrella policy (Count
7
VIII), against Charter Oak as to the 2006 primary policy (Count
IX), as to Travelers regarding the 2006 umbrella policy (Count
X), as to Charter Oak regarding the 2008 primary policy (Count
XI), and as to Travelers regarding the 2008 umbrella policy
(Count
XII),
against
both
a
Statutory
Charter
tort
Oak
claim
and
for
Travelers
lack
of
(Count
good
XIII),
faith
and
a
Common law tort claim for promissory fraud against both Charter
Oak and Travelers
(Count XIV).
On April 16, 2015, Plaintiffs filed the pending motion for
summary judgment.
(ECF No. 510).
On May 21, Defendants filed
the pending cross-motion for summary judgment, along with their
response in opposition to Plaintiffs’ motion.
(ECF No. 514).
Plaintiffs filed a response in opposition (ECF No. 516), and
Defendants
replied
(ECF
No.
523).
On
August
13,
2015,
Plaintiffs filed the pending motions to seal portions of the
summary judgment record as well as portions of the motion to
seal.
(ECF Nos. 524; 525; 526).
Defendants filed a response in
opposition (ECF No. 531), and Plaintiffs replied (ECF No. 532).
Plaintiffs
seek
summary
judgment
on
count
IV
of
their
complaint (declaratory judgment as to duty to defend), and on
all counts of the counterclaim.
judgment
on
all
counts
in
the
Defendants seek dismissal or
complaint
as
judgment on all counts of their counterclaim.
8
well
as
summary
II.
Summary Judgment Standard of Review
A court may enter summary judgment only if there is no
genuine dispute as to any material fact and the moving party is
entitled to judgment as a matter of law.
Fed.R.Civ.P. 56(a);
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Emmett v.
Johnson, 532 F.3d 291, 297 (4th Cir. 2008).
Summary judgment is
inappropriate if any material factual issue “may reasonably be
resolved in favor of either party.”
Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 250 (1986); JKC Holding Co. LLC v. Wash.
Sports Ventures, Inc., 264 F.3d 459, 465 (4th Cir. 2001).
“A party opposing a properly supported motion for summary
judgment ‘may not rest upon the mere allegations or denials of
[his]
pleadings,’
but
rather
must
‘set
forth
specific
showing that there is a genuine issue for trial.’”
facts
Bouchat v.
Balt. Ravens Football Club, Inc., 346 F.3d 514, 522 (4th Cir.
2003) (quoting former Fed.R.Civ.P. 56(e)).
proof
.
.
.
will
not
suffice
to
“A mere scintilla of
prevent
summary
judgment.”
Peters v. Jenney, 327 F.3d 307, 314 (4th Cir. 2003).
“If the
evidence is merely colorable, or is not significantly probative,
summary judgment may be granted.”
249–50 (citations omitted).
construe
the
facts
that
Liberty Lobby, 477 U.S. at
At the same time, the court must
are
presented
in
favorable to the party opposing the motion.
the
most
Scott v. Harris,
550 U.S. 372, 378 (2007); Emmett, 532 F.3d at 297.
9
light
“When
cross-motions
for
summary
judgment
are
before
a
court, the court examines each motion separately, employing the
familiar standard under Rule 56 of the Federal Rules of Civil
Procedure.”
Desmond v. PNGI Charles Town Gaming, LLC, 630 F.3d
351, 354 (4th Cir. 2011).
The court must deny both motions if it
finds there is a genuine dispute of material fact, “[b]ut if
there is no genuine issue and one or the other party is entitled
to prevail as a matter of law, the court will render judgment.”
10A Charles A. Wright, et al., Federal Practice & Procedure §
2720 (3d ed. 1998).
Plaintiffs argue that (1) neither American Capital nor SPL
can recover sums paid by the other or by Baxter, (2) neither SPL
nor American Capital is an “insured” with respect to the heparin
claims, and neither is covered with respect to the conduct of a
joint venture; (3) the settlement abrogates any obligation to
provide coverage, (4) coverage is unavailable for known losses
and under the umbrella policies; and (5) Maryland law limits or
bars the claims for damages.
Defendants
contend
(1)
that
the
joint
venture
exclusion
does not preclude the possibility of coverage; (2) Plaintiffs
are
liable
for
lack
of
good
faith;
(3)
the
duty
to
defend
extends to SPL; (4) specific coverage extends to all policies;
(5) the settlement cannot preclude a duty to defend before its
execution
and
does
not
do
so
10
afterwards
either;
(6)
the
contractual liability exclusion does not apply; (7) the claims
for rescission and reformation cannot retroactively preclude the
duty
to
defend;
(8)
Plaintiffs’
claims
for
reformation
and
promissory fraud fail as a matter of law; (9) the reformation
claim should be dismissed; and (10) the motion regarding damages
is premature and without basis.
III. Declaratory Judgment and Breach of Contract: Plaintiffs’
Duty to Defend
Maryland
law
governs
the
parties’
interpretation of the insurance policies.
24).
dispute
(See ECF No. 64, at
In Maryland,
[Courts]
construe
an
insurance
policy
according to contract principles. Moscarillo
v. Prof’l Risk Mgmt. Servs., Inc., 398 Md.
529, 540 (2007).
Maryland follows the
objective law of contract interpretation.
Sy-Lene of Wash., Inc. v. Starwood Urban
Retail II, LLC, 376 Md. 157, 166 (2003).
Thus, “‘the written language embodying the
terms of an agreement will govern the rights
and liabilities of the parties, irrespective
of the intent of the parties at the time
they entered into the contract.’”
Long v.
State, 371 Md. 72, 84 (2002) (quoting Slice
v. Carozza Props., Inc., 215 Md. 357, 368
(1958)).
“When the clear language of a
contract is unambiguous, the court will give
effect to its plain, ordinary, and usual
meaning, taking into account the context in
which it is used.” Sy-Lene, 376 Md. at 167
(citation omitted).
“Unless there is an
indication that the parties intended to use
words in the policy in a technical sense,
they must be accorded their customary,
ordinary, and accepted meaning.”
Lloyd E.
Mitchell, Inc. v. Md. Cas. Co., 324 Md. 44,
56-57 (1991) (citations omitted).
Although
11
over
Maryland does not follow the rule that
insurance contracts should be construed
against the insurer as a matter of course,
any ambiguity will be “construed liberally
in favor of the insured and against the
insurer as drafter of the instrument.”
Dutta v. State Farm Ins. Co., 363 Md. 540,
556-57
(2001)
(emphasis
in
original)
(citation omitted).
Maryland Cas. Co. v. Blackstone Intern. Ltd, 442 Md. 685, 694-95
(2015).
Determining whether an insurer has a duty to defend
under an insurance policy is a two-step process.
Nautilus Ins.
Co. v. REMAC Am., Inc., 956 F.Supp.2d 674, 680 (D.Md. 2013)
(citing St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187
(1981)).
“First, the policy must be reviewed to determine the
scope of, and any limitations on, coverage.”
omitted).
Id. (citations
“As the second step in the duty-to-defend inquiry,
the allegations of the underlying complaint must be analyzed to
determine whether they would potentially be covered under the
subject policy.”
Id. (citing Pryseski, 292 Md. at 193; Aetna
Cas. & Sur. Co. v. Cochran, 337 Md. 98, 103-04 (1995)); see also
Blackstone, 442 Md. at 695 (noting that even if the underlying
complaint “does not allege facts which clearly bring the claim
within or without the policy coverage, the insurer still must
defend
if
there
is
a
potentiality
covered by the policy”).
that
the
claim
could
be
“In Maryland, the duty to defend is
broader than the duty to indemnify.
Whereas a company has a
duty to defend its insured for all claims that are potentially
12
covered
under
an
insurance
contract,
the
duty
to
indemnify,
i.e., pay a judgment, attaches only upon liability.”
Penn.
Nat’l Mut. Cas. Ins. Co. v. city Homes, Inc., 719 F.Supp.2d 605,
611-12
(D.Md.
2010)
(citations
and
internal
quotation
marks
omitted).
The
parties
provide
differing
interpretations
of
the
applicable law, primarily based on whether extrinsic evidence is
relevant to various aspects of their dispute.
Plaintiffs
contend
indemnity,
SPL’s
facts.”
that
“[f]or
purposes
of
as
insured
depends
status
an
For instance,
both
defense
on
the
and
true
(ECF No. 510 at 22, citing Payne v. Erie Ins. Exch., --
- A.3d ---, 2015 WL 1412698 (Md. 2015); Universal Underwriters
Ins. Co. v. Lowe, 761 A.2d 997, 1008 & n.13 (Md. Ct. Spec. App.
2000)).
Defendants, on the other hand, cite to
Cornerstone
Title & Escrow, Inc. v. Evanston Ins. Co., 555 F.App’x 230, 23436 (4th Cir. 2014), and Aetna Cas. & Sur. Co. v. Cochran, 337 Md.
98 (1995), and argue that extrinsic evidence is not relevant in
this instance because the “‘exception’ to the exclusive pleading
rule is not for the benefit of insurers (to enable new ways to
deny a defense), it is for the benefit of insureds (to establish
the
potentiality
of
a
covered
underlying allegations.).”
judgment
independent
(ECF No. 514 at 45).
court stated that:
13
of
the
The Cochran
Although we have held that an insurer may
not
use
extrinsic
evidence
to
contest
coverage under an insurance policy if the
tort
suit
complaint
establishes
a
potentiality of coverage; we have not had
occasion to determine whether an insured may
rely on extrinsic evidence to establish a
potentiality of coverage when the insurance
policy and the allegations in the complaint
do not establish a potentiality of coverage.
See Brohawn [v. Transamerica Ins. Co.], 276
Md. [396,] 408 [1975].
Cochran, 337 Md. at 107.
It cautioned, however, that:
In holding that an insured may establish a
potentiality of coverage under an insurance
policy
through
the
use
of
extrinsic
evidence, we note that an insured cannot
assert
a
frivolous
defense
merely
to
establish a duty to defend on the part of
his insurer. Only if an insured demonstrates
that there is a reasonable potential that
the
issue
triggering
coverage
will
be
generated at trial can evidence to support
the insured’s assertion be used to establish
a
potentiality
of
coverage
under
an
insurance policy.
Id. at 111.
Rather than engage in arguing generalities under the law,
the better approach is to discuss the specific issues presented
in this case.
A.
Coverage of SPL
Plaintiffs argue that SPL’s status as an insured depends on
the true facts.
Defendants contend that, under
Cochran, an
insurer must offer a defense where it has determined from the
extrinsic
facts
uncovered
in
14
its
investigation
that
the
underlying
against
suit
the
creates
potential
seeking
entity
a
of
coverage.
a
covered
They
also
judgment
argue
that
Plaintiffs made a judicial admission that SPL was covered; that,
at the time it made its decision to deny coverage, SPL was an
affiliate
of
American
Capital;
and
that
the
underlying
suit
alleged that the relationship was one of parent or majority
interest holder.
determination
Plaintiffs
They argue that, until there is a judicial
resolving
owed
a
the
duty
nature
of
defend
and
to
predetermination defense costs.
the
are
affiliation,
liable
for
As will be seen, the situation
is not as clear as either party wishes.
1.
2006-2007 Primary Policy
Plaintiffs argue that SPL, an LLC, is not covered under the
2006-2007 primary policy under the “newly acquired” provision in
the
policy,
which
“partnership[s],
compan[ies].”2
joint
excludes
newly
venture[s],
acquired
[and]
(ECF No. 510-9, at 88).
or
limited
formed
liability
In addition, the policy
covers any newly acquired organization “if there is no other
similar
insurance
available
to
that
organization.”
(Id.).
During the 2006-2007 policy year, SPL was covered by separate
insurance.
(ECF No. 510-18, at 17).
Defendants do not move for
summary judgment under this policy and concede that the 20062
It is undisputed that American Capital acquired its
interest in SPL during the period when the 2006-2007 primary
policy was in effect.
15
2007 primary policy does not cover SPL.
Accordingly,
summary
judgment
will
(ECF No. 514-1, at 73).
be
granted
in
favor
of
Plaintiffs regarding coverage of SPL under the 2006-2007 primary
policy on Counts I and IX of Defendants’ counterclaim.
2.
2007-2008 and 2008-2009 Primary Policies and 2006-2007
Umbrella Policy
The key provision in the 2007-2008 and 2008-2009 primary
policies notes that the policies cover “any organization, other
than
a
partnership
Capital]
or
maintain[s]
joint
ownership
effective date of the policy.”
at
106).
coverage
Similarly,
to
any
venture,
newly
the
or
over
majority
which
[American
interest
on
the
(ECF Nos. 510-10, at 99; 510-11,
2006-2007
acquired
umbrella
policy
extends
organization,
“other
than
a
partnership or joint venture . . . over which [American Capital]
maintain[s] ownership or majority interest.”
at 16).
Defendant SPL was owned entirely by SPL Acquisition
(previously SPL Holdings).
Capital,
(ECF No. 510-12,
in
turn,
owned
(ECF No. 510-5, at 29).
a
majority
of
SPL
American
Acquisition’s
preferred stock and non-voting common stock.
(ECF No. 514-110).
Plaintiffs
ownership
contend
that
American
Capital’s
of
non-
voting shares of SPL Acquisition was not a sufficient ownership
interest
policies.
to
bring
Defendant
SPL
(ECF No. 510-1, at 33).
into
coverage
under
the
Plaintiffs also assert that
it would be absurd for the court to find that American Capital’s
16
investments, of which it allegedly has nearly 200, to be covered
by the policies.
Capital’s
role
(Id. at 34).
was
one
of
Defendants counter that American
“parent”
holder.
(ECF No. 514-1, at 63).
policies
only
cover
portfolio
or
“majority
interest”
They also contend that the
companies
over
which
American
Capital maintains a majority interest (ECF No. 514-1, at 70), of
which there are apparently “dozens” (ECF No. 510-1, at 25).
The parties quarrel over accusations of who knew what when.
These
accusations
may
be
appropriate
for
the
discussion
regarding good faith and fraud, but the issue for coverage is
fundamentally one of contractual construction to determine if
the policies cover SPL based on its actual relationship with
American
Capital.
The
parties
do
not
dispute
the
facts
underlying the relationship between American Capital and SPL as
described in the preceding paragraph.
The parties vigorously
dispute, however, whether this corporate structure means that
American Capital maintains a “majority interest” relationship
over SPL.
policies
The term “majority interest” is not defined in the
and,
in
this
context,
is
ambiguous,
as
reasonable
people could disagree over its meaning and scope, as evidenced
by the parties’ differing interpretations and applications here.
In Maryland,
If
there
is
ambiguity,
the
Court
reviews extrinsic evidence to determine the
parties’ intent, including dictionaries, the
17
history of the parties’ negotiations, the
parties’ conduct and an interpretation of
the term used by one of the parties before
the dispute arose. Holland v. Psychological
Assessment Res., Inc., 482 F.Supp.2d 667,
673-74 (D.Md. 2007); Ohio Cas. Ins. Co. v.
Chamberlin, 172 Md.App. 229, 241, 914 A.2d
160, 167 (Md.Spec.App. 2007).
If extrinsic
evidence
is
dispositive
of
the
term’s
meaning,
the
Court
may
grant
summary
judgment.
Holland, 482 F.Supp.2d at 674.
However, if after resorting to extrinsic
evidence there is a genuine dispute with
respect to interpretation, summary judgment
is improper and the trier of fact decides
the proper interpretation.
Id.; see Bd. of
Educ. of Charles County v. Plymouth Rubber
Co., 82 Md.App. 9, 26, 569 A.2d 1288, 1296
(Md.Spec.App. 1990) (“Only when there is a
bona
fide
ambiguity
in
the
contract’s
language or legitimate doubt as to its
application . . . is the contract submitted
to the trier of fact for interpretation.”).
Ambling Mgmt. Co. v. Univ. View Partners, LLC, 581 F.Supp.2d
706, 712-13 (D.Md. 2008).
both
parties
offer
Because the term is not defined and
plausible
interpretations
based
on
the
policies’ plain language, extrinsic evidence must be examined.
The parties’ discussion regarding coverage of SPL under the
policies
focuses
“subsidiary,”
“majority
thusly:
but
primarily
little
interest.”
on
the
analysis
Plaintiffs’
is
terms
“ownership”
devoted
primary
to
argument
the
and
term
proceeds
if the court determines that American Capital held a
majority interest in SPL, it would, by necessity, mean that it
also held a majority interest in dozens, if not hundreds, of
other companies in which it had invested.
18
Plaintiffs assert
that an absurd result follows from the determination that the
policies covered all these companies, particularly when some,
such as SPL, maintained their own liability insurance.
They
also argue that the premiums charged would be unreasonably low
for general liability insurance for the operations of American
Capital’s
portfolio
companies.
Defendants
counter
that
Plaintiffs are ignoring the plain language of the policy, and
are essentially reading the term “majority interest” out.
They
contend that if “majority interest” requires direct ownership,
then that term is superfluous.
A reasonable person reading this
language could believe either party’s interpretation is correct.
Based on the evidence presented, there remains a “bona fide
ambiguity” and dispute as to whether the parties intended the
“majority interest” clause to apply to the sort of indirect
majority interest American Capital maintained over SPL.
Furthermore,
under
Maryland’s
two-part
test,
the
allegations in the underlying complaints in the heparin lawsuits
cannot convert SPL into a covered insured if the policies do not
actually provide coverage.
Before determining if the underlying
complaints potentially give rise to a covered suit, “the policy
must be reviewed to determine the scope of, and any limitations
on,
coverage.”
omitted).
Nautilus,
956
F.Supp.2d
at
680
(citations
Here, as described above, a factual dispute remains
whether the policies do in fact cover SPL.
19
Defendants
admission”
in
also
their
assert
that
original
Plaintiffs
January
made
2009
a
“judicial
complaint
that
American Capital’s relationship with SPL triggered the majority
interest
clause.
(See
ECF
No.
514-1,
at
60).
Plaintiffs
counter that any admission in their initial complaint is not
binding
because
subsequent
alleged admission.
Rule
15
amendments
removed
the
(ECF No. 516, at 25 (citing West Run Student
Housing Assocs., LLC v. Huntington Nat. Bank, 712 F.3d 165, 171
(3d
Cir. 2013) (recognizing that “judicial admissions may be
withdrawn by amendment”))).
In their reply brief, Defendants
appear to concede this point, but contend that the admission
“remains an evidentiary admission of what [Plaintiffs] believed,
under Federal Rule 11, at the time the statement was made” in
January
2009.
(ECF
No.
523,
at
22).
Although
the
Fourth
Circuit has not definitively held that judicial admissions may
be withdrawn by amendment, the Third Circuit noted that at least
five circuits allow such a practice.
West Run, 712 F.3d at 171-
72; see also Potts v. Potts, No. WDQ-13-1986, 2014 WL 4060031,
at *8 n.30 (D.Md. Aug, 13, 2014) (noting that statement in an
initial complaint was not binding because the “allegations [had]
been removed in the amended complaint”).
Moreover, “the court
is not bound by a party’s conception of the legal effect of
certain facts.”
LLC,
855
Danner v. Int’l Freight Sys. Of Washington,
F.Supp.2d
433,
459
20
n.36
(D.Md.
2012)
(internal
quotation marks omitted) (quoting Meyer v. Berkshire Life Ins.
Co., 372 F.3d 261, 265 n.2 (4th Cir. 2004)).
Plaintiffs’ alleged
admission in their initial complaint was regarding the legal
effects of American Capital’s relationship with SPL and is not
binding on Plaintiffs.
Accordingly, summary judgment is not
appropriate as to whether SPL is a covered insured under the
policies.3
3.
2007-2008 and 2008-2009 Umbrella Policies
The 2007-2008 and 2008-2009 umbrella policies provide that
the policies cover the named insured “American Capital” and “any
subsidiary
thereof.”
(See,
e.g.,
ECF
No.
510-12,
at
27).
Plaintiffs argue that SPL was not a subsidiary under the “common
meaning”
of
the
meaning
of
another
that
term.
“subsidiary”
owns
more
Plaintiffs
is:
than
“a
contend
company
half
of
that
wholly
its
the
common
controlled
voting
stock,”
by
“a
company controlled by another company which owns most of its
shares,”
“one
which
is
controlled
by
another
corporation
by
reason of the latter’s ownership of at least a majority of the
shares
of
corporation
the
capital
(i.e.
parent)
stock,”
owns
3
or
at
“one
least
in
a
which
majority
another
of
the
Plaintiffs also argue that they have not breached the
umbrella policy because a “defense obligation can arise under
the Umbrella Policies . . . only if [coverage under the] Primary
Policies [is] exhausted.” (ECF No. 510, at 46). This argument
is not applicable to the 2006-2007 umbrella policy because SPL
has no coverage under the 2006-2007 primary policy.
21
shares,
and
thus
control.”
(ECF
No.
510-1,
at
(quoting
Comptroller v. Crown Cent. Petroleum Corp., 52 Md.App. 581, 593
(1982)
(citations
and
internal
quotations
marks
omitted))).
Defendants focus on the fact that Plaintiffs have previously
called SPL a subsidiary of American Capital, but they do not
address
the
underlying
question
whether
SPL
actually
was
a
subsidiary, bringing it under coverage of the umbrella policies.
Unlike the term “majority interest,” the term “subsidiary”
is unambiguous and narrower.
Plaintiffs
Maryland
cite
Code
from
as
Crown,
“any
In addition to the definitions
“subsidiary”
corporation
of
is
which
defined
stock
in
the
having
a
majority of the votes entitled to be cast is owned, directly or
indirectly, by the corporation.”
§ 3-801(n).
Md. Code Ann., Corps & Ass’ns
All commonly used meanings of “subsidiary” invoke
ownership and control.
Each party makes allegations as to how
the other has labeled the relationship between SPL and American
Capital, but neither adequately discusses or cites to the record
to
demonstrate
whether
SPL
actually
was
a
subsidiary.
Therefore, the question of whether American Capital exercised
the
requisite
control
over
SPL
to
create
a
subsidiary
relationship is disputed and unclear from the record.
Plaintiffs also contend that there is no claim under the
umbrella policies because a “defense obligation can arise under
the Umbrella Policies . . . only if [coverage under the] Primary
22
Policies [is] exhausted.”
(ECF No. 510, at 46).
Defendants
counter that Plaintiffs’ denial of a defense under the primary
policies triggered a duty to defend under the umbrella policies.
(ECF No. 514-1, at 73).
The umbrella policies state in relevant
part that Plaintiffs “will have no duty to defend any claim or
‘suit’ that any other insurer has a duty to defend.”
No. 510-13, at 13).
(E.g., ECF
The umbrella policies do, however, provide
coverage for damages “payable under [other polices] but which
are not payable by a policy . . . because: (1) Such damages are
not
covered;
or
(2)
The
‘underlying
exhausted by the payment of claims.”
remains
whether
Plaintiffs
had
a
insurance’
(Id.).
duty
to
has
been
Here, a dispute
defend
under
the
primary policies and whether the primary policies cover alleged
damages.
Accordingly, Plaintiffs are not entitled to summary
judgment
on
the
counts
in
Defendants’
counterclaim
regarding
coverage under the umbrella policies.
B.
Joint Venture Clause
The policies provide:
insured
with
respect
to
the
“No person or organization is an
conduct
of
any
current
or
past
partnership, joint venture or limited liability company that is
not shown as a Named Insured.”4
(emphases
added)).
Plaintiffs
4
(E.g., ECF No. 510-9, at 89
argue
that
this
clause
American Capital is the only named insured in each policy.
(See ECF Nos. 510-9; 510-10; 510-11; 510-12; 510-13; 510-14).
23
effectively removes the heparin lawsuits from coverage under the
policies because the allegedly defective heparin was created by
Changzhou,
the
joint
venture.
Defendants
counter
that
the
clause does not remove coverage because the heparin lawsuits
“created the potential for a judgment against American Capital
and/or SPL for liability with respect to the conduct of SPL’s
own Wisconsin operations, . . . independent of any liability
associated with Changzhou.”
(ECF No. 514-1, at 52).
Defendants
assert that all of the suits allege SPL itself was negligent or
strictly
liable,
and
some
do
not
even
reference
the
joint
venture.
Under
defend,
the
the
two-step
key
inquiry
standard
is
for
whether
determining
the
a
duty
underlying
to
heparin
complaints allege an injury that occurred “with respect to the
conduct” of the joint venture.
If there is no potential that
the complaints allege conduct separate from the joint venture,
then Plaintiffs are correct that they have no duty to defend.
Otherwise, the joint venture clause does not relieve them of the
duty.
The term “with respect to” typically is defined broadly.
Merriam-Webster’s
Collegiate
Dictionary
defines
“with
respect
to” as “concerning,” “with reference to,” or “in relation to.”
Merriam-Webster’s
Collegiate
Dictionary
1061
(11th
ed.
2012).
Courts have noted that such a phrase “is not necessarily tied to
24
the concept of a causal connection” and is “broader in scope
than the term ‘arising out of.’”
See, e.g., Coregis Ins. Co. v.
Am. Health Foundation, Inc., 241 F.3d 123, 128-29 (2d Cir. 2001).
In Maryland, the term “arising out of,” which is narrower than
“with respect to,” has been interpreted “‘to mean originating
from, growing out of, flowing from, or the like.’”
Beretta
U.S.A. Corp v. Fed. Ins. Co., 117 F.Supp.2d 489, 493-94 (D.Md.
2000) (quoting N. Assurance Co. V. EDP Floors, Inc., 311 Md. 217
(1987)).
Thus, because of the broad nature of the joint venture
exclusion, Plaintiffs do not have a duty to defend the heparin
lawsuits
unless
there
is
a
potential
unrelated
to
for
heparin
judgment
against
Defendants
completely
originating
with
Changzhou.
Even if the cause of action alleged were negligence
or strict products liability against SPL and American Capital,
the
joint
venture
clause
excludes
the
heparin
lawsuits
from
coverage if the underlying liability relates, in any way, to
heparin received from Changzhou.
See M Consulting and Export,
LLC v. Travelers Cas. Ins. Co., 2 F.Supp.3d 730, 740 (D.Md.
2014) (citing cases for the proposition that it is the substance
of the underlying claim and not a plaintiff’s characterization
or theory of liability that controls).
Many of the complaints do not mention Changzhou or include
any reference to a joint venture.
514-14).
(See, e.g., ECF Nos. 514-11;
In addition, the depositions of two SPL executives
25
show that the contaminated SPL potentially came from a source
other than Changzhou.
For example, Dr. Yan Wang, Vice President
of Business Development and Research at SPL, stated that he
could not confirm that all the contaminated heparin came from
Changzhou because lot 1035, one of the two contaminated lots,
“came from multiple sources,” including an independent Chinese
supplier.
(ECF
No.
510-3,
at
19-20).
In
fact,
Dr.
Wang
confirmed that Changzhou “did not have possession of any [lot]
1035 product.”
(Id. at 15).
Similarly, Mr. David Strunce,
President and CEO of SPL, confirmed that lot 1035 was purchased
from three suppliers, none of which were Changzhou.5
(ECF No.
510-5, at 25).
Accordingly, the joint venture exclusion does not preclude
coverage of the heparin lawsuits or relieve Plaintiffs of a
potential duty to defend.
Thus, Plaintiffs have failed to show
that the joint venture exclusion presents a triable issue of
fact
vis a vis
Plaintiffs’ duty to defend American Capital.
While other provisions may obviate any duty to defend, the joint
venture exclusion does not.
5
Plaintiffs baldly assert that none of the allegedly
contaminated heparin from sources other than Changzhou was
administered to patients.
(ECF No. 510-1, at 16).
This
assertion, however, is not adequately supported by the record.
Rather, the exhibits Plaintiffs cite support the notion that the
allegedly contaminated heparin potentially came from a source
other than Changzhou. (See ECF Nos. 510-3; 510-4; 510-22).
26
C.
Effect of Defendants’ Agreement with Baxter
Each policy states that “[n]o insured will, except at that
insured’s
own
cost,
voluntarily
make
a
payment,
assume
any
obligation, or incur any expense, other than for first aid,
without [the insurer’s] consent.”
90).
(See, e.g., ECF No. 510-9, at
Plaintiffs contend that Defendants’ agreement with Baxter
violated
this
policies
provided
Plaintiffs
are
incorrectly
attached.
provision,
Defendants.
liable
denied
thereby
for
Defendants
the
coverage
voiding
Agreement
and
the
(ECF No. 514-1, at 74-77).
duty
any
coverage
first
costs
to
the
argue
that
because
they
defend
already
Defendants also argue, in
the alternative, that the Agreement does not void the policy;
instead they argue that, at the most, Plaintiffs are relieved
from paying the Agreement costs themselves.
Defendants are correct that Plaintiffs’ duty to defend, if
any, crystalized when the underlying heparin claims were made.
See Sherwood Brands, Inc. v. Hartford Acc. And Indem. Co., 347
Md. 32, 44 (1997).
Plaintiffs did not have an opportunity to
breach their duty to defend, however, until they actually denied
coverage on January 16, 2009.
Id. at 46 (“A duty to defend is
not breached until the insurer is notified of the claim and
then,
without
legal
justification,
declines
to
undertake
defense.”).
Defendants attempt to stretch precedent to argue
that,
Sherwood,
under
Plaintiffs
27
are
liable
for
all
prior
litigation
expenses
if
they
incorrectly
denied
coverage.
However, Sherwood provides for reimbursement of costs made “as a
result of” the improper denial of coverage, that is, because of
the insurer’s breach of its duty to defend.
added).
For
example,
Plaintiffs
may
Id. at 50 (emphasis
be
liable
if
they
improperly denied coverage and then Defendants entered into the
Agreement, because Plaintiffs had breached their duty prior to
the Agreement.
Here, Defendants “voluntarily [made] a payment”
without Plaintiffs’ consent before any alleged breach occurred.
The Agreement was not the result of Plaintiffs’ alleged breach
because
no
potential
breach
had
yet
happened.
Defendants’
conclusory assertions that Plaintiffs denied a defense before
the
Agreement
denial,
and
simply
therefore
January 16, 2009.
are
not
supported
potential
breach,
by
did
the
record.
The
occur
until
not
(ECF No. 514-5).
Defendants assert that the Agreement mitigated Plaintiffs’
potential
exposure.
Even
if
the
Agreement
did
mitigate
potential exposure, it also “cut[] off [Plaintiffs’] right to
‘investigate, defend, control, or settle’ [the] suit” other than
as
proscribed
by
the
Agreement.
See
Perini/Tompkins
Joint
Venture v. Ace Am. Ins. Co., 738 F.3d 95, 104-05 (4th Cir. 2013)
(quoting Prince George’s County v. Local Gov’t Ins. Trust, 388
Md. 162, 190 (2005)).
law
dictates
that
The Fourth Circuit has held that Maryland
insurers
are
28
not
obligated
to
make
such
payments made without their consent.
Id.
In addition, the
amount owed under the Agreement was not merely for costs spent
defending the heparin lawsuits; it included future joint defense
costs spent according to the provisions of the Agreement and the
settlement
argument
of
issues
that
the
unrelated
Agreement
to
did
Plaintiffs.
not
Defendants’
violate
the
voluntary
payments clause because it did not settle any of the underlying
Heparin
suits
policies
is
provides
unpersuasive.
that
The
Plaintiffs
plain
are
language
not
voluntary payments made without their consent.
No.
510-9,
at
90).
The
provision
is
the
for
liable
of
any
(See, e.g., ECF
not
limited
payments made to settle the underlying suits.
only
to
Accordingly, the
policies do not require that Plaintiffs pay the costs of the
Agreement.
policy
because
provision.
instead
The Agreement does not, however, void the entire
it
is
not
a
breach
of
the
voluntary
payment
The provision does not ban voluntary payments, but
mandates
that
the
insured,
rather
cover the cost of such voluntary payments.
than
the
(Id.).
insurer,
Plaintiffs
may ultimately be liable for costs arising from the heparin
lawsuits other than Defendants’ agreement with Baxter, and the
Agreement does not, by itself, relieve Plaintiffs of a potential
duty to defend.
The policies also exclude coverage for injuries “for which
the
insured
is
obligated
to
pay
29
damages
by
reason
of
the
assumption of liability in a contract or agreement.”
510-9, at 81).
(ECF No.
Similar to the voluntary payment provision, this
provision relieves Plaintiffs of their duty to pay the costs of
the Agreement, but does not void coverage altogether.
because
the
policies
provide
that
the
contractual
Further,
liability
exclusion does not apply to damages “[t]hat the insured would
have
in
the
contractual
absence
liability
of
the
provision
contract
is
likely
or
agreement,”
narrower
than
the
the
voluntary payment provision and is of little importance here.
(Id.).
Accordingly, Plaintiffs are not liable for the costs of
the Agreement, but Defendants’ entry into the Agreement did not
void the policies or relieve Plaintiffs of a potential duty to
defend.
D.
Known Bodily Injury Provision
The policies contain a provision that excludes coverage for
injuries when “the insured or authorized ‘employee’ knew, prior
to the policy period, that the ‘bodily injury’ . . . occurred.”
(ECF No. 510-11, at 86).
“bodily
injury,
sickness
The policies define “bodily injury” as
or
disease
sustained
by
including death resulting from these at any time.”
id. at 97).
a
person,
(See, e.g.,
Plaintiffs argue that this provision in the 2008-
2009 primary and umbrella policy excludes the heparin lawsuits
because SPL clearly knew about the alleged contamination prior
to the start of the policy period, which was June 14, 2008.
30
(ECF No. 510-1, at 46).
is
not
applicable
Defendants counter that this provision
because
it
only
excludes
coverage
if
Defendants knew about bodily injury to a particular individual
prior to the policy period.
(ECF No. 514-1, at 72).
The scope of the parties’ disagreement on this issue is
actually
rather
including
the
small.
original
Many
of
multidistrict
the
heparin
litigation
complaints,
action,
were
filed before the 2008-2009 policy and allege injuries that would
fall under earlier policies.
addition,
because
Baxter
(See ECF No. 516, at 42).
and
SPL
recalled
the
In
allegedly
contaminated heparin in early 2008, it is unlikely that many, if
any, injuries occurred during the time covered by the 2008-2009
policies.
correct.
That said, Defendants’ reading of the provision is
Its plain meaning bars coverage only of a specific
bodily injury that was known by Defendants prior to the policy
date.
Plaintiffs
have
provided
no
evidence
that
Defendants
knew, before the start of the 2008-2009 policy period, of any
injuries for which they are seeking coverage under the 2008-2009
policies.
E.
Conclusion
For the foregoing reasons, partial summary judgment will be
entered in favor of Plaintiffs as to Count IV of the Second
Amended
Complaint
(declaratory
judgment)
with
respect
to
coverage of SPL under the 2006-2007 Primary Policy and as to
31
Counts I and IX of the Third Amended Counterclaims (declaratory
judgment
and
breach
of
contract
policy).
In addition, the joint venture clause does not relieve
Plaintiffs of their duty to defend.
for
the
2006-2007
primary
Other claims within Count
IV of the Second Amended Complaint remain.
Counts II through
VIII and X through XII of the Third Amended Counterclaim also
remain.
IV.
Plaintiffs’ Rescission and Reformation Claims
A.
Rescission
Defendants move for summary judgment on Count I of the
Second Amended Complaint, which seeks to rescind the policies
based on Defendants’ purported misrepresentations that it was
not seeking coverage for subsidiaries or other entities, such as
SPL.
(ECF No. 1 ¶¶ 137-141).
Ultimately to succeed on their
rescission claim, Plaintiffs must show that they:
[I]ssued a policy in reliance on a material
misrepresentation
in
the
application.
Materiality is determined by considering
whether, given the circumstances of the
case,
the
information
omitted
could
reasonably have affected the determination
of the acceptability of the risk.
The
misrepresentation must actually have been
relied on in issuing the policy or setting
the premium in order for it to be material.
. . . The materiality of a misrepresentation
can be determined [at summary judgment] as a
matter of law when the evidence is clear and
convincing, or uncontradicted.
32
Mutual Ben. Ins. Co. v. Lorence, 189 F.Supp.2d 298, 302 (D.Md.
2002) (quoting N. Am. Specialty Ins. Co. v. Savage, 977 F.Supp.
725, 728 (D.Md. 1997)) (citations and internal quotation marks
omitted).
seeking
Plaintiffs must also show that they acted promptly in
rescission
after
justify rescission.”
learning
of
“the
facts
that
would
(ECF No. 77, at 9 (quoting Monumental Life
Ins. Co. v. U.S. Fid. & Guar. Co., 94 Md.App. 505, 541 (1993)
(emphasis in original))).
Defendants’ argument that Plaintiffs are “trying to reframe
[their]
rescission
claim
misrepresentations
completely”
regarding
by
coverage
focusing
of
other
on
alleged
entities
in
general rather than on the question of whether American Capital
had subsidiaries (ECF No. 523, at 32) ignores Plaintiffs’ clear
allegations that American Capital made “misrepresentations . . .
that it was not seeking coverage for other entities.”
67
¶
138).
In
addition,
misrepresentation
regarding
Defendants’
subsidiaries
focus
on
the
ignores
alleged
many
alleged misrepresentations contained in the record.
No. 516, at 61-62).
(ECF No.
other
(See ECF
The crux of Plaintiffs’ argument is that
American Capital made material misrepresentations to hide the
fact that it was seeking coverage not only for itself, but also
for
at
least
some
of
its
portfolio
companies,
such
as
SPL.
Accordingly, the appropriate focus is on the totality of the
alleged misrepresentations.
33
Plaintiffs
assert
that
the
record
shows
multiple
misrepresentations made by Defendants, including: (1) indicating
on
its
insurance
application
that
American
Capital
had
no
subsidiaries, had not acquired any operations in the last five
years, was not involved in any joint ventures, and did not sell,
distribute, or use as components foreign products (ECF No. 51610,
at
3,
13,
34);
and
(2)
continually
providing
loss
and
exposure information only for American Capital operations, and
not those of its portfolio companies, including SPL (see ECF
Nos. 516, at 61-62; 516-21, at 6-7).
Plaintiffs contend that,
in reliance on these misrepresentations, they devised American
Capital’s
only
insurance
American
policy,
Capital
including
itself.
its
premiums,
to
assert
that,
Plaintiffs
cover
had
Defendants not misrepresented the scope of coverage they sought,
Plaintiffs
would
have
charged
higher
premiums
or
included
additional language explicitly excluding the portfolio companies
from coverage.
Defendants
(ECF No. 516, at 72).
argue
that
Plaintiffs
did
not
file
their
rescission claim “promptly” after learning of facts that would
justify rescission.
Plaintiffs counter that they acted promptly
after concluding that American Capital would seek coverage on
behalf of SPL.
Viewing the facts in the light most favorable to
the nonmovants, Plaintiffs did not have a “concrete indication”
that Defendants would seek coverage for SPL under the policies
34
until, at the earliest, November 12, 2008.
34).
(See ECF No. 523, at
Prior to this date, Plaintiffs had no concrete indication
that SPL, in addition to American Capital, would seek coverage
under
the
policies
because
American
Capital
was
defendant in all the suits that had been noticed.
514-1, at 32).
a
named
(See ECF No.
Although an insurer is required to act promptly,
“it is entitled to a reasonable time within which to investigate
the matter” before it must rescind.
Savage, 977 F.Supp. at 732.
There is evidence that Plaintiffs acted promptly and diligently
in trying to obtain additional information from American Capital
regarding the heparin lawsuits as soon as they received notice
of
the
suits,
and
that
they
approximately two months later.
510-50).
filed
their
rescission
claim
(See ECF Nos. 510-48; 510-49;
“The Fourth Circuit has found a delay of two months
between discovering a reason for rescission and the date of
actual
rescission
acceptable.”
Savage,
977
F.Supp.
at
732
(citing Thomas v. Prudential Ins. Co. of Am., 104 F.2d 480, 483
(4th Cir. 1939)).
that
any
Capital’s
complex
delay
Defendants have not shown as a matter of law
here
apparent
nature
of
was
lack
unreasonable
of
American
in
responsiveness
Capital’s
light
and
of
the
relationship
American
relatively
with
SPL.
Accordingly, Defendants are not entitled to summary judgment on
Count I of the complaint.
35
B.
Reformation
Defendants also move for summary judgment on Plaintiffs’
reformation claims (Counts II and III), which seek reformation
of the insurance policies due to mutual mistake or unilateral
mistake.6
Plaintiffs
assert
that
the
parties
intended
the
policies to provide coverage only for American Capital and not
for its portfolio companies, such as SPL.
146).
(ECF No. 1 ¶¶ 142-
In Maryland, for a party to obtain reformation of an
insurance
policy,
“it
is
necessary
that
it
appear,
by
appropriate proof, that a valid agreement exists, and that by
reason
of
fraud,
or
by
mutual
mistake
on
the
part
of
both
parties to the agreement, it does not conform to the actual
agreement of the parties.”
Am. Cas. Co. of Reading, Pa. v.
Ricas, 179 Md. 627, 634 (1941).
judgment
is
warranted
because
Defendants argue that summary
the
policies
comport
with
the
terms intended by the parties, Plaintiffs affirmed the contracts
on December 30, 2008, a third party relied on the contract as
written,
and
Plaintiffs’
reformation
claim
is
procedurally
deficient because it does not contain a redline version of the
proposed reformed policies.
6
Plaintiffs do not oppose Defendants’ motion for summary
judgment
as
to
reformation
due
to
unilateral
mistake.
Accordingly, summary judgment will be entered on Count III of
the complaint.
See Cray Commc’ns, Inc. v. Novatel Computer
Sys., Inc., 33 F.3d 390, 393-95 (4th Cir. 1994).
36
A genuine dispute of material fact remains as to the extent
of coverage intended by the parties.
President
of
Finance
at
American
Thomas McHale, Senior Vice
Capital,
asserted
in
his
deposition that he had always understood the policies to cover
American Capital’s portfolio companies.
5).
The
record
contains
(ECF No. 514-134, at 4-
evidence,
however,
supporting
Plaintiffs’ contention that the parties intended the policies to
cover only American Capital.
For example, Defendants did not
provide Plaintiffs with any information regarding SPL or other
portfolio
companies
(ECF
No.
516,
at
77),
and
employees
in
American Capital’s treasury department described that SPL might
only be covered by a “loophole” in the policy (ECF No. 516-17,
at 3).
In addition, depositions of Travelers’ underwriters show
that Travelers did not believe it was providing coverage for
American Capital’s portfolio companies such as SPL.
(ECF Nos.
516-20, at 50-51; 516-21, at 20-21).
Defendants’ other arguments are not sufficient to warrant
summary
judgment.
First,
Defendants
allege
that
Plaintiffs
“affirmed the contracts’ subsistence” in a December 30, 2008 email sent to American Capital with regard to its relationship
with Nationwide Arena, which was involved in a lawsuit unrelated
to the heparin lawsuits.
(ECF No. 514-25).
This e-mail does
not affirm the validity of the policies as written, but rather
suggests
that
Plaintiffs
were
37
undergoing
the
same
coverage
determination with regard to Nationwide Arena as they were with
the
heparin
lawsuits.
Defendants
also
assert
that
reliance on the policies precludes reformation.
Baxter’s
There is no
evidence in the record, however, of Baxter’s reliance on the
policies, and such a determination is not appropriate at this
time.7
Finally, Defendants contend that summary judgment is
warranted because Plaintiffs did not supply a redline version of
their
proposed
authority
reformations.
requiring
a
party
Defendants
seeking
redline version of a contract.
do
not
reformation
cite
to
any
submit
a
Rather, Defendants’ argument
rests on the fact that a party seeking reformation must show
“the precise agreement which the parties intended.”
See Emanuel
v. Ace Am. Ins. Co., No. ELH-11-875, 2012 WL 2994285, at *7
(D.Md. July 20, 2012); Lazenby v. F.P. Asher, Jr. & Sons, Inc.,
266 Md. 679, 682-84 (1972).
Although a redline version would
certainly
determine
Plaintiffs
Plaintiffs
help
a
factfinder
contend
have
made
existed,
plain
one
their
is
the
not
belief
precise
agreement
required
that
the
here.
parties
intended the policies to cover only American Capital and any
7
Plaintiffs are also correct that the Restatement (Second)
of Contracts § 155 cmt. f, on which Defendants rely, only
discourages reformation for “good faith purchases for value” and
“[s]uch other third parties . . . who have given value and come
within the definition of ‘purchaser’” under the Uniform
Commercial Code, such as “mortgagees, pledgees and other holders
of a security interest.” Baxter does not appear to fall within
this definition.
38
entity
that
was
included
in
its
application
and
exposure
schedule, but not unreported portfolio companies such as SPL.
Accordingly, Defendants are not entitled to summary judgment on
Count II of the complaint.
V.
Defendants’ Statutory Lack of Good Faith Counterclaim
Defendants and Plaintiffs cross move for summary judgment
on
Defendants’
statutory
lack-of-good-faith
counterclaim.
Defendants assert this counterclaim under two Maryland statutes,
which require an insurer to make “an informed judgment based on
honesty and diligence supported by evidence the insurer knew or
should have known at the time the insurer made a decision on a
claim.”
Md. Code Ann., Cts. & Jud. Proc. § 3-1701; see Ins. §
27-1001(a).
As the undersigned previously noted, the court in
Cecilia Schwaber Trust Two v. Hartford Accident and Indem., Co.,
636 F.Supp.2d 481, 487 (D.Md. 2009), determined that assessing
whether an insurer acted in good faith requires “an evaluation
of the insurer’s efforts to obtain information related to the
loss,
accurately
and
honestly
assess
this
information,
and
support its conclusion regarding coverage with evidence obtained
or reasonably available.”
requiring
an
insurer
to
This test has been summarized as
meet
“standards
of
reasonable
investigation, honest assessment, and reasonable explanation.”
All Class Const., LLC v. Mut. Ben. Ins. Co., 3 F.Supp.3d 409,
418 (D.Md. 2014).
This court considers the following factors
39
when
determining
if
an
insurer
meets
the
aforementioned
standards:
[(1)] efforts or measures taken by the
insurer to resolve the coverage dispute
promptly or in such a way as to limit any
potential prejudice to the insureds; [(2)]
the substance of the coverage dispute or the
weight of legal authority on the coverage
issue; [and (3)] the insurer’s diligence and
thoroughness in investigating the facts
specifically pertinent to coverage.
Cecilia Schwaber, 636 F.Supp.2d at 487 (citation and internal
quotation marks omitted).
Defendants
allege
that
the
record
shows
that
Plaintiffs
denied coverage in bad faith primarily because, less than a week
before denying coverage, a draft position letter indicated that
Plaintiffs
would
(ECF No. 514-54).
provide
coverage
for
the
heparin
lawsuits.
Defendants also argue that the fact that Mr.
Robert Crivelli, Travelers’ head of complex claims, sent an email describing the declaratory judgment suit as “leverage” for
a settlement shows lack of good faith.
Defendants
summarize
their
(ECF No. 514-1, at 58).
lack-of-good-faith
assertions
arguing that:
Travelers (i) reversed course on the eve of
issuing its coverage position letter to deny
a defense obligation after drafts of just a
few days earlier agreed to provide a defense
to each insured for the asking; (ii) could
not provide any good faith explanation for
its
change
of
position;
and
(iii)
impermissibly relied on extrinsic evidence
to deny a duty to defend based on joint
40
as
venture grounds even those heparin
that contain no mention whatsoever
joint venture.
(Id. at 59-60).
suits
of a
Plaintiffs counter that Defendants have simply
not shown that Plaintiffs “failed to make an ‘informed judgment
based on honesty and diligence supported by the evidence the
insurer knew or should have known at the time the insurer made a
decision on a claim.’”
(ECF No. 510-1, at 48 (quoting Md. Code
Ann., Cts. & Jud. Proc. § 3-1701)).
Plaintiffs contend that the
draft statements and internal deliberations are not sufficient
to show a lack of good faith.8
An improper denial of coverage alone does not show a lack
of good faith.
See All Class Const., 3 F.Supp.3d at 418.
The
question of good faith turns not on what the policies actually
cover, but what the insurer reasonably believed and articulated
they covered at the time of denial.
See id.; Lanham Servs.,
Inc. v. Nationwide Property and Cas. Ins. Co., No. PWG-13-3294,
2014 WL 2772227, at *5 (D.Md. June 18, 2014).
In their letter
denying coverage, Plaintiffs informed Defendants that because
8
Plaintiffs make two additional arguments that can be
addressed quickly.
First, they argue that Defendants’ claim
must fail because Plaintiffs are entitled to summary judgment on
the coverage issue.
Although the underlying proposition is
true, see Cecilia Schwaber, 636 F.2d at 488 n.6, it is
inapplicable because Plaintiffs’ motion for summary judgment on
coverage will, in large part, be denied.
Second, Plaintiffs
continue to argue that § 3-1701 does not apply to this case.
The undersigned has already held otherwise.
(ECF No. 378, at
16-18 (citing Whiting-Turner Contracting Co. v. Liberty Mut.
Ins. Co., 912 F.Supp.2d 321, 339 (D.Md. 2012))).
41
“[t]he heparin lawsuits relate to the conduct of the [joint
venture,] . . . the heparin lawsuits fall outside the coverage
of the primary and umbrella policies.”
(ECF No. 514-5, at 3).
The letter further stated Plaintiffs’ understanding of the facts
of
the
underlying
complaints,
which
was
that
defective heparin was manufactured by Changzhou.
the
allegedly
(Id. at 4).
There remains a dispute of material fact as to whether
Plaintiffs’ decision to deny coverage was informed, based on
honesty and diligence, and supported by evidence that Plaintiffs
knew or should have known at the time of the decision.
primary
justification
Plaintiffs
provided
in
their
The
letter
denying coverage was that the joint venture provision precluded
coverage.
As discussed above, however, many of the underlying
complaints did not mention Changzhou or the existence of a joint
venture, and actually may not relate to the joint venture.9
addition,
Plaintiffs’
quick
reversal
from
a
draft
In
letter
granting coverage raises a dispute as to whether Plaintiffs met
the standards of reasonable investigation and honest assessment
when
denying
coverage,
particularly
because
the
draft
letter
appeared to recognize that Plaintiffs had a duty to defend at
9
Although the inquiry into a lack of good faith “focuses on
the time at which the insurer’s decision was made,” All Class
Const., 3 F.Supp.3d at 416, the fact that discovery has shown
that the heparin lawsuits may not be related to heparin from
Changzhou further puts into question whether Plaintiff conducted
a diligent and thorough investigation of the facts pertinent to
coverage.
42
least some of the heparin lawsuits that were not related to the
joint venture.
(See ECF No. 514-54, at 2).
Moreover, it is
premature to determine, as a matter of law, whether Plaintiffs’
coverage determination was made in good faith when the meaning
and scope of the provisions, and thus, the “weight of legal
authority
on
the
coverage
issue,”
remains
unresolved.
Accordingly, both Plaintiffs’ and Defendants’ motion for summary
judgment will be denied as to Count XIII of the third amended
counterclaim.
VI.
Defendants’ Common Law Tort Claim for Promissory Fraud
Defendants’
counterclaim
also
alleges
that
Plaintiffs
“committed promissory fraud” because Plaintiffs never intended
“to
perform
policies.
written,
express
contractual
promises”
set
forth
in
the
Specifically, Defendants assert that the policies, as
cover
American
Capital’s
portfolio
companies,
but
Plaintiffs never intended actually to carry out the provisions
of the policies.
Plaintiffs
(ECF No. 380 ¶¶ 295-300).
first
argue
that
Maryland
prohibits Defendants’ promissory fraud claim.
public
policy
(ECF No. 510-1,
at 52-54).
Plaintiffs’ argument is based on the principle that
it
appropriate
is
not
to
allow
tort
remedies
essentially a breach of contract action.
for
what
is
Plaintiffs support
their public policy argument by relying on a Court of Appeals of
Maryland case, Mesmer v. Maryland Auto. Ins. Fund, 353 Md. 241
43
(1999), and one from the United States Court of Appeals for the
Fourth Circuit, Hartz v. Liberty Mut. Ins. Co., 269 F.3d 474 (4th
Cir. 2001).
In Mesmer, the Court of Appeals held that, “a
liability insurer breaches no tort duty when, upon learning of a
claim, it erroneously denies coverage and refuses to undertake
any defense against the claim.”
353 Md. at 258.
Similarly, the
Fourth Circuit noted that “[t]he Maryland Court of Appeals has
repeatedly held that the duty which is owed to an insured for
failure to settle a claim sounds in contract and not in tort.”
Hartz, 269 F.3d at 476 (citing Jones v. Hyatt Ins. Agency, Inc.,
356 Md. 639 (1999)).
These cases stand for the proposition that
wrongful denial of coverage, absent more, cannot be brought as a
tort claim.
See Mesmer, 353 Md. at 253 (“‘Mere failure to
perform a contractual duty, without more, is not an actionable
tort.’” (citing Wilmington Trust Co. v. Clark, 289 Md. 313, 32829 (1981) (emphasis added)).
a
mere
failure
Plaintiffs
to
Here, Defendants assert more than
defend.
fraudulently
Rather,
entered
into
their
the
claim
policies
intention of offering the terms contained within.
with
that
no
As this court
has previously stated:
“[W]hile ‘fraud cannot be predicated on
statements that are merely promissory in
nature, or upon expressions as to what will
happen in the future,’ . . . ‘the existing
intention of a party at the time of
contracting is a matter of fact’ and ‘fraud
may be predicated on promises made with a
44
is
present intention not to perform them.’”
Parker v. Columbia Bank, 91 Md.App. 346,
360-61
(1992);
Orteck
Int’l
Inc.
v.
TransPacific Tire & Wheel, Inc., No. DKC-052882, 2006 WL 2572474, at *11 (D.Md. Sept.
5, 2006).
“The gist of the fraud in such
cases is . . . the false representation of
an existing intention to perform where such
intent is in fact non-existent.”
Tufts v.
Poore, 219 Md. 1, 12 (1959); Hale Trucks of
Md., LLC v. Volvo Trucks N.A., Inc., 224
F.Supp.2d
1010,
1032
(D.Md.
2002)
(“a
deliberate
misrepresentation
of
one’s
existing
intentions,
where
the
misrepresentation is material, ‘may form the
basis for an action in fraud or deceit’”).
This
is
exactly
the
theory
on
which
Defendants
base
the
promissory
fraud
counterclaim.
Specifically, the proposed
fraud counterclaim alleges that at the time
Travelers issued the three policies, it did
not intend to perform “according to the very
terms that Travelers specifically intended
to include in the [p]olicies.”
(ECF No.
285-2 ¶ 301).
Defendants further allege in
support
of
this
counterclaim
that
“Travelers’ intention was to perform only
those promises of coverage that Travelers
was
not
seeking
to
remove
via
its
‘reformation claim.’” (ECF No. 285-1 ¶ 84).
(ECF No. 378, at 19-20).
Accordingly, Defendants’ promissory
fraud claims are not barred by Maryland public policy.10
10
In addition, in the years since the two cases cited by
Plaintiffs were decided, Maryland created the aforementioned
statutory cause of action against insurers for lack of good
faith.
Md. Code Ann., Cts. & Jud. Proc. § 3-1701.
This
statutory change further indicates that Maryland public policy
does not bar claims such as Defendants’ promissory fraud tort
claim.
45
Both parties proceed to debate the substantive merits of
Defendants’ promissory fraud claim.
In Maryland, the elements
of fraud are:
(1)
that
the
defendant
made
a
false
representation to the plaintiff; (2) that
its falsity was either known or that the
representation
was
made
with
reckless
indifference as to its truth; (3) that the
misrepresentation was made for the purpose
of defrauding the plaintiff; (4) that the
plaintiff relied on the misrepresentation
and had the right to rely on it; and (5)
that the plaintiff suffered compensable
injury resulting from the misrepresentation.
Md. Envtl. Trust v. Gaynor, 370 Md. 89, 97 (2002).
Plaintiffs
move for summary judgment only on the fourth and fifth elements.
Plaintiffs assert they are entitled to summary judgment because,
“[i]f the Court finds that the Policies do not in fact provide
[the coverage Defendants allege], then there could have been no
justifiable reliance as a matter of law.”
53).
(ECF No. 510-1, at
As the undersigned discussed in relation to the parties’
declaratory judgment and statutory lack of good faith claims,
because the precise meaning and scope of the policies remains
disputed, summary judgment is not appropriate on this element.
In
addition,
Plaintiffs
allege
that
Defendants
have
not
adequately shown that they were injured by their reliance on the
alleged misrepresentations.
This argument is unavailing because
if Defendants are ultimately correct about the other elements,
including
the
scope
of
the
policies’
46
coverage,
the
alleged
injury is clear.
the
scope
of
Without the alleged misrepresentations as to
coverage,
Defendants
would
have
procured
a
different policy that provided the coverage they sought, and the
heparin lawsuits would have been covered.
To be clear, success
on
forgone
the
other
Defendants
elements
must
still
is
far
prove
from
the
a
extent
of
conclusion,
the
damages
proximately caused by the fraud, and Plaintiffs are not liable
for the costs of the Agreement.
Plaintiffs are not, however,
entitled to summary judgment as a matter of law.
Defendants’
argument
for
summary
judgment
rests
on
the
allegation that Plaintiffs purposefully misrepresented the scope
of
the
policy
in
order
to
defraud
Defendants.
The
record
disputes Defendants’ various assertions that Plaintiffs did not
intend to honor the terms of the policy.
the
parties
as
to
coverage
remains
First, the intent of
disputed.
Second,
as
discussed throughout this opinion, a factfinder could determine
that the record shows the existence of a heated internal dispute
over
the
nature
misrepresentation.
and
scope
of
What
the
policies,
not
Defendants
intentional
allege
are
misrepresentations as to the scope of the policy may be mere
factual explanations of the policy’s language.
For example,
Defendants cite to an e-mail from a Travelers account executive
that states that the policies “cover the [general liability] on
a comprehensive basis subject to the policy forms.
47
Therefore we
are
covering
all
the
operations
(subject
to
the
policy
limitations and exclusions) of the named insured . . . .”
No.
514-91).
Nothing
in
this
e-mail
indicates
(ECF
attempted
misrepresentation, and it conveys that coverage is limited by
the terms of the policies.
The meaning and scope of those terms
is what is now being disputed.
Such a coverage dispute is not
enough to show that, as a matter of law, Plaintiffs engaged in
promissory fraud.
Accordingly, Defendants’ motion for summary
judgment will be denied.
VII. Motions to Seal
In addition to the common-law standard for a motion to seal
that the court has applied in prior opinions (See, e.g., ECF
Nos. 492; 517), a qualified First Amendment right of access
“attaches
to
materials
judgment motion.”
filed
in
connection
with
a
summary
Doe v. Pub. Citizen, 749 F.3d 246, 258, 267
(4th Cir. 2014) (citation omitted).
restricted
only
if
government
closure
interest’
and
is
the
This right of access “may be
‘necessitated
denial
tailored to serve that interest.’”
of
by
access
a
is
compelling
‘narrowly
Id. at 266 (quoting In re
Wash. Post Co., 807 F.2d 383, 390 (4th Cir. 1986) (quoting PressEnter. Co. v. Superior Court, 464 U.S. 501, 510 (1984) (internal
quotation marks omitted))).
Unfortunately, the parties are, once again, unable to agree
on a motion to seal.
Plaintiffs move to seal portions of the
48
summary
judgment
records
and
record
that
testimony
fall
into
regarding
two
categories:
Travelers’
“(a)
underwriting
processes, procedures and actions related to American Capital
Policies
and
(b)
records
and
testimony
client communications and work product.”
containing
attorney-
(ECF No. 524-1, at 1).
Plaintiffs, complying with Local Rule 105.11, have filed the
briefs
with
proposed
redactions
highlighted
(ECF
Nos.
524-3
through 524-7), and a list of exhibits proposed for redaction
(ECF No. 524-8).
They also publicly filed the documents with
the proposed redactions.
Defendants
their
burden
contend
of
(ECF Nos. 527; 528; 529; 530).
that
showing
Plaintiffs
that
the
have
proposed
failed
to
meet
redactions
are
narrowly tailored to further a compelling interest, as required
under the First Amendment.
Although Plaintiffs noted the reason
for each proposed redaction, Defendants seek to have Plaintiffs
specify with more particularity why each redaction is necessary
to protect confidential underwriting processes and procedures or
attorney-client communications and work product.
In a prior memorandum opinion the undersigned held that,
under
the
redacting
processes,
common-law
standard,
“information
that
underwriting
Plaintiffs
pertains
decisions,
attorneys, and attorney impressions.”
Similarly,
Plaintiffs
have
a
to
justified
their
in
business
communications
with
(ECF No. 492, at 6-7).
compelling
49
were
interest
in
keeping
sensitive internal underwriting processes and procedures sealed.
See Sky Angel U.S., LLC v. Discovery Commc’ns, LLC, 95 F.Supp.3d
860, 882-83 (D.Md. 2015) (granting motion to seal at summary
judgment stage because releasing the information could cause the
party to “suffer significant harm to its business dealings”).
Plaintiffs
internal
details
have
sufficiently
information
as
to
how
material
as
give
Plaintiffs
potential insureds.
this
could
articulated
their
evaluate
how
releasing
competitors
risk
and
this
sensitive
coverage
of
Contrary to Defendants’ characterization of
“routine
claims
handling
materials,”
the
redacted material is plainly the type of sensitive, confidential
internal business information that is appropriate to keep under
seal.
Plaintiffs also have a compelling interest in maintaining
the confidentiality of attorney-client communications and work
product.
Plaintiffs continue to have an interest in keeping
this information confidential despite its disclosure under seal
pursuant
to
court
orders.
(See,
e.g.,
ECF
No.
325).
The
parties argue over whether Plaintiffs’ interest should be framed
as attorney-client privilege or a duty of confidentiality, but
this
distinction
is
immaterial
because
both
are
compelling
interests that justify redactions at this time.
Plaintiffs’ proposed redactions are relatively limited and
reasonable.
Plaintiffs redact only relevant portions of the
briefs, leaving the parties’ arguments readily discernible from
50
the
redacted
versions.
Plaintiffs
propose
redactions
to
90
exhibits, leaving the vast majority of the nearly 300 exhibits
publicly available in their entirety.
finds,
following
an
independent
Accordingly, the court
review
of
the
proposed
redactions, that Plaintiffs have demonstrated that the proposed
redactions to the summary judgment record are justified.
As before, the undersigned will not endeavor to determine
what
portions
(if
any)
of
this
information that is under seal.
will
be
filed
under
seal
Memorandum
Opinion
contain
Rather, the Memorandum Opinion
temporarily,
and
the
parties
are
directed to review it and within fourteen (14) days suggest
jointly any necessary redactions that should be made before it
is released to the public docket.
VIII.
Conclusion
For the foregoing reasons, the motions for summary judgment
filed by Defendants and Plaintiffs will both be granted in part
and
denied
granted.
in
part.11
Plaintiffs’
motions
to
seal
will
be
A separate order will follow.
/s/
DEBORAH K. CHASANOW
United States District Judge
11
The parties’ discussion regarding the level of damages is
premature because issues of liability have not been resolved.
51
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