The Charter Oak Fire Insurance Company et al v. American Capital, Ltd. et al
Filing
842
MEMORANDUM OPINION. Signed by Judge Deborah K. Chasanow on 8/3/2017. (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.
:
MEMORANDUM OPINION
What started as an ordinary relationship between an insured
and its insurer has become, since the notice of the first claim,
anything but.
Primarily at issue in this insurance coverage
case is whether Plaintiffs/Counter-Defendants Charter Oak Fire
Insurance
Casualty
Company
(“Charter
Company
of
Oak”)
America
and
Travelers
(“Travelers”)
Property
(collectively,
“Plaintiffs”) breached the duty to defend Defendants/CounterPlaintiffs
American
Scientific
Protein
Capital,
Ltd.
Laboratories
(“American
LLC
(“SPL”)
Capital”)
and
(collectively,
“Defendants”) in more than 1,000 underlying lawsuits pertaining
to allegedly contaminated heparin under six insurance policies.1
The six insurance policies are: three primary commercial general
liability
1
(“CGL”
or
“Primary”)
insurance
policies
issued
by
SMG, formerly known as Spectator Management Group, is also
named as a defendant and counter-plaintiff in connection with a
lawsuit against American Capital and SMG unrelated to heparin.
Baxter International Inc. and Baxter Healthcare Corporation
(collectively, “Baxter”) are interested parties.
Charter Oak to American Capital for the 2006-2007, 2007-2008,
and 2008-2009 coverage years (PTX 163 (2006); PTX 164 (2007);
PTX 453
(2008));
and
three
commercial
excess
liability
(“Umbrella”) insurance policies issued by Travelers to American
Capital
for
the
2006-2007,
2007-2008,
and
years (PTX 166 (2006); PTX 167 (2007)).2
from March 8 to April 18, 2017.
2008-2009
coverage
A bench trial was held
The following findings of fact
and conclusions of law are issued pursuant to Federal Rule of
Civil Procedure 52(a).3
For the reasons set forth below, the court finds that: (1)
Charter Oak breached its duty to defend American Capital in the
heparin
litigation
under
the
2006,
2007,
and
2008
Primary
2
The designation “PTX” refers to exhibits offered by
Plaintiffs (insurers Charter Oak and Travelers) at trial. “DTX”
refers to exhibits offered by Defendants (American Capital and
SPL).
References to trial testimony are designated by the ECF
docket entry of the official transcript and page number.
3
Rule 52(a) provides, in relevant part, that “[i]n an
action tried on the facts without a jury . . . , the court must
find the facts specially and state its conclusions of law
separately. The findings and conclusions . . . may appear in an
opinion or a memorandum of decision filed by the court.”
To
comply with this rule, the court “‘need only make brief,
definite, pertinent findings and conclusions upon the contested
matters,’ as there is no need for ‘over-elaboration of detail or
particularization of facts.’”
Wooten v. Lightburn, 579
F.Supp.2d 769, 772 (W.D.Va. 2008) (quoting Fed.R.Civ.P. 52(a)
advisory committee’s note to 1946 amendment). Rule 52(a) “does
not require the court to make findings on all facts presented or
to make detailed evidentiary findings; if the findings are
sufficient to support the ultimate conclusion of the court they
are sufficient.”
Darter v. Greenville Cmty. Hotel Corp., 301
F.2d 70, 75 (4th Cir. 1962) (quoting Carr v. Yokohama Specie
Bank, Ltd., 200 F.2d 251, 255 (9th Cir. 1952)).
2
Policies; (2) Travelers breached its duty to defend SPL in the
heparin litigation under the 2006 Umbrella Policy, and Charter
Oak breached its duty to defend SPL in the heparin litigation
under the 2007 and 2008 Primary Policies; (3) Plaintiffs are not
entitled to rescission of the policies; (4) Plaintiffs are not
entitled to reformation of the policies; (5) American Capital
has not proven promissory fraud; and (6) Defendants have not
proven that Plaintiffs acted with a lack of good faith.
court will decline to issue declaratory judgments.
the
court
described
will
enter
herein
and
judgment
award
in
favor
damages
of
in
The
Accordingly,
Defendants
the
amount
as
of
$62,717,069.00 plus interest.
I.
Factual Background
A.
At
traded
The Parties
all
relevant
private
Delaware,
Maryland.4
with
equity
its
times,
firm
principal
American
Capital
incorporated
place
of
was
under
business
a
the
in
publicly
laws
of
Bethesda,
As a registered business development company, it
provided “significant managerial assistance” to its “portfolio
companies” under the Investment Company Act of 1940, 15 U.S.C.
§ 80a-2(46)-(48), through its wholly owned domestic consolidated
operating
subsidiary,
American
4
Capital
Financial
Services
American Capital was formerly known as American Capital
Strategies, Ltd. It was recently acquired by Ares Capital Corp.
and converted into ACAS, LLC. (ECF No. 601).
3
(“ACFS”).
an
In August 2006, American Capital formed and acquired
interest
in
SPL
Acquisition
Corp.,
which
acquired
SPL
Holdings, LLC, which wholly owned SPL.
SPL, which manufactures
and
ingredients
distributes
Waunakee,
active
Wisconsin,
pharmaceutical
was
a
portfolio
company
(“API”)
of
in
American
Capital.
Charter Oak and Travelers are subsidiaries of The Travelers
Companies, Inc.
State
of
They are incorporated under the laws of the
Connecticut
and
maintain
their
principal
place
of
business in Hartford, Connecticut.
B.
Insurance Purchase and Renewals
More than eleven years ago, American Capital purchased a
package
of
six
insurance
policies
–
commercial
general
liability, excess liability, property, business auto, foreign,
and
workers’
compensation
–
from
Travelers
and
Charter
Oak.
Through insurance broker Marsh USA (“Marsh”), American Capital
solicited policy proposals for the 2006-2007 term year.
In so
doing, Marsh sent an undated commercial insurance application
form, the “ACORD form,” to the McKee Risk Management agency
(“McKee”).
Pursuant
to
an
underwriting
agreement
with
Plaintiffs, McKee sent application materials regarding American
Capital to Plaintiffs to see if they were interested in putting
in
a
quote
for
its
business.
Within
two
days,
Plaintiffs
prepared a proposal, which they sent to McKee and McKee sent to
4
Marsh.
from
Marsh sent Plaintiffs’ proposal, along with proposals
two
other
insurance
carriers,
to
American
Capital.
American Capital accepted Plaintiffs’ proposal, and the policies
were bound on June 23, 2006.
The policies were renewed with
minimal changes for the 2007-2008 and 2008-2009 coverage years.
C.
Underlying Heparin Litigation
Heparin
surgeries,
is
which
manufactured
a
blood-thinning
is
Heparin
derived
Sodium,
drug,
from
USP.
pig
commonly
used
intestines.
Under
a
supply
in
SPL
agreement
entered into in 2001, it supplied heparin products to Wyeth
Pharmaceuticals,
Inc.
(See
DTX
315).
In
2004,
Wyeth
Pharmaceuticals, Inc. sold its heparin business to Baxter, and
SPL and Baxter agreed to an amended supply agreement.
Some, but not all, of the heparin API supplied by SPL to
Baxter originated in China.
At all relevant times, a subsidiary
of SPL held rights in Changzhou SPL Co., Ltd. (“CZSPL” or the
“Changzhou
joint
joint
venture”),
venture
an
agreement
entity
between
created
pursuant
Changzhou
to
a
Techpool
Pharmaceutical Co., Ltd., a Chinese company, and a predecessor
of
SPL
in
1999.
CZSPL
obtained
crude
heparin
from
consolidators, which combined smaller lots of crude heparin into
larger lots.
The consolidators obtained the crude heparin from
heparin workshops, which extracted the crude heparin from raw
materials obtained from Chinese farms.
5
From the crude heparin,
CZSPL manufactured Heparin Sodium, USP in China, which it sold
to
SPL
heparin
and
SPL
directly
resold
from
to
Baxter.
SPL
and
consolidators
also
received
manufactured
crude
Heparin
Sodium, USP at its Wisconsin facility, which it then sold to
Baxter.
Baxter
finished
the
heparin
and
supplied
it
to
hospitals, where the drug was administered to patients.
Following reports of severe patient reactions to heparin,
including patient deaths, Baxter and SPL recalled all of their
United States heparin products between January and March 2008.
Investigations concluded that the heparin had been contaminated
by oversulfated chondroitin sulfate.
is
now
evident
that
the
The parties agree that it
contaminated
heparin
which
administered to patients had been sourced through CZSPL.
was
SPL
sourced heparin from multiple suppliers, however, and supplied
heparin to Baxter that had not been purchased from CZSPL.
Some
of the non-CZSPL heparin sold by SPL to Baxter had also tested
positive
patients.
for
contamination,
but
was
not
administered
to
The source of the contamination in the heparin SPL
purchased from CZSPL was traced to the raw materials, which had
been contaminated before they were obtained by CZSPL.
The first heparin lawsuits were filed in March 2008.
In
total, 574 lawsuits against American Capital, SPL, or Baxter
were filed in federal court and transferred to a multidistrict
litigation
before
the
United
States
6
District
Court
for
the
Northern District of Ohio (PTX 628); and 490 lawsuits against
American Capital, SPL, or Baxter were filed in state courts,
many of which were also consolidated (PTX 631).
litigation” refers to these 1,064 suits.
insurers
in
this
case,
American
The “heparin
As calculated by the
Capital
was
approximately 68% of the heparin litigation suits.
PTX 631).
sued
in
(PTX 628;
Only 3% of the heparin litigation suits were brought
against Baxter without naming American Capital or SPL.
628; PTX 631).
(PTX
Some of the suits named CZSPL as a defendant or
alleged that the contaminated heparin the patient received had
been sourced through the Changzhou joint venture, but many of
the complaints did not mention Changzhou or reference a joint
venture.
2008,
Although the heparin products were recalled in early
heparin
complaints
were
filed
which
alleged
injuries
during the 2006, 2007, and 2008 policy periods.
D.
Underlying Nationwide Arena Litigation
On November 24, 2008, American Capital and its portfolio
company SMG were sued in an Ohio state court action unrelated to
heparin.
The suit alleged an injury to a spectator at the
Nationwide Arena in Columbus, Ohio, which was managed by SMG, on
March 1, 2008.
(PTX 471).
SMG is a partnership organized under
the laws of Pennsylvania that manages sports arenas.
Capital had acquired its interest in SMG in 2007.
7
American
E.
Notice and Claims Handling
American
Capital
first
provided
notice
litigation to Plaintiffs on August 20, 2008.
a
submission
by
Marsh,
and
did
not
of
the
heparin
It did so through
request
a
coverage
determination or tender the suits to Plaintiffs for a defense at
that time.
Instead, at the suggestion of McKee, Marsh informed
Plaintiffs that the heparin complaints were being provided to
Plaintiffs for “record purposes only.”
Plaintiffs acknowledged
receipt of the suits, opened a claim for the heparin litigation,
and began to investigate coverage.
(See DTX 618).
Throughout
September, Plaintiffs investigated American Capital’s coverage
under their policies “under a full and complete reservation of
rights” and requested meetings with its principals.
(PTX 550).
They also began an investigation into whether there were grounds
for rescission of the policies.
(See DTX 661).
On October 8,
2008, American Capital informed Plaintiffs that it was seeking a
“no-cost
dismissal”
of
American
Capital
in
the
heparin
litigation which could moot coverage issues, and accordingly,
that it “would prefer not to allocate resources at this time to
discussing those coverage issues” with Plaintiffs.
(PTX 557).
American Capital and Plaintiffs eventually met on November 4,
2008.
notice
On November 6, American Capital, through Marsh, provided
of
another
heparin
suit
and
requested
Plaintiffs’
coverage position “as to American Capital, Ltd and any entity
8
alleged in the pleadings to be a direct or indirect affiliate of
American Capital.”
(PTX 461).
During this time, American Capital, SPL, and Baxter were
involved in negotiations to resolve potential conflicts between
SPL and Baxter under their supply agreement and allow for a
joint defense in the heparin litigation.
The three entered into
the “Confidential Settlement and Cost-Sharing Agreement” (the
“Agreement”) and related agreements on December 2, 2008.
480).
The
heparin
litigation,
agreement.
Agreement,
which
did
functioned
Plaintiffs
were
in
not
settle
part
informed
as
of
the
a
the
(PTX
underlying
joint
defense
Agreement
on
December 22, and received a copy on December 29.
Separately, American Capital was served in the unrelated
Nationwide
Arena
lawsuit
on
December
2,
2008,
and
provided
notice of the suit to Plaintiffs on December 4.
On January 14, 2009, American Capital provided Plaintiffs
with a summary of all the heparin complaints pending at that
time, and again requested a coverage determination as to it and
SPL.
(PTX 894).
On January 16, Plaintiffs: (1) sent a letter
to American Capital providing their “coverage position” on the
heparin lawsuits, stating that the heparin lawsuits fell outside
the coverage of the Primary and Umbrella Policies (PTX 576); (2)
sent a separate letter to American Capital stating that they
would provide a defense in the Nationwide Arena lawsuit, subject
9
to a full and complete reservation of their rights to disclaim
defense and indemnity obligations (DTX 607); and (3) filed this
declaratory judgment action in federal court, seeking rescission
or reformation of the Primary and Umbrella Policies (ECF No. 1).
On
February
17,
Defendants
sent
an
email
to
Plaintiffs
“to
confirm that [American Capital] and SPL are demanding a defense
from Travelers/Charter Oak to all heparin suits filed against
them to date,” and noting that Plaintiffs’ January 16 coverage
position letter did not include all of the companies identified
as the actual issuers of the policies.
(PTX 588).
Plaintiffs
sent American Capital a letter on April 10 stating, “Charter Oak
and Travelers each has determined that it does not have a duty
to defend and indemnify American Capital and SPL with respect to
the
heparin
lawsuits.”
(DTX
558A).
On
May
15,
Plaintiffs
returned the premiums paid by American Capital for the Primary
and Umbrella Policies.
(PTX 600).
Further facts will be discussed as relevant to the various
legal issues.
II.
Procedural Background
A.
Claims and Counterclaims
Plaintiffs commenced this action on January 16, 2009.
No. 1).
(ECF
The operative Second Amended Complaint was filed on
March 29, 2011.
(ECF No. 67).
After summary judgment was
entered against Plaintiffs on their claim for reformation due to
10
unilateral
rescission
mistake
of
the
(ECF
six
No.
536),
insurance
three
counts
against
contracts,
remain:
American
Capital (Count I); reformation of the insurance contracts due to
mutual
mistake,
against
American
Capital
(Count
II);
and
declaratory judgment concerning the duty to defend or indemnify
as to all Defendants (Count IV).
Defendants’
consist
of
Third
fourteen
Amended
counts:
Counterclaims
six
(ECF
declaratory
No.
380)
judgment
counterclaims that the unilateral rescission of the insurance
policies was without legal basis as to Charter Oak regarding the
2006 Primary Policy for coverage of American Capital (Count I),5
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); six breach of contract counterclaims concerning the duty to
defend against Charter Oak under the 2007 Primary Policy (Count
VII), against Travelers under the 2007 Umbrella Policy (Count
VIII), against Charter Oak under the 2006 Primary Policy for
coverage of American Capital (Count IX), against Travelers under
the 2006 Umbrella Policy (Count X), against Charter Oak under
5
Summary judgment was entered in favor of Plaintiffs
regarding coverage of SPL under the 2006 Primary Policy (Counts
I and IX). (See ECF Nos. 536; 545; 557; 558).
11
the 2008 Primary Policy (Count XI), and against Travelers under
the 2008 Umbrella Policy (Count XII); a statutory tort claim for
lack of good faith against Charter Oak and Travelers (Count
XIII);
and
a
common
law
tort
claim
for
promissory
fraud
by
American Capital against Charter Oak and Travelers (Count XIV).
B.
Motions for Summary Judgment and Supplemental Motion
for Summary Judgment
After more than six years of litigation, the parties filed
cross-motions for summary judgment.
(ECF Nos. 510; 514).
On
February 17, 2016, the court granted in part and denied in part
both motions.
(ECF Nos. 535; 536).6
Plaintiffs’ motion for
reconsideration was granted in part on July 1.
558).
(ECF Nos. 557;
Judgment was entered against Plaintiffs on their claim
for reformation due to unilateral mistake and against Defendants
regarding coverage of SPL under the 2006 primary policy.
Nos. 536; 545; 557; 558).
(ECF
The court also declared that the
policies’ joint venture exclusion does not relieve Plaintiffs of
a duty to defend American Capital in the heparin litigation and
that
Defendants’
Agreement
with
Baxter
does
not
relieve
Plaintiffs of a duty to defend the heparin litigation.
(ECF
Nos. 536; 545; 557; 558; see also ECF No. 764, at 5-6 (denying
Plaintiffs’
renewed
motion
for
6
reconsideration
of
the
An amended memorandum opinion was issued on March 3.
No. 545).
12
joint
(ECF
venture exclusion ruling)).
A jury trial was scheduled for the
four-week period beginning March 7, 2017.
On
December
16,
2016,
Plaintiffs
(ECF No. 565).
filed
a
supplemental
motion for summary judgment, arguing that Defendants would be
unable to prove all or most of their alleged damages.
584).
(ECF No.
Plaintiffs contended that the court’s summary judgment
opinion precluded the vast majority of Defendants’ damages and
that defense costs paid by Baxter and monitoring counsel fees
were not recoverable under Maryland law.
They asked the court
to enter summary judgment for them or calculate nominal damages
without a jury.
In denying the motion during a February 28,
2017, pretrial motions hearing, the court clarified that the
summary judgment opinion had foreclosed only one of the two
methods
for
calculating
damages
advanced
by
Defendants
on
summary judgment, damages based on the considerations paid by
American
Capital
and
SPL
in
cash
or
in
alternative litigation funding with Baxter.
foreclosed
from
seeking
an
available under Maryland law.
appropriate
kind
to
obtain
Defendants were not
measure
of
damages
(ECF No. 764, at 8-9, 15-16).
Plaintiffs’ motion was also denied to the extent it sought to
preclude evidence on monitoring counsel fees because they did
not
show,
recoverable.
as
a
matter
of
law,
(Id. at 16).
13
that
those
fees
were
not
Additionally, Plaintiffs sought to prevent Defendants from
recovering damages for settlements and judgments paid in the
heparin litigation under their claims for breach of a duty to
defend.
(ECF No. 584-1, at 13-14).
Defendants argued that
their claims should be read to include a claim for a breach of
the “narrower, subsumed duty to indemnify.”
72:8-11; accord ECF No. 615, at 10-17).
(ECF No. 690, at
Although Plaintiffs’
motion was denied, the court rejected this argument, finding
that Defendants “never have pled breach of duty to indemnify in
this case, and it’s too late, too close to trial to revisit
that.”
(ECF
No.
764,
at
18:16-18;
7
see
id.
at
6-8).7
In Maryland, “the duty to defend is broader than the duty
to indemnify.”
Walk v. Hartford Cas. Ins. Co., 382 Md. 1, 15
(2004). “Whereas a company has a duty to defend its insured for
all claims that are potentially 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
omitted). It is therefore true that “whatever establishes that
the insurer ‘owes no duty to defend, necessarily also
establishes that [the insurer] owes no duty to indemnify.’”
(ECF No. 615, at 10 (alteration in original) (quoting Nautilus
Ins. Co. v. REMAC Am., Inc., 956 F.Supp.2d 674, 681-82 (D.Md.
2013))).
If there is no duty to defend, then there are no
claims that are even potentially covered, and there can be no
breach of the duty to indemnify.
It does not follow, however,
that establishing a breach of the duty to defend will establish
a breach of the duty to indemnify.
See Warfield-Dorsey Co. v.
Travelers Cas. & Sur. Co. of Ill., 66 F.Supp.2d 681, 685 n.2
(D.Md. 1999) (rejecting argument that “if the duty to defend
issue is decided in plaintiff’s favor, defendant also has a duty
to indemnify plaintiff for sums paid in settling the underlying
action” as “clearly wrong”). Defendants’ claim for a breach of
the duty to defend is distinct from a claim for a breach of the
14
Accordingly, Defendants’ claim for breach of contract damages
was limited to those damages available under Maryland law for a
breach of the contractual duty to defend.
C.
(Id. at 7-8).8
Additional Proceedings
Defendants waived their right to a jury four days before
trial was scheduled to begin.
(ECF No. 767).
Accordingly, with
Plaintiffs’ consent (ECF Nos. 771; 774), a bench trial was held
beginning on March 8, 2017.9
case-in-chief,
Defendants
After Plaintiffs completed their
moved
for
a
judgment
on
partial
findings under Fed.R.Civ.P. 52(c), but the court declined to
render judgment until the close of the evidence.
After the
trial concluded, the court took the matter under advisement and
reviewed
the
pleadings,
eleven
days
of
trial
transcripts,
twenty-nine designated depositions, and admitted exhibits.
Ninety-four
pretrial
motions
were
filed.
The
motions
include: twenty-five motions in limine (ECF Nos. 578; 581; 587;
590; 593; 595; 598; 606; 614; 638; 640; 641; 642; 645; 647; 653;
655; 657; 659; 662; 664; 666; 668; 669; 672); sixty-five motions
to seal (ECF Nos. 580; 583; 585; 589; 594; 596; 600; 603; 605;
duty to indemnify, and a breach of the duty to indemnify was not
pleaded in the counterclaims.
8
In light of this determination, Defendants appeared to
withdraw their breach of contract claims under the 2007 and 2008
Umbrella Policies.
(ECF No. 762).
This issue is further
discussed below.
9
Plaintiffs’ motion to strike Defendants’ jury demand (ECF
No. 691) therefore will be denied as moot.
15
608; 611; 616; 622; 627; 631; 635; 637; 639; 644; 646; 649; 652;
654; 656; 658; 660; 663; 665; 667; 670; 671; 673; 679; 688; 694;
696; 698; 700; 702; 704; 706; 708; 710; 712; 714; 716; 719; 722;
724; 726; 728; 730; 732; 734; 736; 741; 743; 745; 748; 751; 753;
755; 757; 760; 770); Plaintiffs’ supplemental motion for summary
judgment
discussed
above
(ECF
No.
584);
Plaintiffs’
renewed
motion for reconsideration of summary judgment (ECF No. 672);
and Plaintiffs’ motion to vacate discovery rulings from 2012 and
2013
(ECF
No.
677).
Plaintiffs
also
filed
a
request
for
judicial notice on a variety of issues on the penultimate day of
trial (ECF No. 817), to which Defendants object (ECF No. 820).
Finally, Plaintiffs have filed a conditional motion to certify a
question of law to the Court of Appeals of Maryland, which has
been fully briefed.
(ECF Nos. 839; 840; 841).
Those necessary
to the decision here will be resolved, and the remaining motions
will be denied as moot.
The
facts
of
this
case
are
complicated,
overlap between the claims and counterclaims.
and
there
is
The court will
first address Defendants’ breach of contract counterclaims and
Plaintiffs’ declaratory judgment claim, followed by Plaintiffs’
rescission
claim
and
Defendants’
declaratory
judgment
counterclaims, Plaintiffs’ reformation claim, American Capital’s
promissory fraud counterclaim, and finally, Defendants’ lack of
good faith counterclaim.
16
III. Findings of Fact and Conclusions of Law
A.
Breach of Contract and Declaratory Judgment
The
question
at
the
center
of
this
dispute
is
whether
Plaintiffs owed Defendants a defense in the underlying heparin
litigation.
not
Plaintiffs seek a declaration that the policies do
provide
lawsuits,
future
defense
the
or
Nationwide
lawsuits
“against
indemnity
Arena
coverage
lawsuit,
American
or
Capital
for
the
other
or
heparin
current
its
or
purported
subsidiaries relating to the subsidiaries, joint ventures, or
other entities.”
Counterclaims,
(ECF No. 67 ¶ 160).
Defendants
conversely
In the Third Amended
allege
that
Plaintiffs
breached their duty to defend or to fund the defense of the
heparin litigation under each of the six policies at issue in
this litigation.
1.
Maryland Contract Law
As previously determined, Maryland law governs the parties’
dispute over interpretation of the insurance policies.
64, at 24).
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
17
(ECF No.
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 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)
(citation
omitted).
Md.
Cas.
(2015).
Co.
v.
Blackstone
Int’l
Ltd.,
442
Md.
685,
694-95
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.”
Id.
“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 Aetna Cas. & Sur. Co. v. Cochran, 337 Md. 98, 103-04
(1995); Pryseski, 292 Md. at 193); see also Blackstone, 442 Md.
18
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 that the claim could be covered by the policy.”).
2.
Primary Policies
Defendants
argue
that
Charter
Oak
breached
its
duty
to
defend American Capital under the 2006 Primary Policy and its
duty to defend American Capital and SPL under the 2007 and 2008
Primary Policies.
The material terms of these policies are the same.10
They
bind the insurer to “pay those sums that the insured becomes
legally obligated to pay as damages because of ‘bodily injury’
or
‘property
damage’
to
which
this
insurance
applies,”
and
provide that the insurer has “the right and duty to defend the
insured against any ‘suit’ seeking those damages.”
TRAV0041559).
(PTX 163, at
“‘Suit’ means a civil proceeding in which damages
10
Plaintiffs’ counsel asserted in his closing argument that
the 2008 Primary and Umbrella Policies had not been admitted in
evidence, and accordingly, that Defendants’ claims for breach of
these policies (Counts XI and XII) should be dismissed for lack
of evidence. (ECF No. 832, at 6). Counsel did not comment on
whether Plaintiffs could prove their claims for rescission,
reformation, and declaratory judgment concerning the 2008
Policies without the terms of those policies.
Regardless, the
2008 Primary Policy was admitted as Plaintiffs’ Exhibit 453
through the designated deposition testimony of Marion Rohm
without objection (PTX 453; see ECF Nos. 830, at 40; 786, at 8;
Rohm Dep. at 303:16), and as explained below, it will not be
necessary to reach Defendants’ claim for breach of the 2008
Umbrella Policy.
19
because of ‘bodily injury’ . . . to which this insurance applies
are alleged.”
(Id. at TRAV00415789-90).
“Bodily injury” is
defined by endorsement as “bodily injury, shock, fright, mental
injury,
disability,
mental
anguish,
humiliation,
sickness
or
disease sustained by a person, including death resulting from
any of these at any time.”
(Id. at TRAV0041582).
include
general
a
$2,000,000.00
aggregate
The policies
limit
and
a
$2,000,000.00 products-completed operations aggregate limit, as
well as separate limits for personal and advertising injuries,
damage to premises, and medical expenses.
The
“products-completed
operations
(Id. at TRAV0041555).
hazard”
includes,
with
exceptions, “all ‘bodily injury’ and ‘property damage’ occurring
away from premises you own or rent and arising out of ‘your
product’
or
‘your
work[.]’”
(Id.
at
TRAV0041572).
“Your
product” is defined as, “Any goods or products, other than real
property, manufactured, sold, handled, distributed or disposed
of by: (a) You; (b) Others trading under your name; or (c) A
person
or
organization
acquired[.]”
whose
business
(Id. at TRAV0041573).
or
assets
you
have
“Your work” is defined as
“(1) Work or operations performed by you or on your behalf; and
(2) Materials, parts or equipment furnished in connection with
such
work
or
operations,”
and
includes
“(1)
Warranties
or
representations made at any time with respect to the fitness
quality, durability, performance or use of ‘your work,’ and (2)
20
The
providing
instructions.”
of
or
failure
to
provide
warnings
or
(Id. at TRAV0041573-74).
Each policy lists American Capital as the “Named Insured”
on the declarations page.
(PTX 163, at TRAV0041481; PTX 164, at
TRAV0041662; PTX 453, at AMCA00702513).
As “[a]n organization
other than a partnership, joint venture or limited liability
company” designated in the declarations, American Capital is an
insured.
(PTX 163 at TRAV0041566).
Its executive officers and
directors are insureds with respect to their duties as officers
or directors, and its stockholders are insured with respect to
their liability as stockholders.
the
“XTEND
Endorsement,”
a
included in package policies.
No.
784,
at
80:24-81:3).
(Id.). The policies include
Travelers’
trademark
generally
(Drennen Dep., at 261:9-18; ECF
The
XTEND
Endorsement
“broadens
coverage” in several ways, including by expanding the definition
of Named Insured.
Under the endorsement:
The Named Insured in Item
Declarations is as follows:
1.
of
the
The person or organization named in
Item
1.
of
the
Declarations
and
any
organization, other than a partnership or
joint venture, over which you maintain
ownership
or
majority
interest
on
the
effective date of the policy.
However,
coverage for any such organization will
cease as of the date during the policy
period that you no longer maintain ownership
of,
or
majority
interest
in,
such
organization.
21
(PTX 163, at TRAV0041579).
The policies additionally provide
that, if the insurer defends an insured against a suit in which
an indemnitee of the insured is also named as a party, the
insurer
will
defend
the
conditions have been met.
The
policies
insured’s
indemnitee
if
certain
(Id. at TRAV0041566).
contain
a
“Financial
Services”
exclusion,
which states:
This insurance does not apply to “bodily
injury,”
“property
damage,”
“personal
injury” or “advertising injury” arising out
of the rendering of or the failure to render
financial services by any insured to others.
This insurance also does not apply to
“bodily
injury,”
“property
damage,”
“personal injury” or “advertising injury”
arising out of the selection, investigation,
hiring, supervision, training, retention or
termination of any person or organization
who has rendered or failed to render
financial services.
(PTX 163, at TRAV0041597).
They also contain what has been
referred to in this litigation as the “joint venture exclusion,”
which provides, under the heading of “Section II - Who Is An
Insured,” that “[n]o 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
in
the
Declarations.”
(Id.
at
TRAV0041568).
There are, of course, many additional coverage exclusions and
provisions not discussed here, such as exclusions relating to
lead, asbestos, and aircraft products.
22
a.
Coverage of American Capital
There is no question that American Capital would be covered
under the Primary Policies as an insured against claims such as
those
made
in
the
heparin
applicable exclusion.
litigation
in
the
absence
of
an
American Capital is named as an insured,
and the policies provide liability insurance coverage against
bodily
injury
arising
out
suits,
of
including
those
products-completed
alleging
bodily
operations.
injury
Heparin
complaints named American Capital as a defendant in civil suits
alleging
bodily
injury
under
theories
of
negligence,
liability, gross negligence, and failure to warn.
DTX 33 (“Skidmore complaint”)).11
strict
(See, e.g.,
These allegations plainly fell
within the liability coverage afforded by the Primary Policies,
and such suits were brought alleging bodily injuries occurring
during each of the policy periods.
1)
Joint Venture Exclusion
As has been repeatedly explained in this litigation, an
insurer’s duty to defend turns on the potentiality of a covered
judgment against the insured.
Plaintiffs’ position has been
11
The Skidmore complaint alleged that contaminated heparin
was administered “prior to, during and immediately following
surgery” on or about June 7, 2006, causing an immediate serious
allergic reaction that led to the patient’s death on July 2,
2006. (DTX 33). The effective date of the 2006 Primary Policy
was June 14, 2006. Whether this suit falls outside of coverage
because the alleged bodily injury did not occur during the
policy period was not raised at trial.
23
that,
if
all
the
contaminated
heparin
originated
with
the
Changzhou joint venture, then the heparin suits were brought
with respect to the conduct of a joint venture not named as an
insured in the declarations, CZSPL, and American Capital is not
“an insured” for the purposes of those suits under the joint
venture exclusion.
Summary
judgment
question.
Despite
exclusion,”
the
was
the
court
entered
“broad
against
nature
nevertheless
Plaintiffs
of
the
concluded
joint
that,
on
this
venture
given
the
allegations of at least some of the heparin complaints, there
was
a
potential
for
judgment
against
Defendants
unrelated to heparin originating with Changzhou.”
at 25-26).
“completely
(ECF No. 545,
Assuming that the joint venture exclusion would
preclude coverage if the claims against American Capital were
made solely “with respect to the conduct of” a joint venture not
named in the declarations, the question of the source of the
heparin would still be an issue to be resolved in the underlying
tort suits.
As such, the “potentiality rule” is applicable even
though the question goes to the issue of coverage under the
terms and requirements of the insurance policy.
Md.
at
venture
193-94.
Accordingly,
exclusion
litigation
and
does
did
not
not
the
court
preclude
relieve
defend American Capital.
24
held
coverage
Plaintiffs
of
Pryseski, 292
that
of
the
the
their
joint
heparin
duty
to
Plaintiffs have repeatedly challenged this holding, twice
moving
for
recently,
reconsideration.
Plaintiffs
have
(ECF
argued
Nos.
for
541;
the
672).
entry
of
Most
summary
judgment in their favor on the duty to defend because it is now
undisputed
that
all
of
the
contaminated
heparin
which
was
administered to patients originated from the joint venture.12
(ECF No. 672).
It was not, however, a disputed factual issue on
the source of the contaminated heparin that prevented the entry
of summary judgment in favor of Plaintiffs.
entered
judgment
in
favor
of
Defendants
Instead, the court
on
the
question
of
whether the joint venture exclusion relieved Plaintiffs of a
duty to defend.13
The questions that remained on Defendants’
claims for trial were: (1) whether any other provisions in the
policies relieved Plaintiffs of their duty to defend, and (2) if
not, whether Plaintiffs breached their duty to defend.
12
The evidence purportedly proving that the non-Changzhou
lots of heparin which tested positive for contamination were not
distributed was not admitted at trial, although Plaintiffs have
requested that the court take judicial notice of this document.
(ECF No. 817, at 2-3).
As discussed during the pretrial
hearing, however, Defendants do not dispute as a factual matter
that all the contaminated lots which reached patients contained
CZSPL heparin. (See ECF Nos. 711, at 8; 764, at 5).
13
Plaintiffs’ duty to indemnify Defendants is not at issue
in this case, and the court need not determine whether the joint
venture exclusion would have relieved Plaintiffs of the duty to
indemnify.
25
2)
Financial Services Exclusion
Although Plaintiffs raised in the pretrial order that the
policies’
financial
services
exclusion
precluded
coverage
of
American Capital in the heparin litigation (see ECF No. 661, at
6-7), such evidence was not presented at trial, and counsel
explained
in
his
closing
argument
that
Plaintiffs
did
not
contend that the exclusion applied to these claims (ECF No. 832,
at 38).
The suits against American Capital generally alleged
that American Capital itself was negligent or liable under a
theory
of
strict
liability
contaminated heparin.
for
injuries
(See, e.g., DTX 33).
resulting
from
The claims alleged
against American Capital were not premised on its provision of
financial services to SPL or any other entity, and the financial
services exclusion is therefore inapplicable here.
preclude
coverage
of
the
heparin
claims
It does not
against
American
Capital, and did not relieve Plaintiffs of their duty to defend
American Capital in the heparin litigation.
Accordingly,
Plaintiffs
owed
American
Capital
a
duty
to
defend in the heparin litigation at the time this lawsuit was
filed, when there existed the potentiality for covered judgments
against American Capital given the allegations of at least some
of the heparin complaints.
26
b.
Coverage of SPL
Although not named in the 2007 and 2008 Primary Policies,
SPL
is
also
an
insured
under
the
policies
because
American
Capital maintained a majority interest in SPL on the effective
dates of the policies.
declarations
to
The XTEND endorsement expands the policy
include
“any
organization,
other
than
a
partnership or joint venture, over which [the insured] maintain
ownership or majority interest on the effective date of the
policy.”
(PTX 164, at TRAV0041759).
It is undisputed that SPL
is a limited liability corporation, and not a partnership or
joint
venture.
The
relevant
question
at
trial
was
whether
American Capital maintained an “ownership or majority interest”
in SPL.
The undefined term “ownership” must be given its customary,
ordinary, and accepted meaning.
Md. at 56-57.
Lloyd E. Mitchell, Inc., 324
American Capital did not wholly own SPL, through
intermediaries or directly, and the term “ownership” will not be
read as “beneficial ownership.”
The term “majority interest” is
not defined in the policies, and as held on summary judgment, is
ambiguous, as reasonable people could disagree over its meaning
and scope.
Under Maryland law, where there is ambiguity in a
contract, “the Court reviews extrinsic evidence to determine the
parties’
parties’
intent,
including
negotiations,
dictionaries,
the
parties’
27
the
history
conduct
of
and
the
an
interpretation of the term used by one of the parties before the
dispute arose,” but if extrinsic evidence does not resolve the
issue,
then
“the
interpretation.”
trier
of
fact
decides
the
proper
Ambling Mgmt. Co. v. Univ. View Partners, LLC,
581 F.Supp.2d 706, 712-13 (D.Md. 2008).
The extrinsic evidence
examined on summary judgment was inconclusive, and this “‘bona
fide ambiguity’ as to whether the parties intended the ‘majority
interest’
clause
to
apply
to
the
sort
of
indirect
majority
interest American Capital maintained over SPL” was reserved for
trial.
(ECF
No.
545,
at
Maryland
does
not
follow
19).
the
As
rule
noted
that
above,
“Although
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.’”
Blackstone Int’l, 442 Md. at 695 (quoting Dutta, 363 Md. at 55657).
The
XTEND
endorsement
was
drafted
by
Plaintiffs
included in the policies by Plaintiffs’ underwriters.
and
Its terms
were not made known to American Capital until after Plaintiffs’
insurance
proposals
were
accepted
and
coverage
was
bound.
Plaintiffs’ expert Matthew Bialecki testified to the meaning of
“majority interest,” but admitted that he did not consider how
that
term
clause.
is
used
in
the
insurance
(ECF No. 802, at 38:5-10).
28
industry
in
an
insuring
Rather, he determined that
American Capital did not have a controlling financial interest
in SPL from an accounting and financial perspective.
(Id. at
13:17-22).
Plaintiffs
take
the
position
that
“majority
interest”
extends coverage only to an organization in which an insured
maintained
a
direct
and/or
controlling
financial
interest
because of the possible outcome here, where its inclusion in a
private equity company’s policy potentially expands the policy’s
definition of insured significantly to include some or all of
the insured’s portfolio companies.
its
underwriters
did
not
Plaintiffs have shown that
appreciate
the
possible
coverage
implications of its policy forms and endorsements and included
the XTEND endorsement in all insurance policies as a matter of
course.
(See, e.g., ECF No. 784, at 24:1-8 (As Plaintiffs’
underwriter
on
the
2007
and
2008
American
Capital
policy
renewals, Maureen McEwen, testified, the XTEND endorsement is “a
form that typically got attached automatically to all general
liability policies[.]”)).
this
narrower
definition
They have not shown, however, that
of
“majority
interest”
when the widely-used endorsement was drafted.
superfluous
if
it
required
absolute
was
intended
The term would be
ownership,
and
there
is
insufficient evidence to conclude that it must be construed to
require
control,
as
the
term
elsewhere in the policies, does.
29
“subsidiary,”
which
is
used
Given the ambiguity of the
term, it must be construed against the insurer as its drafter,
and “majority interest” is defined to mean a financial interest,
either direct or indirect, of greater than 50% but less than
100%.
On
August
10,
2006,
American
Capital
acquired
97,236.33
shares of Series A Preferred Stock and 97,236.33 shares of NonVoting Common Stock in SPL Acquisition Corp. for a purchase
price of $47,160,870.86.
(PTX 35).
SPL Acquisition Corp. in
turn held all 1,000 units authorized, issued, and outstanding in
SPL
Holdings,
authorized,
LLC,
issued,
which
and
in
turn
outstanding
held
of
all
SPL.
1,000
units
(Id.).
SPL
Acquisition Corp. was formed by American Capital shortly before
August 10, and acquired its interests in SPL Holdings, LLC from
Arsenal Capital Partners.
(ECF No. 816, at 6:24-7:15).
Both
SPL Acquisition Corp. and SPL Holdings, LLC were “strictly []
holding compan[ies]” without employees or other business.
at 6:13-20, 7:16-23).
dissolved (id.
(Id.
In October 2007, SPL Holdings LLC was
at 7:24-8:11), and from October 29, 2007 and
until at least July 1, 2009, SPL Acquisition Corp. held all
units of SPL.
(See ECF No. 823, at 25:20-27:21, 44:3-21; PTX
65; PTX 153).
Throughout this time, American Capital held the
majority of the convertible preferred stock in SPL Acquisition
Corp.,
which
common stock.
was
“unconditionally
convertible”
into
voting
(ECF No. 816, at 8:17-9:9; see ECF No. 823, at
30
25:20-27:21, 44:3-21; DTX 11; PTX 65; PTX 153).
Had American
Capital elected to convert to voting stock, it would have held
the majority of the voting stock in SPL Acquisition Corp.
No. 823, at 25:20-27:21).
(ECF
During the relevant time period,
American Capital had a majority of the total equity value in SPL
Acquisition
basis.
Corp.
on
both
a
fully-diluted
and
a
non-diluted
(ECF No. 816, at 12:17-13:19, 18:15-19:4).
The
court
concludes
that
American
Capital
maintained
a
majority interest in SPL on the effective dates of the 2007 and
2008 Primary Policies, and accordingly, SPL is a named insured
under the terms of the policies.
a
majority
company
it
interest
in
formed,
which
SPL
American Capital clearly held
Acquisition
in
turn
held
Corp.,
all
the
units
holding
of
SPL.
American Capital maintained this interest from August 10, 2006,
until at least July 1, 2009.
as
a
defendant
in
civil
The heparin complaints named SPL
suits
alleging
bodily
injury
under
theories of negligence, strict liability, gross negligence, and
failure to warn.
(See, e.g., DTX 33).
Such suits were brought
against SPL during each of the policy periods, and Plaintiffs
were given notice of these suits.
As explained above, these
allegations plainly fell within the liability coverage afforded
by the Primary Policies.
Accordingly, Plaintiffs owed SPL a
duty to defend in the heparin litigation.
31
3.
Coverage of SPL Under the 2006 Umbrella Policy
The 2006 Umbrella Policy provides:
newly
acquire
venture,
and
or
form,
over
which
other
you
than
“Any organization you
a
maintain
partnership
ownership
interest, will be deemed to be a Named Insured.”
TRAV0042139).
liability
or
or
joint
majority
(PTX 166, at
The Umbrella Policy provides commercial excess
insurance
coverage
for
bodily
injury
claims,
and
defines “bodily injury” as the Primary Policies do. (Id. at 8,
18).
As explained above, American Capital acquired a majority
interest in SPL on August 10, 2006, and maintained that interest
during the remainder of the policy term.
Accordingly, SPL was
an insured under the 2006 Umbrella Policy, and was entitled to a
defense to the heparin claims for bodily injury occurring after
the date of its acquisition.
4.
Breach
Plaintiffs owed a contractual obligation to defend American
Capital under the 2006, 2007, and 2008 Primary Policies, and to
defend SPL under the 2006 Umbrella Policy and 2007 and 2008
Primary Policies.
prove
that
To prove their claims, Defendants must also
Plaintiffs
breached
that
obligation.
It
is
undisputed that Plaintiffs did not offer, at any time, to defend
American Capital or SPL in the heparin litigation or to fund
their defense.
Instead, Plaintiffs determined that the heparin
32
complaints did not allege covered claims; offered to return the
premiums paid by American Capital for the Primary and Umbrella
Policies;
and
filed
the
instant
action
reformation, and declaratory judgment.
1).
for
rescission,
(See PTX 576; ECF No.
Plaintiffs breached their contractual duty to defend.
A factual dispute as to the date of the breach arose prior
to
trial.
argument
On
that
summary
their
judgment,
damages
could
in
be
rejecting
measured
Defendants’
by
the
costs
incurred in entering into the Agreement with Baxter, the court
noted that Plaintiffs’ duty to defend, if any, crystalized when
the
underlying
heparin
claims
were
made,
but
found
that
Plaintiffs did not have an opportunity to breach their duty to
defend
“until
2009,”
and
they
that
actually
Plaintiffs’
denied
coverage
“denial,
and
motion
During
in
the
limine
pretrial
number
motions
12
16,
potential
(ECF No. 545, at
hearing
regarding
January
therefore
breach, did not occur until January 16, 2009.”
27-28).
on
the
on
Defendants’
testimony
of
Plaintiffs’ proposed expert Steven Plitt, Defendants’ counsel
argued that the court had determined that the January 16 letter
was a denial letter.
(ECF No. 764, at 123).
Plaintiffs and
their proposed expert characterized the letter as “reservation
of rights” letter.
(See id. at 25, 102, 123).
As the court
noted, Plaintiffs “obviously did not defend, have not funded the
defense, and [January 16] was the time when they said:
33
We are
not going to do it right now,” but it was not the court’s intent
in the summary judgment ruling to say the January 16 letter was
“a denial as opposed to a reservation of rights” if that was a
critical factual dispute.
(Id. at 124).
On January 16, Plaintiffs sent a letter to American Capital
providing a “coverage position” on the heparin litigation (PTX
576), and filed this lawsuit seeking rescission, reformation,
and declaratory judgment (ECF No. 1).
Plaintiffs characterize
their January 16 letter as a “reservation of rights” letter,
meant
to
put
the
insured
“on
notice”
issues,” and not a denial of coverage.
4).
of
“various
coverage
(ECF No. 790, at 51:1-
Instead, Plaintiffs posit that they denied a defense on
April 10, 2009, after American Capital and SPL tendered the
lawsuits to them for a defense.
(DTX 558A; see ECF No. 794, at
230:23-231:6).
The January 16 letter, sent by Plaintiffs’ claims handler
Edward Zawitoski, stated that the heparin lawsuits had not yet
been tendered for defense and indemnity, but that Charter Oak
and Travelers “give our position in this letter” in response to
American Capital and SPL’s request “for our coverage position on
these
suits.”
(PTX
576,
at
TRAV0000739).
Plaintiffs
“reserve[d] all their rights to disclaim defense and indemnity
obligations with respect to the heparin lawsuits” on the grounds
that: (1) “Charter Oak and Travelers are entitled to rescission
34
or reformation of the insurance policies with American Capital”
because
American
Capital
“did
not
seek
insurance
for
any
subsidiaries, and it affirmatively represented to Charter Oak
and Travelers that it did not have subsidiaries,” and 2) “The
heparin lawsuits relate to the conduct of Changzhou SPL – a noninsured joint venture,” and, “[a]s such, the heparin lawsuits
fall outside the coverage of the primary and umbrella policies”
under the joint venture exclusion.
(Id. at TRAV0000740).
In
the same correspondence, Plaintiffs noted their contemporaneous
filing of the instant action for rescission or reformation and a
judicial declaration, and offered to return the premium payments
in full, with interest.
(Id.).
The letter went on to state in
more detail that Charter Oak and Travelers reserved their rights
to
disclaim
defense
and
indemnity
lawsuits on numerous grounds.
coverage
for
the
heparin
(Id. at TRAV0000741-60).
On April 10, 2009, Mr. Zawitoski sent another letter, which
characterized the January 16 letter as providing “preliminary
coverage positions,” and stated that “Charter Oak and Travelers
do
not
have
defense
and
indemnity
obligations
to
American
Capital and SPL with respect to the heparin lawsuits.”
558A at TRAV0003308-09).
(DTX
The letter provides several grounds
for this determination, and reiterates that Plaintiffs “reserve
all
of
defense
their
and
rights
indemnity
under
any
contract
obligations
35
for
the
or
law
to
heparin
disclaim
lawsuits.”
(Id. at TRAV0003309).
Plaintiffs returned the premiums paid by
American Capital for the Primary and Umbrella Policies on May
15, 2009.
(PTX 600).
Upon consideration of the testimony and exhibits admitted
during the trial, Plaintiffs’ breach occurred on January 16,
2009.
Whereas other, earlier, “reservation of rights” letters
sent by Mr. Zawitoski stated “that coverage may not exist or may
be limited for the lawsuits” (PTX 558, at TRAV0048406), the
January
16
letter
for
the
first
time
made
a
coverage
determination in stating that the heparin lawsuits “fall outside
the coverage of the primary and umbrella policies” (PTX 576, at
TRAV0000740).
The January 16 letter did reserve Plaintiffs’
rights, but, particularly in combination with the filing of this
litigation, was effectively a denial of coverage.
Plaintiffs
reaffirmed this denial of coverage in April, but Plaintiffs’
breach of the duty to defend occurred on January 16, 2009.
5.
2007 and 2008 Umbrella Policies
There is no need to reach Defendants’ remaining claims for
breach of contract regarding the 2007 and 2008 Umbrella Policies
(Counts VIII and XII) because the court finds that SPL is an
insured under the 2007 and 2008 Primary Policies and the duty to
indemnify is not at issue.
outside
would
limits”
not
be
policies,
exhausted
by
The Primary Policies are “defense
meaning
the
36
that
the
insurer’s
policies’
payment
of
limits
defense
costs.
In light of the court’s pretrial determination that
Defendants did not plead a breach of the duty to indemnify in
their counterclaims (see supra n.7), Defendants do not seek to
recover damages for their payment of judgments or settlements in
the heparin litigation.
(See ECF No. 762, at 1 (noting that
“the Court’s ‘no indemnity’ ruling means that the 2007-08 and
2008-09 umbrella policies will not come into play at all” in the
trial)).
Any damages American Capital or SPL may recover under
the Primary Policies for breach of the duty to defend will not
exhaust the Primary Policy limits.
Similarly, because the court
determines that SPL qualifies as an insured under the Primary
Policies’ “majority interest” provision, there is no need to
determine in this litigation whether SPL qualified as an insured
“subsidiary” under the 2007 and 2008 Umbrella Policies.
6.
In
Declaratory Judgment
the
declaration
Second
pursuant
Amended
to
28
Complaint,
U.S.C.
§ 2201
Plaintiffs
that
the
seek
a
insurance
policies do not provide defense or indemnity coverage for the
heparin
lawsuits,
the
current
or
lawsuits
future
portfolio companies.
Nationwide
against
Arena
lawsuit,
American
and
Capital
other
or
its
(ECF No. 67 ¶ 160).
The Declaratory Judgment Act states that “[i]n a case of
actual controversy within its jurisdiction . . . any court of
the United States . . . may declare the rights and other legal
37
relations
of
any
interested
party
seeking
whether or not further relief is sought.”
(emphasis added).
such
declaration,
28 U.S.C. § 2201(a)
The United States Court of Appeals for the
Fourth Circuit has further explained that a federal court may
properly
exercise
jurisdiction
where
three
criteria
are
met:
“(1) the complaint alleges an actual controversy between the
parties of sufficient immediacy and reality to warrant issuance
of
a
declaratory
judgment;
(2)
the
court
possesses
an
independent basis for the jurisdiction over the parties (e.g.,
federal question or diversity jurisdiction); and (3) the court
does not abuse its discretion in its exercise of jurisdiction.”
Volvo Constr. Equip. N. Am. v. CLM Equip. Co., 386 F.3d 581, 592
(4th Cir. 2004) (citing 28 U.S.C. § 2201; Cont’l Cas. Co. v.
Fuscardo, 35 F.3d 963, 965 (4th Cir. 1994)).
“In the declaratory judgment context, the normal principle
that
federal
courts
should
adjudicate
claims
within
their
jurisdiction yields to considerations of practicality and wise
judicial administration.”
New Wellington Fin. Corp. v. Flagship
Resort Dev. Corp., 416 F.3d 290, 296 (4th Cir. 2005) (quoting
Wilton
v.
Accordingly,
Seven
the
Falls
court
Co.,
may,
515
in
the
U.S.
277,
exercise
287
of
(1995)).
its
“broad
discretion,” S.C. Dept. of Health & Envtl. Control v. Commerce &
Indus. Ins. Co., 372 F.3d 245, 260 (4th Cir. 2004), decline to
exercise its jurisdiction and dismiss the action.
38
Volvo Constr.
Equip., 386 F.3d at 594.
A court must be cautious, however, as
it should only decline to exercise jurisdiction where there is a
“good reason” to do so.
Id.
In particular, a court should
normally entertain a declaratory action where the “relief sought
(i) ‘will serve a useful purpose in clarifying and settling the
legal relations in issue,’ and (ii) ‘will terminate and afford
relief from the uncertainty, insecurity, and controversy giving
rise to the proceeding.’”
Fuscardo, 35 F.3d at 965 (quoting
Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d 371, 375
(4th Cir. 1994)).
“[C]onsiderations of federalism, efficiency,
and comity” are also significant.
Aetna Cas. & Sur. Co. v. Ind–
Com Elec. Co., 139 F.3d 419, 422–23 (4th Cir. 1998).
At the present time, there is no need formally to declare
the parties’ rights and duties.
As discussed above, Plaintiffs’
duty to indemnify Defendants is not at issue in this litigation,
and there is no need to resolve coverage of SPL as a subsidiary
under
the
2007
and
2008
Umbrella
Policies.
To
issue
a
declaratory judgment on those issues would not “serve a useful
purpose
in
clarifying
and
settling
the
legal
relations
in
issue,” Fuscardo, 35 F.3d at 965 (quoting Nautilus, 15 F.3d at
375), and is not necessary to resolve this litigation.
As the
actual controversy will be resolved by the court’s findings on
Defendants’
breach
of
contract
counterclaims
under
the
2006,
2007, and 2008 Primary Policies and 2006 Umbrella Policy, the
39
court will, in the exercise of its discretion, decline to issue
a broader declaration determining whether SPL was a subsidiary
of American Capital; the extent of indemnity coverage for the
heparin litigation under the policies; or the extent of defense
coverage for the heparin litigation under the 2007 and 2008
Umbrella Policies.
Plaintiffs have not expressly withdrawn their request in
the Second Amended Complaint for declarations as to defense or
indemnity
coverage
Nationwide
Arena
for
lawsuit
American
and
for
Capital
any
and
other
SMG
potential
in
the
claims
against American Capital or its portfolio companies, although
they appear to have abandoned the request.
In any event, such a
declaration necessarily would entail numerous factual findings
for
which
there
is
insufficient
evidence.
Although
SMG
is
nominally a party to this litigation, it asserts no counterclaim
for damages relating to the Nationwide Arena litigation, and
American Capital does not seek to recover damages relating to
the Nationwide Arena litigation.
Given the limited evidence
presented on the relationship between American Capital and SMG,
the court cannot determine whether defense or indemnity coverage
may have been owed to either party under the policies for the
Nationwide Arena claim.
The court similarly cannot determine
generally that coverage was or was not provided to American
Capital’s portfolio companies under the policies.
40
Although the
resolution of SPL’s claim provides the necessary framework for
the analysis, such a determination would require evidence of
American Capital’s interests in each portfolio company.
the necessary evidence, the court cannot proceed.
Without
Accordingly,
Count III of the Second Amended Complaint will be dismissed.
B.
Rescission
Plaintiffs seek to rescind the 2006, 2007, and 2008 Primary
and
Umbrella
misrepresentation
Policies
that
it
based
was
on
not
Defendants’
seeking
coverage
purported
for
its
subsidiaries or entities other than American Capital, such as
SPL, when it applied for insurance.14
(ECF No. 67 ¶¶ 137-141).
To succeed on their rescission claim, Plaintiffs must prove 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.
Mut. Benefit Ins. Co. v. Lorence, 189 F.Supp.2d 298, 302 (D.Md.
2002) (citations omitted) (quoting N. Am. Specialty Ins. Co. v.
14
Although the ACORD applications and schedules discussed
below were submitted in connection with the package of six
insurance policies purchased by American Capital in 2006, 2007,
and 2008, Plaintiffs did not return the premiums paid and do not
seek rescission of the other four policies from each policy
year.
41
Savage, 977 F.Supp. 725, 728 (D.Md. 1997)).
Plaintiffs must
also prove that they acted promptly in seeking rescission after
learning
of
“the
facts
that
would
justify
rescission.”
Monumental Life Ins. Co. v. U.S. Fid. & Guar. Co., 94 Md.App.
505, 541 (1993).
As the court explained in denying summary judgment on this
claim:
“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.”
Plaintiffs
identified
misrepresentations:
(1)
the
Two
(ECF No. 545, at 33).
following
ACORD
allegedly
applications,
At trial,
material
submitted
to
Plaintiffs by McKee in connection with American Capital’s 2006
application and 2008 renewal application, containing a checkmark
in the “no” answer box for question 1.b. (“Does the applicant
have
any
Capital”
subsidiaries?”),
as
the
applicant;
and
identifying
and
(2)
only
Schedules
“American
submitted
to
Plaintiffs in connection with the 2006 application and 2007 and
2008 renewal applications, which included office locations of
American
companies.
Capital
and
ACFS
but
not
SPL
or
(PTX 325; PTX 352; PTX 539; PTX 413).
42
other
portfolio
Considering the totality of the alleged misrepresentations,
Plaintiffs
have
failed
to
prove
that
American
Capital
made
material misrepresentations to hide the fact that it was seeking
coverage
for
portfolio
companies.
It
is
undisputed
that
American Capital did not instruct Marsh to seek coverage for its
portfolio companies, did not consider that its CGL and umbrella
policies might cover its portfolio companies as named insureds,
and did not seek such coverage.
To the extent that there is
coverage for companies other than American Capital under these
policies,
that
Plaintiffs’
coverage
policy
exists
forms
and
by
virtue
of
endorsements.
the
terms
of
Construing
Plaintiffs’ claim as an argument that they would not have made
the same insurance proposal or offered the same policy forms and
endorsements
had
they
received
accurate
applications
from
American Capital, the specific alleged misrepresentations will
be addressed in turn.
1.
ACORD Applications
The parties dispute whether the ACORD applications may be
attributed to American Capital as representations at all.
Under
Maryland law, an insured is bound by the representations of its
agent.
See, e.g., Commercial Cas. Ins. Co. v. Schmidt, 166 Md.
562 (1934); Serdenes v. Aetna Life Ins. Co., 21 Md.App. 453, 461
(1974) (“It is immaterial that it is the agent who inserts false
statements
about
material
matters
43
in
an
application
for
insurance, because if the [in]sured has the means to ascertain
that the application contains false statements, he is charged
with the misrepresentations just as if he had actual knowledge
of them and was a participant therein.”).
At least with respect to procuring insurance in 2006, 2007,
and 2008, Christopher Wasko, an employee of Seabury & Smith who
worked under the direction of Marsh employees, was acting as an
agent of American Capital, and any representations he made in
the
insurance
applications
American Capital.15
generally
would
be
attributed
to
The facts of this case, however, give pause.
Mr. Wasko testified that he regularly used a pre-filled and
automatically
digitally
simply a cover sheet.
51:22, 75:18-78:20).
signed
version
of
an
ACORD
form
as
(See Wasko Dep., at 35:22-36:18, 50:9He did not necessarily change or verify
the information provided on this form.
Mr. Wasko verified the
other information submitted in the applications with American
15
In 2004, Marsh was appointed by American Capital to act
as its broker of record and to represent it in all matters
pertaining to “Property/Casualty lines of insurance,” and a
broker of record letter was provided to The Hartford, American
Capital’s insurer at that time. (PTX 3). It is not clear from
the record or the testimony at trial whether Mr. Wasko or Marsh
was appointed as American Capital’s broker of record during the
relevant timeframe, nor was it shown that Plaintiffs knew Mr.
Wasko was American Capital’s broker of record.
(See ECF No.
785, at 144:20-25). Moreover, a broker may be an agent of both
the insured and the insurer at different points in a
transaction.
The evidence at trial proves, however, that Mr.
Wasko was representing American Capital with respect to the
placement of these policies.
44
Capital, but did not show the ACORD forms to American Capital
prior
to
120:18),
submitting
and
them
American
to
McKee
Capital
(ECF
was
No.
785,
unaware
of
at
the
119:7alleged
misrepresentations contained therein until the filing of this
lawsuit
in
January
2009
(ECF
No.
785,
at
46:19-47:12).
Moreover, the ACORD form submitted in connection with the 2006
application, as sent by Mr. Wasko to McKee, was undated.
15).
(PTX
On the version sent by McKee to Plaintiffs, a date had
been added and other changes may have been made.
(PTX 325).
It
is not evident that American Capital had the means to discover
the falsity of the representations on the ACORD form.
even
assuming
representations
arguendo
that
attributable
the
to
ACORD
However,
contained
Capital,
American
forms
Plaintiffs
have failed to prove they relied on a material misrepresentation
in the forms.
a.
The ACORD Forms Contain a Misrepresentation
Plaintiffs
that,
if
SPL
have
is
attempted
covered
to
under
create
the
a
2007
Catch-22,
and
2008
arguing
Umbrella
Policies as American Capital’s subsidiary, then American Capital
made a material misrepresentation in its ACORD application by
representing that it did not have subsidiaries, and the policies
must
be
rescinded.
(ECF
No.
construction is overly complicated.
832,
at
21:6-20).
This
Whether or not SPL is a
subsidiary of American Capital, a relationship both parties have
45
advanced at times during this litigation when it would be to
their
advantage,
American
Capital
did
have
at
least
one
subsidiary, as understood by all the parties, in June 2006: its
consolidated operating subsidiary, ACFS.16
785, at 200:18-201:15).
of
whether
the
American
Capital
Thus, the “no” answer to the question
applicant
misrepresentation.
(See, e.g., ECF No.
The
did
has
ACORD
not
have
“any
subsidiaries”
form’s
was
representation
subsidiaries
was
a
that
factually
inaccurate, but that is the extent of the misrepresentation on
this form.
b.
Plaintiffs Have Not Proven the Misrepresentation in
the 2006 ACORD Form Was Material
A misrepresentation must have been actually relied on in
issuing the policy or setting the premium in order for it to be
material.
Plaintiffs
cannot
subsidiary
misrepresentation
prove
in
the
that
2006
they
relied
ACORD
on
the
application
because Plaintiffs knew that it was a misrepresentation prior to
issuing
the
policy
and
setting
the
premium.
Gary
Lovett,
Plaintiffs’ underwriter on the American Capital account in 2006,
testified that he knew before making an insurance proposal to
16
American Capital had not acquired its interests in SPL
and SMG at the time the 2006 ACORD application was submitted.
Accordingly, there could not have been a misrepresentation as to
whether American Capital considered SPL or SMG its subsidiaries
on the 2006 ACORD application, but Plaintiffs’ argument will be
construed to refer generally to American Capital’s portfolio
companies.
46
American
Capital
subsidiary,
that
ACFS,
which
application materials.
relied
on
the
American
“no”
was
Capital
disclosed
had
in
at
least
American
one
Capital’s
Mr. Lovett explained that he could have
answer
on
the
ACORD
form
as
a
material
representation, even though he “nominally” knew that answer was
incorrect,
because
he
considered
ACFS
“acceptable,
notwithstanding that answer to the question,” as ACFS’s “name
began similarly with the words American Capital.”
at 41:10-24).
Mr.
Lovett
other
(ECF No. 801,
Although he knew the “no” answer was not correct,
did
not
subsidiaries
investigate
at
that
whether
time.
American
(Id.
at
Capital
had
41:25-42:4).
Plaintiffs’ underwriter on the American Capital account for the
2007
policy
renewals,
Maureen
McEwen,
issued
the
renewal
policies in reliance upon the 2006 application materials.
No. 784, at 16:2-8, 17:6-19).
(ECF
She similarly testified that she
was aware that ACFS was a named insured under the policy and a
subsidiary
renewals.
of
American
Capital
prior
to
the
2007
policy
(PTX 18; ECF No. 784, at 69:11-21, 106:10-20).
Ms.
McEwen acknowledged that the other information contained in the
application itself as well as the research done by Plaintiffs in
the course of putting together a proposal, such as reviewing
American Capital’s website and 2006 and 2007 Dun & Bradstreet
reports,
also
revealed
that
there
American Capital’s family tree.
47
were
many
companies
in
(See ECF No. 784, at 73:4-
78:6).
She
testified,
however,
that
the
subsidiary
misrepresentation would have been material to her decision if
she
had
been
aware
that
American
Capital
portfolio companies to be subsidiaries.
considered
its
(Id. at 29:3-30:20,
106:10-20).
Plaintiffs’ argument for materiality is, essentially, that
they
relied
on
their
misrepresentation.
They
own
contend
interpretation
that
they
of
relied
the
on
a
misrepresentation they knew was untrue — that American Capital
did not have any subsidiaries — because they understood the
misrepresentation to mean that American Capital did not consider
its portfolio companies to be its subsidiaries.
It is far from
clear that American Capital actually considered its portfolio
companies to be its subsidiaries when it applied for insurance,
and thus Plaintiffs have not shown that this would have been a
misrepresentation had it been made.
Plaintiffs
have
representation
not
in
shown
its
that
insurance
More importantly, however,
American
Capital
application
relationship with its portfolio companies.
made
any
regarding
its
Even assuming that
American Capital’s portfolio companies are its subsidiaries, the
representation
that
American
Capital
did
not
have
any
subsidiaries was not a representation that American Capital’s
only
subsidiary
was
the
unmentioned
ACFS.
Plaintiffs’
assumption of how the subsidiary misrepresentation was false is
48
not a material misrepresentation made by American Capital or its
agent.
The ACORD form represented that American Capital did not
have any subsidiaries, and Plaintiffs issued the policies with
the
knowledge
that
this
representation
was
false.
The
misrepresentation accordingly cannot have been material, and the
2006 and 2007 policies will not be voided on this ground.17
c.
Plaintiffs Have Not Proven the Misrepresentation in
the 2008 ACORD Form Was Material
An ACORD application was also submitted in connection with
American
Capital’s
2008
policy
renewals,
which
contained a “no” answer to the subsidiary question.
similarly
(PTX 539).
This application was dated September 10, 2008, and received by
Plaintiffs the same day.
(Id.; DTX 624).
The 2008 policies
incepted on June 14, 2008, and the policies were delivered on
September 5, 2008.
that
Plaintiffs
(ECF No. 784, at 95:6-25).
could
not
have
17
issued
the
It is axiomatic
2008
Policies
in
Plaintiffs
also
contend
that
there
were
other
misrepresentations in the ACORD form justifying rescission, such
as the answer “American Capital” in the ACORD form section “NAME
(First Named Insured & Other Named Insureds).” (ECF No. 832, at
23:9-22). At most, this answer was a misrepresentation in that
American Capital sought coverage for ACFS as a named insured,
but Plaintiffs were aware of this from the application and could
not have reasonably relied on this answer. (See ECF No. 784, at
106:10-20 (“I knew [ACFS] was a named insured under the
policy.”). As discussed, it was the insurers’ inclusion of the
XTEND endorsement, after receiving the ACORD application, which
broadened the definition of “Named Insured” potentially to
provide coverage to American Capital’s portfolio companies. To
the extent that endorsement created a misrepresentation in the
application, it cannot be attributed to the applicant and cannot
have been material.
49
reliance on a misrepresentation made after the policies were
issued.
2.
(Id. at 96:12-97:8).
Schedules
Plaintiffs
also
contend
that
the
schedules
submitted
in
connection with the 2006 applications and 2007 and 2008 policy
renewals
contained
material
misrepresentations
because
they
listed only office locations of American Capital and ACFS, not
American
Capital’s
portfolio
companies.
Plaintiffs
have
not
proven either that this was a misrepresentation or that it was
material.
American Capital applied for coverage for itself and
its operating subsidiary, and regardless of the extent to which
Plaintiffs’ policies extended that coverage to other insureds,
the
schedules
misrepresentations.
American
Capital
submitted
were
not
Moreover, while the schedules were used to
calculate American Capital’s premiums, they could not reasonably
have been relied on by Plaintiffs’ underwriters regarding the
extent of coverage sought.
As the underwriters testified, they
did not include a designated premises exclusion in the policies,
and they understood that the coverage they were writing was not
limited to the scheduled locations.
(ECF Nos. 801, at 50:16-24;
784, at 63:11-64:4, 104:11-105:11; see also PTX 372).
Plaintiffs have not proven that they issued the policies in
reliance on a material misrepresentation in the applications,
and they are not entitled to rescission of the policies.
50
This
finding
resolves
counterclaims,
Defendants’
which
seek
parallel
a
declaratory
declaration
that
judgment
Plaintiffs’
unilateral rescission of the policies was without legal basis,
and a separate declaration will not be issued.
C.
Reformation
In Count II of the Second Amended Complaint, Plaintiffs
seek
reformation
mistake,
provide
alleging
coverage
portfolio
of
the
that
only
companies,
insurance
the
for
such
policies
parties
intended
American
Capital
as
SPL,
or
portfolio companies or other entities.
“with
due
the
and
to
mutual
policies
to
not
for
its
respect
to”
its
(ECF No. 67 ¶¶ 142-46).
For a party to obtain reformation of an insurance policy under
Maryland law, “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.”
(1941).
Am. Cas. Co. of Reading v. Ricas, 179 Md. 627, 634
In denying Defendants’ motion for summary judgment on
this claim, the court found that a genuine dispute of material
fact
remained
parties.
The
as
to
court
the
also
extent
of
rejected
coverage
intended
Defendants’
by
argument
the
that
Plaintiffs were required as a matter of law to provide a redline
version of the policies.
51
As
noted
in
denying
Defendants’
motion
for
summary
judgment, Plaintiffs “made plain their belief that the parties
intended the policies to cover only American Capital and any
entity
that
was
included
in
its
application
and
exposure
schedule, but not unreported portfolio companies such as SPL.”
(ECF No. 545, at 38-39).
It was made clear at trial, however,
that Plaintiffs also believe that the parties did not intend the
policies
to
cover
American
Capital
itself
for
any
exposure
arising out of its portfolio companies.
As to coverage of American Capital’s portfolio companies as
insureds
themselves,
convincing
Capital
evidence
may
not
Plaintiffs
sufficient
have
sought
have
for
not
shown
clear
reformation.
coverage
for
its
and
American
portfolio
companies, and Plaintiffs’ underwriters may not have intended to
write
the
policies
in
a
way
that
created
that
coverage
obligation, but the parties intended the terms of the policies
to be their actual and valid agreement.
the
policies
extended
named
insured
By their plain terms,
status
to
those
organizations in which the insured maintained an ownership or
majority interest.
A party seeking reformation has the burden of proving “the
precise agreement which the parties intended.”
Emanuel v. Ace
Am. Ins. Co., No. ELH-11-875, 2012 WL 2994285, at *7 (D.Md. July
20, 2012); see also Lazenby v. F.P. Asher, Jr. & Sons, Inc., 266
52
Md. 679, 682-84 (1972).
Plaintiffs were not required to provide
a redline version of their proposed policies, but the difficulty
the court would have in drafting a reformed policy illustrates
the lack of evidence showing a different agreement.
Assuming
that excising the “broadened named insured” provision of the
XTEND endorsement would achieve Plaintiffs’ goal of excluding
portfolio companies from the definition of named insured, there
is no evidence to support this relief.
The XTEND endorsement’s
broadened named insured provision was included in the policies
by Plaintiffs’ underwriters (ECF No. 784, at 80:24-81:15); it
was included in the proposal reviewed by American Capital (DTX
37, at AMCA00663059); and it was paid for through a premium
enhancement by American Capital (see ECF No. 784, at 81:16-18).
There is no evidence of any agreement that the provision should
not
be
included
in
the
policies.
Similarly,
there
is
no
evidence that the parties did not intend to abide by the “newly
acquired” provisions of the policies.
As it is the terms of the
policy forms and endorsements which potentially extend coverage
to portfolio companies as named insureds, Plaintiffs as their
drafter
cannot
avoid
the
terms.
The
subjective
intent
of
Plaintiffs’ underwriters is not enough to show that the parties
had a precise agreement which differed from the terms of the
policies as they were written.
(As
Plaintiffs’
claims
(Cf. ECF No. 794, at 153:1-10
handler
53
Edward
Zawitoski
testified,
coverage
is
determined
policy,”
and
“by
Plaintiffs
did
the
terms
not
and
consider
conditions
the
of
the
underwriter’s
intent regarding the policy in determining coverage)).
Plaintiffs have also emphasized an American Capital email
in
which
the
potential
coverage
under
the
policies
heparin litigation was described as a “loophole.”
for
the
(PTX 566).
This is not evidence that the parties had intended an agreement
different from the actual policies.
It is hardly surprising or
suspicious that an insured would not review the terms of its
insurance policies in detail until that coverage was needed.
Again, the evidence shows that American Capital did not seek to
purchase
liability
Plaintiffs
coverage.
issued
coverage
policies
for
its
that
portfolio
companies,
but
created
such
potentially
As shown at trial, there are numerous ways in which
insurers typically avoid picking up the liability for a private
equity firm’s portfolio companies.
Plaintiffs did not include
those common exclusions and endorsements, and they cannot remedy
that decision through reformation.
They are bound by the terms
of the policies they wrote.
In
coverage
seeking
for
reformation
liabilities
of
the
“relating
to”
policies
or
“with
to
foreclose
respect
to”
American Capital’s portfolio companies (ECF No. 67 ¶¶ 142-46),
Plaintiffs essentially ask the court to rewrite the policies to
remove the heparin litigation from coverage.
54
Again, Plaintiffs
have not proven that this was the precise agreement intended by
the parties.
services
Plaintiffs have pointed to the policies’ financial
exclusion,
which
certainly
may
limit
coverage
of
American Capital’s liabilities arising out of its provision of
management services to its portfolio companies — for example, in
a suit against American Capital by a portfolio company if its
services
allegedly
personal
or
caused
bodily
advertising
injury,
injuries.
property
The
damage,
financial
or
services
exclusion, however, does not prove that the parties intended to
preclude coverage for liabilities relating to American Capital’s
portfolio
companies.18
Plaintiffs
have
not
proven
that
reformation of the policies to preclude coverage of American
Capital with respect to its portfolio companies is justified.
The
coverage
burden
of
parties
intended
determinations,
clear
and
the
and
written
Plaintiffs
convincing
evidence
policies
have
not
necessary
to
control
met
to
their
obtain
reformation.
18
Moreover, although American Capital renewed the policies
with the exclusion in 2007 and 2008, the financial services
exclusion was not included in the 2006 insurance proposal
accepted by American Capital, but rather added by Plaintiffs’
underwriters in a second proposal not sent to American Capital
before ultimately being included in the policies. (ECF No. 801,
at 50:25-53:19.
Compare DTX 608, at TRAV0008189-90, with PTX
32, at TRAV0010690-91).
55
D.
Promissory Fraud
In this case, the counterclaim for promissory fraud mirrors
the
reformation
claim.
American
Capital
asserts
that
the
policies, as written, provide coverage to American Capital for
suits alleging bodily injury and extend coverage to American
Capital’s current and newly-acquired portfolio companies, but
Plaintiffs never intended to carry out the provisions of the
policies. (ECF No. 380 ¶¶ 295-300).
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. Tr. v. Gaynor, 370 Md. 89, 97 (2002).
American
Capital
has
not
proven
that
Plaintiffs
false representation for the purpose of defrauding it.
subjective
scope
of
understanding
coverage
is
of
Plaintiffs’
insufficient
underwriters
evidence
of
made
a
As the
of
the
Plaintiffs’
coverage intent for the purposes of reformation, so too is it
insufficient to prove promissory fraud.
the
parties
control
at
intended
the
time
the
the
The evidence shows that
written
terms
policies
were
56
of
the
issued,
policies
and
to
American
Capital
has
policies’
not
terms
proven
or
did
written at that time.
that
not
Plaintiffs
intend
to
misrepresented
honor
the
policies
the
as
Even though Plaintiffs later sought in
this litigation to reform the policies, Plaintiffs’ reformation
claim itself is not evidence that Plaintiffs misrepresented the
scope
of
coverage
under
the
policies
for
the
purpose
of
defrauding American Capital at the time the policies were bound.
There is insufficient evidence to find that Plaintiffs did not
intend to perform the policies as written at the time they were
issued.
E.
Lack of Good Faith
Count
XIII
of
the
Third
Amended
Counterclaims
is
Defendants’ statutory lack of good faith counterclaim, asserted
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, Cts. & Jud.
Proc. § 3-1701; see Ins. § 27-1001(a).
The remedies available
under
these
statutes
are
recoverable
only
“if
the
trier
of
fact . . . finds in favor of the insured and finds that the
insurer failed to act in good faith[.]”
Proc. § 3-1701.
Md. Code, Cts. & Jud.
As discussed above, the court finds in favor of
Defendants on their breach of contract counterclaims.
57
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.”
Cecilia Schwaber
Tr. Two v. Hartford Accident & Indem., Co., 636 F.Supp.2d 481,
487 (D.Md. 2009).
This “totality of the circumstances” standard
has been summarized as requiring an insurer to meet “standards
of reasonable investigation, honest assessment, and reasonable
explanation.”
All Class Constr., LLC v. Mut. Benefit Ins. Co.,
3 F.Supp.3d 409, 416-18 (D.Md. 2014).
considered
when
determining
if
The following factors are
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 (alterations in original)
(quoting State Farm Mut. Auto. Ins. Co. v. Laforet, 658 So.2d
55, 63 (Fla. 1995)).
Notice
of
the
first
heparin
complaint
was
sent
to
Plaintiffs on August 20, 2008 (PTX 98), and Plaintiffs denied
coverage of the heparin suits on January 16, 2009 (PTX 576).
58
The
evidence
at
trial
did
not
paint
Plaintiffs’
efforts during this time in the best light.
employees’
Considering the
totality of the circumstances, however, the court finds that
Defendants have not met their burden of proof on this claim.
Although Plaintiffs reserved their rights to deny coverage
on a number of grounds, the joint venture exclusion was the
primary
justification
January.
(PTX
for
576).
the
The
coverage
first
determination
complaint
noticed,
made
in
the
Ash
complaint, alleged that the contaminated heparin originated with
the
Changzhou
joint
venture
(PTX
98),
but
within
a
week,
American Capital had provided nine other heparin complaints to
Plaintiffs,
complaint
including
(DTX
the
33).
joint
Coverage
venture-silent
for
the
Skidmore
specifically was denied in the January 16 letter.
TRAV0000764).
Skidmore
claim
(PTX 576, at
Plaintiffs contend that, although the court has
disagreed with them as to the applicability of the joint venture
exclusion, their coverage determination was made in good faith.
During the 2017 trial, Tracey D. King Seitz, Plaintiffs’
in-house
counsel,
Plaintiffs’
complex
and
claim
Robert
unit
Crivelli,
in
2008,
a
supervisor
testified
that
in
they
could recall only reading the Ash complaint (ECF Nos. 794, at
233:23-25; 805, at 24:4-13, 25:1-6), and Mr. Zawitoski testified
that, while he had “generally” read all the complaints listed in
his January 16 letter, he was unsure whether he knew at that
59
time that some of those did not reference a joint venture (ECF
No. 794, at 119:24-121:23).19
Mr. Zawitoski believed at that
time,
those
however,
coverage.
that
all
of
complaints
(ECF No. 794, at 121:1-122:22).
fell
outside
In a September 3,
2008, email, Mr. Crivelli reported that American Capital had “a
majority
ownership
of
Scientific
Protein
Labs”
and
that
a
component of heparin was manufactured at a facility in China,
but
also
involved.
coverage
noted
that
SPL
(DTX 791).
evaluation
owned
“a
US
plant”
which
might
be
Mr. Crivelli testified that during the
he
developed
the
understanding
“that
the
Changzhou joint venture was involved in the actual manufacture
of the component product of the heparin; that it was involved in
a
joint
imported
venture
into
with
the
SPL;
United
and
that
States
that
and
used
component
by
Baxter
finished product.”
(ECF No. 794, at 256:15-25).
Mr.
testified
Zawitoski
insurer
could
also
look
to
“the
that,
in
actual
their
facts”
part
in
was
the
Both he and
experience,
rather
than
the
a
complaint’s allegations to determine if an entity was an insured
19
If Plaintiffs had denied coverage based on the
allegations of only one out of dozens of complaints, while
representing to the insured, as they did, that the coverage
determination was based on the allegations of all the
complaints, they could not have reached an informed judgment
based on honesty and diligence.
Given the significant passage
of time since these events and the contemporaneous records
acknowledging the allegations of the other complaints, however,
the court does not conclude that Plaintiffs failed to consider
the joint venture-silent complaints in making their coverage
determination.
60
under the policies (id. at 256:4-9; see also id. at 8:24-9:14),
and
that
in
this
case,
they
considered
the
question
of
the
involvement of a joint venture to be part of this determination.
The
court
disagreed
on
summary
judgment,
as
discussed
above, but an improper denial of coverage alone does not show a
lack of good faith.
The
question
of
See All Class Constr., 3 F.Supp.3d at 418.
good
faith
turns
not
on
what
the
policies
actually cover, but what the insurer reasonably believed and
articulated
Although
they
covered
Plaintiffs
allegations
of
the
at
time
not
should
the
have
complaints
in
of
denial.
looked
making
See
beyond
their
id.
the
coverage
determination as to the duty to defend, the issue is complicated
and
ambiguous
Plaintiffs
did
enough
not
that
the
court
reasonably
is
believe
not
persuaded
the
joint
that
venture
exclusion precluded coverage at the time of the denial.
The
evidence
also
does
not
prove
that
Plaintiffs
had
reached a contrary coverage position on the heparin litigation
prior to January 16.
The fact that Mr. Zawitoski set a reserve
for the Ash claim on September 4, 2008 (DTX 655) does not show
that Plaintiffs had made a coverage determination at that time.
Mr. Crivelli wrote in an email on October 13, 2008, “We have
confirmed coverage,” (DTX 791), but without further context for
this statement, and in light of his testimony that a coverage
determination had not been reached in late December 2008 (ECF
61
No.
794,
at
completed
215:6-11),
their
it
is
not
investigation
at
clear
that
that
time.
Plaintiffs
Mr.
had
Crivelli’s
December 30, 2008, email suggesting that Plaintiffs may want to
“reiterate”
they
would
pay
only
reasonable
defense
costs
in
light of the law firm Defendants had retained suggests that a
finding of coverage was possible at that time, but it is not
proof that Plaintiffs had determined they had a duty to defend.
(See PTX 842).
A draft of the January 16 letter, dated January 13 and
prepared
by
evidence.
defense
Plaintiffs’
(PTX 878).
to
American
reservation of rights.
counsel,
was
also
admitted
into
The draft letter would have offered a
Capital,
and
(Id.).
possibly
SPL,
with
a
Defendants contend that this
letter is evidence that a coverage determination was reached,
and that the reversal of position two days later demonstrates
that the coverage position was not made in good faith.
true
that
neither
Mr.
Zawitoski,
the
claims
handler
It is
on
the
account who signed the letter; Mr. Crivelli, his supervisor who
approved
the
letter;
nor
Delores
Cranston,
Plaintiffs’
Rule
30(b)(6) designee, could provide an explanation for the changes
between the January 13 and January 16 positions.
Cranston Dep., at 136:2-19, 145:12-146:4).
(See DTX 380;
Plaintiffs were not
bound by the coverage position taken in a draft letter prepared
by their counsel, however.
Moreover, the draft letter advanced
62
the same arguments as the January 16 letter that Plaintiffs were
entitled
to
rescission
and
that
the
joint
venture
exclusion
precluded coverage, and would have reserved Plaintiffs’ rights
to
disclaim
defense
and
indemnity
coverage
reimbursement of any defense or indemnity payments.
and
seek
(PTX 878).
Accordingly, it does not show that the coverage position was not
reached in good faith.20
It
neither
is
clear
Plaintiffs
from
nor
the
evidence
American
presented
Capital
had
at
trial
expected
that
bodily
injury claims like those made in the heparin litigation would be
brought against American Capital, and that American Capital and
SPL had not originally realized that SPL was an insured under
American
Capital’s
policies.
Given
the
complexity
of
the
coverage issues involved and considering the totality of the
circumstances, Defendants have not met their burden to prove
that Plaintiffs did not act in good faith.
20
Defendants have also argued that Plaintiffs’ offer to
fund a defense of American Capital in the Nationwide Arena
litigation is significant.
(See ECF No. 832, at 91:13-94:4).
The January 16, 2009, coverage position letter as to the
Nationwide Arena litigation offered to provide a defense to
American Capital subject to a full and complete reservation of
rights to disclaim defense and indemnity obligations and seek
reimbursement. (See DTX 607). The Nationwide Arena letter does
not prove that Plaintiffs had determined that defense coverage
was owed under the policies for either the Nationwide Arena or
heparin litigation. Plaintiffs could have offered to provide a
defense in the heparin litigation as well, as contemplated in
the January 13 draft letter, but the fact that they did not do
so does not prove that they acted with a lack of good faith.
63
F.
Damages
Defendants seek breach of contract damages in the amount of
$62,717,069.00,
litigation
representing
expenses
incurred
attorneys’
in
the
fees
defense
and
of
the
other
heparin
litigation between January 18, 2009, and June 14, 2016.
(See
DTX 868A).
Under Maryland law, an insurer is liable for the attorneys’
fees the insured “incurred in defending against the underlying
damage claim” due to the insurer’s breach of its contractual
duty to defend.
Enters.,
Appeals
Inc.,
has
Bankers & Shippers Ins. Co. of N.Y. v. Electro
287
Md.
explained,
641,
648
liability
(1980).21
insurance
As
the
“is
Court
of
‘litigation
insurance’ as well, protecting the insured from the expense of
defending suits brought against him.”
Brohawn v. Transamerica
Ins. Co., 276 Md. 396, 410 (1975).
Therefore, whenever an insured must conduct
his own defense at his own expense as a
result
of
an
insurer’s
breach
of
a
contractual duty to defend its insured, the
21
Under Maryland law, an insured also is entitled to
recover attorney fees incurred in seeking coverage from an
insurer that has breached its contractual duty to defend, see,
e.g., Nolt v. U.S. Fid. & Guar. Co., 329 Md. 52, 66 (1993);
Cont’l Cas. Co. v. Bd. of Educ., 302 Md. 516, 537 (1985);
Electro Enters., 287 Md. at 648-49; Cohen v. Am. Home Assurance
Co., 255 Md. 334, 363 (1969), but the question presently before
the court is the measure of damages incurred by the insureds in
defending against the underlying litigation.
The parties have
stipulated that the invoices underlying Defendants’ damages
claim do not relate to the insurance coverage litigation. (ECF
No. 816, at 94:19-95:24).
64
insured may recover the expenses of that
defense from the insurer.
7C J. Appleman,
Insurance Law and Practice § 4691, pp. 238240 (Berdal ed. 1979).
Furthermore, the
right of an insured to recover attorneys’
fees in such a situation applies not only to
the named insured of the policy but also to
any
person
who
is
within
the
policy
definition of an insured and against whom a
claim alleging a loss within the policy
coverage has been filed.
Electro Enters., 287 Md. at 649.
expenses
are
awarded
to
the
Where attorneys’ fees and
insured
as
breach
of
contract
damages, the insurer is “entitled to have the amount of fees and
expenses
proven
with
the
certainty
and
under
the
standards
ordinarily applicable for proof of contractual damages.”
661
(holding
“short,
oral
that
“informal
representations
fee
at
and
the
expense
hearing
Id. at
petitions”
of
the
and
amounts
claimed” were insufficient, and instructing the trial court to
conduct
remand).
“a
proper
It
is
trial
the
regarding
insured’s
the
burden
damages
to
incurred”
produce
on
sufficient
evidence of the amount of defense costs sought, as well as the
necessity and reasonableness thereof.
See Bd. of Trs., Cmty.
Coll. of Balt. Cty. v. Patient First Corp., 444 Md. 452, 484–85
(2015).
1.
Heparin Litigation Joint Defense Expenses
Defendants’ Exhibit 868A is a summary exhibit tallying the
894 invoices introduced by Defendants.
(See DTX 877-1417; DTX
1419-541; DTX 1544-51; DTX 1796-877; DTX 2108-09; DTX 2114-95;
65
DTX 2198; DTX 2200-49; DTX 2257-61).
The parties agree that the
information in the summary exhibit appears on the underlying
invoices and is an accurate reflection of that information, and
that the calculations are correct.
61:20-62:20).
Plaintiffs
(ECF No. 816, at 61:7-13,
objected
to
the
underlying
exhibits, but do not challenge their authenticity.
63:1-20, 75:6-22).
(Id.
894
at
The parties stipulated that the law firm
invoices reflected time recorded by attorneys in the law firms’
recording mechanism from which the invoices were compiled, and
that the vendor invoices were received from the vendors and
prepared in the ordinary course of business.
8:12-11:22).
(ECF No. 823, at
Plaintiffs’ counsel argued during closing argument
that these invoices were prepared in anticipation of litigation
and should not be admitted as business records.
There was no
credible evidence that the time records were prepared for the
primary
purpose
of
litigation.
routine billing records.
possible
source
of
the
Instead,
they
are
normal,
Plaintiffs have not shown that the
information
indicate a lack of trustworthiness.
or
other
circumstances
In light of the fact that
Plaintiffs do not challenge the authenticity of the invoices or
that they were prepared in the course of a regularly conducted
business activity, and given the parties’ stipulations during
trial, any remaining objection to the exhibits is overruled and
the invoices are admitted under Fed.R.Evid. 803.
66
The parties
agree
that
the
invoices
generally
American Capital from Baxter.22
underlying
invoices
are
were
received
by
(Id. at 3:9-6:21).
redacted,
and
the
SPL
and
Some of the
amount
sought
by
Defendants has been reduced from the total of the invoices to
account for those redactions.
(See DTX 868A, at 32 (noting a
reduction in damages claimed of $3,446,350.38 to account for
redactions)).
Where attorneys’ fees are sought as contractual damages,
“the billings supporting the award should be ‘as detailed as
reasonably possible, so that the client, and any other person
who might be called upon to pay the bill, will know with some
precision what services have been performed.’”
Patient First,
444 Md. at 485-86 (quoting Diamond Point Plaza Ltd. P’ship v.
Wells Fargo Bank, N.A., 400 Md. 718, 760 (2007)).
The opposing
party must have “at least the opportunity to point out to the
court anything it deemed questionable.”
Id.
at 487;
accord
Electro Enters., 287 Md. at 661 (holding that insurer must be
given
“a
realistic
opportunity
to
challenge
expenses” claimed as duty to defend damages).
those
fees
and
“The sufficiency
of the evidence presented as to attorneys’ fees must be more
22
The parties agreed that a small percentage of the
invoices were first received by SPL and sent to Baxter.
(See
ECF No. 816, at 75:23-76:4). From the invoices, it appears that
some invoices were also sent directly to SPL and American
Capital (see, e.g., DTX 1435-43), and others were transmitted
directly to SPL (see, e.g., DTX 1446-50).
67
than simply the number of hours worked, but less than a line by
line analysis of services rendered.”
Royal Inv. Grp., LLC v.
Wang, 183 Md.App. 406, 458 (2008) (quoting Long v. Burson, 182
Md.App. 1, 26 (2008)); see also Patient First, 444 Md. at 487
(noting
that
the
fee
request
must
be
more
than
“a
mere
compilation of hours multiplied by fixed hourly rates . . . a
request
for
fees
must
specify
the
services
performed”
(alteration in original) (quoting Maxima Corp. v. 6933 Arlington
Dev. Ltd. P’ship, 100 Md.App. 441, 453-54 (1994))).
There are 894 invoices detailing the expenses claimed as
duty
to
defend
damages
in
evidence.
The
invoices
include
detailed descriptions of the services performed on the heparin
cases by each attorney to the tenth of an hour over seven-and-ahalf years of litigation.
While there are minimal redactions in
the invoices, Defendants are not seeking fees for work that has
been redacted.23
(See DTX 868A); cf. Patient First, 444 Md. at
487-88 (finding evidence for fee award insufficient where “all
description of the services rendered in the billing statements”
had been redacted).
Providing far more than a compilation of
hours multiplied by hourly rates, they enabled Plaintiffs and
23
Plaintiffs’ counsel argued that these redactions were for
“insurance issues” and are evidence that the invoices were
prepared in anticipation of the coverage litigation.
(ECF No.
832, at 62:15-19).
There is no evidence to support this
speculation, and as noted, the parties have stipulated that the
invoices underlying Defendants’ damages claim do not relate to
insurance coverage matters.
68
the
court
to
scrutinize
the
legal
services
provided
in
the
defense of the heparin litigation to American Capital, SPL, and
Baxter.
contest
Plaintiffs
the
were
given
sufficiency
of
an
opportunity
these
at
invoices
trial
and
to
their
reasonableness, and had proposed an expert witness to testify on
damages (see ECF No. 661, at 80), but chose not to introduce any
rebuttal evidence on damages.
Instead, Plaintiffs argue that
Defendants have not proven that the litigation expenses were
reasonable and necessary.
Daniel
William
Groskreutz,
who
primarily
served
as
the
chief financial officer of SPL during his tenure at the company
from June 2004 until March 2015, testified that the heparin
litigation presented “a bet-the-company type of exposure,” and
that SPL determined they “needed to have the best law firm that
we could find [to] handle this.”
(ECF No. 816, at 34:21-23).
When the first claims were filed, Mr. Groskreutz estimated that
the
claims
dollars.”
its
could
(Id. at 34:18-20).
counsel
nationally
“escalate”
in
the
recognized
into
the
“tens
of
millions
of
SPL chose Arnold & Porter LLP as
summer
of
2008
firm
that
had
because
handled
“[t]hey
large
were
a
litigation
like this before, particularly in products liability” (id. at
35:4-14), and the heparin litigation involved many “very complex
cases . . . spread across the country” (id. at 39:4-16).
He
understood that Arnold & Porter’s hourly rates for partners for
69
this type of work were “[u]p to $800 an hour” (id. at 35:15-17),
and considered an upper limit of “$225 an hour for a senior
partner”
proposed
by
a
different
insurer “really
pretty
shocking” given the exposure the heparin litigation presented
(id. at 34:21-25).
After a joint defense agreement was reached with Baxter and
American
Capital,
Kirkland
&
Ellis
LLP
assumed
the
heparin
litigation joint defense, although Arnold & Porter continued to
represent SPL as well.
Mr. Groskreutz testified that he did not
review each invoice received from Baxter “one at a time” for
reasonableness, but rather “did a cursory review of the invoices
that we received primarily because Baxter had already reviewed
them or Kirkland & Ellis had already reviewed them, if they were
counsel and experts that they had hired, for reasonableness and
necessity.”24
(ECF No. 816, at 60:9-19).
His review “was to
look through them to see that most of the names were familiar,
that the topics were familiar, that the days looked right, and
also
to
make
sure
that . . . the
totals
arithmetically that the invoices worked.”
added
up
and
just
(Id. at 60:20-24).
The hourly rates charged generally increased during the course
24
As further discussed below, under the joint defense
agreement between American Capital, SPL, and Baxter, Baxter was
charged with the “responsibility to oversee and direct the dayto-day conduct of both the defense and settlement of the Heparin
Litigation” (PTX 480 ¶ 3.2), and with advancing payment of the
litigation expenses (id. ¶¶ 5.3-5.4).
70
of the heparin litigation, as reflected in the invoices, but,
after
discounts,
Kirkland
&
Ellis
appears
generally
to
have
charged hourly rates below or comparable to those Mr. Groskreutz
testified he understood Arnold & Porter charged.
(See, e.g.,
DTX 1428; DTX 1526; DTX 1535).
Mr. Groskreutz testified that, beginning in 2009, “[w]hat
seemed like a significant number of [heparin] cases, in the tens
and maybe hundreds, kept growing and growing very, very rapidly.
Before long, we were at 400, 500 cases.
number was over 1,000 cases.
I believe the ultimate
So, the exposure grew just because
the number of plaintiffs grew.”
(ECF No. 816, at 65:14-21).
Furthermore,
took
a
bellwether
trial
place,
resulting
in
a
$625,000 verdict for a single plaintiff, without a finding of
negligence or punitive damages.
(Id. at 65:22-66:2; DTX 1660).
SPL was therefore concerned that its exposure “was getting into
the hundreds of millions of dollars potentially” (ECF No. 816,
at
66:3-8),
particularly
after
a
ruling
in
the
consolidated
state court action allowed the heparin complaints to be amended
to add a count for punitive damages against SPL (see id. at
69:5-11).
Defendants waived their right to a jury for their breach of
contract claims, and so it falls to the court to determine the
measure of Defendants’ damages as fact-finder.
The role of the
fact-finder is not transformed, however, because the court is
71
sitting without a jury.
must
be
weighed
Defendants
The evidence presented as to damages
factually,
have
shown
as
that
the
the
jury
would
detailed
have
billing
done.
records
introduced were reviewed contemporaneously by Baxter and SPL and
received by American Capital.
Given the circumstances facing
the heparin defendants - “bet-the-company” stakes, more than a
thousand
underlying
lawsuits,
and
on-going
and
uncertain
coverage litigation – they had the incentive to scrutinize and
question
the
exorbitant.
invoices
they
were
receiving
if
they
were
Moreover, if Charter Oak or Travelers was concerned
about Defendants’ “incentive or ability to economize on [their]
legal costs, it could, while reserving its defense that it had
no duty to defend, have assumed the defense and selected and
supervised
and
paid
for
the
lawyers
defending
[the
insureds] . . . and could later have sought reimbursement if it
proved that it had indeed had no duty to defend[.]”
Taco Bell
Corp. v. Cont’l Cas. Co., 388 F.3d 1069, 1076 (7th Cir. 2004).
Instead,
“it
exonerated
declined
from
a
to
duty
to
do
so—gambling
defend—with
insureds] selected the lawyers.”
Plaintiffs
also
had
that
the
it
result
would
that
be
[the
Id.
the
opportunity
at
trial,
after
receiving detailed billing records from the heparin litigation
defense
during
discovery,
to
present
expert
testimony
as
to
attorneys’ fees, a detailed analysis of the heparin litigation
72
billing,
or
“concrete
and
admissible
evidence
to
demonstrate
that they would have been able to command lower rates or spur
more
efficient
litigation[.]”
Baker’s
Express,
LLC
v.
Arrowpoint Capital Corp., No. ELH-10-2508, 2012 WL 4370265, at
*25 (D.Md. Sept. 20, 2012).
They chose not to do so, instead
relying
on
the
arguments
that
insufficient
and
that
rates
litigation
consider
were
the
unreasonable.25
Defendants’
detailed
Defendants’
charged
The
in
court
billing
evidence
the
heparin
therefore
records,
was
must
witness
testimony, and the other evidence in the record in the absence
of any contradicting evidence.
In light of the complexity of the heparin litigation, the
amount of time and labor involved over more than seven years,
and the potential exposure the heparin defendants faced, the
court
finds
that
the
heparin
25
litigation
defense
costs
Plaintiffs’ counsel argued that Defendants should have
introduced status reports “to describe what was being done, why
it was being done, the cost at which it was being done, whether
that cost met budgeting expectations.”
(ECF No. 832, at 63:49).
The invoices here are sufficiently detailed, however, to
show precisely what was being done to defend American Capital,
SPL, and Baxter in the heparin litigation and the cost at which
it was being done.
Plaintiffs’ counsel also argued that the rates charged for
attorneys were “regularly double what the Appendix B rates are
here in the District of Maryland,” and that there was no
evidence justifying those rates.
(ECF No. 832, at 63:10-15).
The heparin litigation was not before the District of Maryland,
however, and the presumptively reasonable rates in this district
are not evidence as to the fee customarily charged for similar
legal services.
73
represented
in
Defendants’
Exhibit
868A
were
reasonable
and
necessary.
2.
Incurrence of the Heparin Litigation Expenses
Plaintiffs
have
argued
that
Baxter,
not
Defendants,
“incurred” the heparin litigation fees and costs, and that there
is “no opportunity for recovery by American Capital or SPL”
here.
(ECF No. 832, at 55:22-56:12; see id. at 57:5-11).
This
issue was also raised in Plaintiffs’ supplemental motion for
summary judgment.
(ECF No. 584-1, at 14-16).
To address these
arguments, it is necessary to revisit the Agreement entered into
by American Capital, SPL, and Baxter on December 2, 2008.
(PTX
480).
a.
The Agreement
The
Agreement
functioned,
in
part,
as
a
joint
defense
agreement, specifying that Kirkland & Ellis “shall undertake to
jointly represent and defend [American Capital, SPL, and Baxter]
in the Heparin Litigation.”26
(PTX 480 ¶ 3.1).
The Agreement
provided that American Capital, SPL, Baxter, and their joint
counsel “shall consult regularly on the work being performed in
26
In addition, Dechert LLP was to be retained “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[.]”
(PTX 480 ¶ 3.1). Kirkland & Ellis, Dechert, “and any other law
firms jointly retained . . . in connection with the defense of
the Heparin Litigation” were referred to as “joint counsel” in
the Agreement. (Id.).
74
connection with the Heparin Litigation, including the definition
and
review
of
appropriate
strategies
for
litigation
and
settlement as well as the assignment of appropriate counsel to
do such work,” but that “[i]t shall be Baxter’s responsibility
to oversee and direct the day-to-day conduct of both the defense
and settlement of the Heparin Litigation[.]”
(Id. ¶ 3.2).
SPL
and American Capital retained the right “to participate in both
and to direct the Parties’ Joint Counsel with respect to tasks
that are of special concern to SPL and/or [American Capital].”
(Id.).
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
judgments
for
compensatory
damages awarded” in the heparin lawsuits, were “joint costs.”
(Id. ¶ 5.1(b)).
The
Agreement
specified
that
Baxter
was
responsible
for
paying the first $20 million in joint costs, SPL was responsible
for paying the next $15 million, and Baxter was responsible for
paying
all
joint
costs
Baxter
was
entitled
to
exceeding
be
$35
reimbursed
separate Change of Control Agreement.27
27
million,
in
provided
accordance
(Id. ¶ 5.3).
that
with
a
Baxter
Under the change of control agreement, American Capital
agreed to reimburse a portion of the joint defense costs over
$35 million paid by Baxter upon the sale of its interest in SPL.
75
agreed to advance the $15 million to be paid by SPL, and a
reimbursement schedule for SPL to pay Baxter was outlined in the
Agreement.
(Id. ¶ 5.4).
In addition to the $15 million for
joint costs, SPL assigned to Baxter rights from its separate
insurance policies and entered into an exclusive “below market”
supply agreement with Baxter.
(ECF No. 816, at 41:17-42:11; see
also PTX 480 ¶ 4.4; DTX 53; PTX 154).
American Capital and SPL
also assigned to Baxter “the right, title and interest of SPL,
[American Capital] and the SPL Companies in any proceeds or
other
insurance
benefits
that
are
payable,
or
may
become
payable, to them under the primary Commercial General Liability
Policy issued to [American Capital] by The Charter Oak Insurance
Company for the policy year June 14, 2007 to June 14, 2008
(policy no. P-630-5074A126-COF-07) . . . in connection with the
Heparin Litigation[.]”
(PTX 480 ¶ 4.7).
b.
Plaintiffs’ Supplemental Motion for Summary Judgment
In
their
Plaintiffs
supplemental
argued
that
“99%”
motion
of
for
summary
Defendants’
judgment,
damages,
which
included the heparin litigation defense costs, settlements, and
a judgment, “is for the ‘costs of the Agreement,’ for which the
Court has held ‘Plaintiffs are not liable.’”
5 (citing ECF No. 545 at 29, 47)).
(ECF No. 584-1, at
On summary judgment, the
(PTX 153; see also PTX 480 ¶¶ 5.3(iii), 7.1; ECF No. 825, at
55:4-14).
76
court held that, under the voluntary payment provision of the
policies,
“Plaintiffs
are
not
liable
for
the
costs
of
the
Agreement, but Defendants’ entry into the Agreement did not void
the
policies
defend.”
or
relieve
Plaintiffs
of
a
potential
duty
to
(ECF No. 545, at 30 (emphasis added)).
As the court explained in denying the supplemental motion
for summary judgment during the pretrial hearing, the summary
judgment opinion’s language must be interpreted in the context
of the evidence and arguments advanced in the initial motions
for summary judgment.
damages
report
prepared
At that time, Defendants relied on a
by
Mark
Gallagher,
Defendants’ damages using two methods.
which
calculated
One method calculated
“breach of contract” damages by calculating “the sum of all
consideration paid by [American Capital] and SPL (in cash or inkind) to obtain alternative funding for the heparin litigation
in
lieu
of
Plaintiffs.”
the
coverage
that
was
to
be
(ECF No. 510-18, at 9, 23).28
provided
by
the
This calculation
included: invoiced defense costs predating the Agreement; the
$15 million SPL was contractually obligated to pay in joint
costs under the Agreement; defense costs not covered by the
Agreement; the $20 million in-kind payment made by Defendants
28
The other method, which purported to “represent[] damages
due to payments covered under the insurance policies,” summed
defense costs, based on invoices for legal services and
estimates for outstanding invoices, with allegedly covered
settlements and judgments. (ECF No. 510-18, at 14-16, 23).
77
through the assignment of other insurance policies to Baxter;
the $15 million agreed to be paid to Baxter pursuant to the
change of control agreement; and the value of the Agreement’s
exclusivity clause, estimated at more than $37 million, for a
total of $137 million in damages related to the Agreement.
at 16-23).
(Id.
Defendants’ expert opined that these damages “flow
from the Plaintiffs’ breach of the insurance contracts,” because
they represent the “far larger cost” of the replacement coverage
Defendants
were
required
Plaintiffs denied coverage.
to
purchase
from
Baxter
after
(Id. at 9, 24).
It was this calculation of damages that the court rejected
on summary judgment in finding Plaintiffs not liable for the
“costs of the Agreement.”
The court held that, because the
denial of coverage, “and therefore potential breach, did not
occur until January 16, 2009,” “Defendants ‘voluntarily [made] a
payment’ without Plaintiffs’ consent before any alleged breach
occurred.”
(ECF
No.
545,
at
28
(alteration
in
original)).
Therefore, “[t]he Agreement was not the result of Plaintiffs’
alleged breach because no potential breach had yet happened.”
(Id.).
of
Accordingly, Plaintiffs were not liable for the “costs
the
Agreement”
—
that
is,
the
actual
and
in-kind
consideration Defendants paid to enter the Agreement — because
those
costs
were
voluntary
payments,
78
exempted
from
coverage
under the voluntary payment provisions of the policies.29
The
court also held that those costs of the Agreement could not be
used
as
a
measure
of
consequential
damages
for
the
alleged
breach of contract because they predated the alleged breach.
But the court rejected Plaintiffs’ argument that the Agreement
voided the policies and cut off their duty to defend:
“The
Agreement does not, however, void the entire policy because it
is
not
a
breach
of
the
voluntary
payment
provision.
The
provision does not ban voluntary payments, but instead mandates
that the insured, rather than the insurer, cover the cost of
such voluntary payments.”
In
sum,
the
(Id. at 29).
court’s
summary
judgment
holding
was
that
Defendants could not recover from Plaintiffs the consideration
paid for their Agreement with Baxter, not that Defendants could
not recover any damages that also fit the definition of “joint
costs” under the Agreement.
judgment
“costs
order,
of
the
In accordance with the summary
Defendants
have
Agreement”
theory
not
of
sought
damages
recovery,
and
under
as
a
was
discussed at length during trial, any evidence of payments made
by SPL or American Capital to Baxter pursuant to the Agreement
were not considered as evidence of breach of contract damages.
29
The court also held that defense costs incurred before
Plaintiffs’ alleged breach of contract were voluntary payments.
Defendants have withdrawn their claim for those costs.
79
c.
American Capital and SPL Incurred the Heparin
Litigation Expenses
During closing arguments, Plaintiffs’ counsel argued that
American Capital and SPL were not “legally obligated to pay” any
amount
for
litigation
attorneys’
other
–
fees
SPL’s
than
associated
$15
with
million
the
payment
heparin
of
joint
costs, which was a voluntary payment and not recoverable under
the
policies
–
because
Baxter
agreed
defense costs under the Agreement.
to
advance
the
joint
(ECF No. 832, at 54:13-
56:4).
As
previously
noted,
under
Maryland
law,
an
insurer
is
liable for “attorneys’ fees incurred by an insured as a result
of the insurer’s breach of its contractual obligation to defend
the
insured
coverage[.]”
added).
against
a
claim
potentially
within
the
policy’s
Electro Enters., Inc., 287 Md. at 648 (emphasis
Unless otherwise provided by the policies, an insured
is not required to prove that it paid the fees and expenses
itself.
Dutta v. State Farm Ins. Co., 363 Md. 540, 562-63
(2001) (holding that where statute and insurance policy “require
only for expenses to be incurred,” expenses were incurred on the
insured’s behalf when he “received medical treatment and signed
an agreement to pay expenses,” “regardless of whether it is the
insured,
the
maintenance
insured’s
health
organization,
or
insurer,
any
80
other
the
insured’s
collateral
health
source
of
benefits, who ultimately pays the bill”);30 see also Worsham v.
Greenfield, 435 Md. 349, 357 (2013) (collecting cases); Weichert
Co. of Md., Inc. v. Faust, 419 Md. 306, 330-31 (2011) (holding
that “a general obligation to pay for incurred attorney’s fees
refers to those fees incurred on behalf of the prevailing party”
and the fact that the prevailing party “may not be personally
responsible for the payment of the attorney’s fees . . . is not
relevant
fees”
to
our
where
determination
she
had
of
provided
whether
she
‘incurred’
consideration
for
the
her
indemnification (citing Dutta, 363 Md. at 561-62)); (ECF No.
764, at 164-66).
Under
the
terms
of
the
Agreement,
the
joint
defense
expenses were clearly incurred on behalf of American Capital and
SPL.
(See PTX 480 ¶¶ 3.1-3.2).
American Capital and SPL were
obligated to reimburse Baxter for a portion of the expenses
advanced by Baxter under the Agreement (id. ¶¶ 5.3(ii)-(iii),
30
In Dutta, the Court of Appeals found that an insured
incurred medical expenses when he received medical treatment and
signed an agreement to pay for those services, but specifically
noted:
We do not mean to imply that whether an
individual
incurs
expenses
depends
on
whether that individual signed an agreement
to pay. We merely point out that, under the
facts of the case sub judice, petitioner
acknowledged
his
personal
financial
responsibility for the hospital expenses
when he signed the Consent to Treat form.
363 Md. at 557 n.16.
81
5.4), and assigned to Baxter “any proceeds or other insurance
benefits that are payable, or may become payable, to them” under
the 2007 Primary Policy.
defense
expenses,
responsible
for
Had Baxter failed to pay the joint
American
those
Capital
legal
and
expenses,
SPL
as
would
Mr.
have
been
Groskreutz
and
Bowen Slayden Diehl, formerly a managing director of American
Capital and SPL board member, testified.
60:1-7
(“My
understanding
was
that
if,
(ECF Nos. 816, at
for
whatever
reason,
Baxter wasn’t able to pay, that SPL would still be obligated to
pay because we were receiving a service from them, namely, our
defense, and that was a service that provided value to us.
And
we knew that they were doing it, and so we would be obligated to
pay them.”); 823, at 31:2-14 (testifying that American Capital
and SPL jointly retained Kirkland & Ellis to defend them), 32:714 (“[A]s from SPL’s perspective and from American Capital’s
perspective,
you
know,
Kirkland
&
Ellis
was
representing
us
all. . . . So, if someone wasn’t going to make the payment, the
other
people
Moreover,
could
under
absolutely
Weichert,
be
liable
whether
or
for
not
that,
yes.”)).
Defendants
were
themselves liable for the joint defense invoices is not relevant
to
whether
consideration
they
for
incurred
the
the
fees
Agreement,
pursuant
advanced the joint defense expenses.
82
because
to
they
which
provided
Baxter
Defendants have proven
that
they
incurred
the
legal
expenses
that
they
seek
to
recover.31
d.
Motion to Certify Question of Law to Court of Appeals
of Maryland
Following the conclusion of trial, the Court of Appeals of
Maryland issued an opinion in Eastern Shore Title Co. v. Ochse,
__
Md.
__,
2017
WL
2361793
(May
31,
2017),
reconsideration
denied (July 10, 2017), which Plaintiffs argue is controlling
and dispositive of Defendants’ claims for damages.
The parties
filed correspondence with the court regarding this decision (ECF
Nos. 835; 836; 837; 838), and Plaintiffs have filed a motion to
certify a question of law to the Court of Appeals of Maryland
(ECF No. 839).
840),
is
This motion, which Defendants oppose (ECF No.
conditional
upon
whether
Plaintiffs that Ochse is controlling.
does
not,
Plaintiffs
request
the
court
agrees
with
In the event this court
certification
of
the
following
question:
31
Because the court finds that American Capital and SPL
incurred the heparin litigation joint defense expenses, it is
not necessary to determine whether Plaintiffs were liable to
Baxter for the defense costs as SPL’s indemnitee and a thirdparty beneficiary under the policies’ supplementary payments
provisions.
83
When a third party has already paid an
insured’s
defense
costs
pursuant
to
a
settlement
entered
into
without
the
insurer’s prior consent, has the insured
incurred
those
same
defense
costs
for
purposes
of
calculating
the
damages
recoverable from its liability insurer?
(ECF No. 839, at 1).
1)
Eastern Shore Title Co. v. Ochse
Plaintiffs
calculating
argue
damages,
that,
under
attorney’s
Ochse,
fees
“for
and
purposes
costs
were
of
not
‘incurred’ when the plaintiffs had already received payment from
a third party who was also responsible for the same fees and
costs.”
(ECF
No.
835,
at
1).
They
contend
that
American
Capital and SPL cannot have incurred any attorneys’ fees and
costs if the fees and costs were paid by Baxter.
Ochse,
negligence
fees
attorneys’
a
incurred
action,
in
concerned
collateral
the
litigation
award
as
damages
under the collateral litigation doctrine and is inapposite.
court held:
[A]
party
may
recover
attorney’s
fees
actually incurred, as damages, pursuant to
the collateral litigation doctrine, when the
expenses were the proximate result of the
complained-of injury, incurred necessarily
and in good faith, and the amount is
reasonable.
However, the plaintiff has the
burden
in
any
negligence
action
to
demonstrate actual injury.
If a plaintiff
seeks to recover attorney’s fees as damages
pursuant
to
the
collateral
litigation
doctrine,
then
the
plaintiff
must
84
of
The
demonstrate that he or she actually incurred
the attorney’s fees.
Ochse, 2017 WL 2361793, at *19.
The court found that the Ochses
could not recover their collateral litigation attorneys’ fees
under the collateral litigation doctrine where a judgment for
the same fees had been satisfied pursuant to a fee-shifting
provision because the Ochses could not demonstrate that they
“actually
incurred
the
attorney’s
fees,”
or
that
they
were
“incurred necessarily,” as required by the collateral litigation
doctrine in a negligence action.
doctrine
has
no
bearing
on
Id.
the
The collateral litigation
recovery
of
the
heparin
litigation defense expenses sought by Defendants in this breach
of contract action pursuant to the duty to defend, and Ochse is
not relevant to whether those expenses were incurred.
2)
Motion to Certify Question of Law
Although the court does not agree with Plaintiffs as to the
effect of Ochse, Plaintiffs’ motion for certification will be
denied.
A court should certify an issue to the state court
“[o]nly if the available state law is clearly insufficient[.]”
Roe v. Doe, 28 F.3d 404, 407 (4th Cir. 1994).
Plaintiffs chose
to file this action in federal court more than eight years ago.
Throughout
this
lengthy
litigation,
which
included
multiple
dispositive motions and a bench trial, Plaintiffs have never
suggested
that
the
available
85
Maryland
case
law
provided
insufficient guidance for this court to resolve the parties’
dispute.
Indeed, not even in their motion for certification do
they do so; instead, they argue that the recently-decided Ochse
is controlling, and submit certification as an alternative.
If
Plaintiffs disagree with the court’s interpretation of Ochse,
they may raise the issue on appeal to the United States Court of
Appeals for the Fourth Circuit, but that is not a reason to
certify an issue to the state court.
Existing Maryland law on
damages for an insurer’s breach of its contractual obligation to
defend its insured is sufficient here, as discussed above.
See
Lynn v. Monarch Recovery Mgmt., Inc., 953 F.Supp.2d 612, 622
(D.Md.
2013)
(“Certification
is
unnecessary
when
existing
authority permits the court to reach a ‘reasoned and principled
conclusion.’” (quoting Simpson v. Duke Energy Corp., Nos. 981906, 98-1950, 1999 WL 694444, at *3 (4th Cir. 1999))).
Moreover, Plaintiffs’ proposed question appears to raise
issues previously decided by this court as to the effect of the
“settlement entered into without the insurer’s prior consent,”
meaning the Agreement discussed above, and Plaintiffs suggest
that the court may also want to certify a question regarding the
application of Maryland’s eight corners rule.
at 3, 5 n.4).
(ECF No. 839-1,
Again, Plaintiffs may be able to challenge the
court’s prior decisions on appeal to the Fourth Circuit, but it
would
not
be
appropriate
to
invite
86
the
Court
of
Appeals
of
Maryland to opine on those decisions at this time.
Finally, the
parties and the court have expended considerable resources to
resolve
the
issues
in
this
case,
and
“[c]ertification
would
involve an unnecessary ‘imposition on the time and resources of
the [state court]’ and ‘an increase in the expenditure of time
and resources by the parties.’”
Lynn, 953 F.Supp.2d at 622
(alteration in original) (quoting West Am. Ins. Co. v. Bank of
Isle
of
Wight,
Certification
is
673
not
F.Supp.
warranted,
760,
and
764
(E.D.Va.
accordingly,
1987)).
Plaintiffs’
motion will be denied.
3.
Allocation
Finally,
Plaintiffs
contend
that
the
heparin
litigation
expenses must be allocated (1) between covered and uncovered
claims, and (2) between covered and uncovered parties.
The Court of Appeals of Maryland has held that, outside the
conventional
liability
insurance
duty
to
defend
context,
an
“insured has the burden of establishing that a given item of
legal service or expense [for an uncovered claim] was reasonably
related to the defense” of the covered claims.
Baker’s Express,
2012 WL 4370265, at *21 (alteration in original) (quoting Cont’l
Cas. Co. v. Bd. of Educ. of Charles Cty., 302 Md. 516, 536
(1985)).
Where
the
insured’s
claim
is
“a
breach
of
the
contractual duty to defend the entire suit under a policy and
under
a
state
of
facts
like
87
those
presented
in
Brohawn,”
however,
damages
are
measured
“by
defending the entire [] suit.”
the
reasonable
cost
of
Cont’l Cas., 302 Md. at 531.
Attorneys’ fees awarded for breach of a liability policy’s duty
to defend are not allocated between covered and uncovered claims
because, “[u]nder Maryland’s potentiality rule, if ‘any claims
potentially
obligated
come
to
allegations
within
defend
outside
the
all
the
policy
claims
policy’s
coverage,
the
insurer
is
notwithstanding
alternative
coverage,
such
until
times
[sic] . . . that the claims have been limited to ones outside
the policy coverage.’”
(alterations
in
Baker’s Express, 2012 WL 4370265, at *20
original)
(quoting
Utica
Mut.
Ins.
Co.
v.
Miller, 130 Md.App. 373, 383 (2000)).
Defendants’ claims in this case are for a breach of the
contractual duty to defend under commercial general liability
and
excess
liability
policies.
Assuming
arguendo
that
individual heparin complaints alleged both potentially covered
and uncovered claims against American Capital or SPL, Plaintiffs
had a duty to defend the entire heparin suit under the policies,
and allocation of the attorneys’ fees would not be called for
under Maryland law.
Plaintiffs
should
be
argue
extended
to
that
the
require
“reasonably
allocation
related”
of
standard
attorneys’
fees
between covered and uncovered suits, rather than claims within a
suit, and that the court must allocate the heparin litigation
88
defense
costs
Changzhou
between
joint
those
venture
was
suits
the
heparin and those that did not.
which
source
alleged
of
the
that
the
contaminated
This argument is unsound.
Even
if the reasonably related standard was applicable to the duty to
defend under general liability policies like those in this case,
there would be no basis for the court to find that Plaintiffs’
duty to defend was limited to only the joint venture-silent
heparin suits.
As held on summary judgment and as discussed
above, the joint venture exclusion did not relieve Plaintiffs of
their duty to defend the heparin litigation.
At the time the
duty
had
to
defend
crystallized,
heparin
suits
been
filed
against Defendants which were silent as to the source of the
contaminated heparin and therefore clearly alleged potentially
covered claims.32
interrelated
The heparin suits, which not only involved
facts
but
were
consolidated
in
a
multidistrict
litigation and a consolidated state action, had to be considered
collectively.
In
Co.,
Federal
760
Realty
F.Supp.
533
Investment
(D.Md.
Trust
1991),
v.
which,
Pacific
like
Insurance
Continental
Casualty, concerned the award of defense costs under a directors
32
It is not evident that the joint venture exclusion would
have relieved Plaintiffs of their duty to defend even if all of
the heparin suits had alleged that the Changzhou joint venture
was the source of the heparin, particularly in light of the
evidence presented at trial regarding the relationship between
SPL and the Changzhou joint venture, but that question is not
before the court.
89
and officers insurance policy rather than a general liability
policy, the court applied the Continental Casualty allocation
standard to covered and uncovered parties.
Plaintiffs argue,
without identifying particular expenses, that Baxter is not a
covered party, and the fees sought by American Capital and SPL
should be reduced to account for defense costs that were not
reasonably related to their defense.
insufficient
evidence
in
the
They suggest that there is
record
to
allocate
the
defense
costs “among covered and uncovered suits among the parties to
see what work was done for which parties” because “underlying
privileged materials between Baxter and Kirkland & Ellis” were
not produced.
of
defense
called
for
(ECF No. 832, at 66:16-22).
costs
when
between
covered
determining
and
damages
Even if allocation
uncovered
for
a
parties
breach
of
were
the
contractual duty to defend under a general liability policy,
Defendants have shown that the claims against Baxter, SPL, and
American
Capital
were
not
only
reasonably
related
but
inextricably intertwined.
4.
Prejudgment Interest
Defendants seek prejudgment interest under Maryland common
law or a Texas statute as incorporated by the policies.33
The
parties briefed this issue in response to Plaintiffs’ motion in
33
Defendants also sought prejudgment interest at a
statutory rate of 10% under Maryland statutory law with respect
to their lack of good faith claim. (ECF No. 380 ¶ 294).
90
limine
number
Defendants
5,
from
which
seeking
requested
that
prejudgment
the
interest
court
or
either
bar
instruct
the
jury that September 13, 2016, was the earliest possible date on
which prejudgment interest could have begun to accrue.
(ECF No.
655).
Under Maryland common law, there are “three basic rules
governing the allowance of pre-judgment interest.”
Buxton, 363 Md. 634, 656-57 (2001).
Pre-judgment interest is allowable as a
matter of right when “the obligation to pay
and the amount due had become certain,
definite, and liquidated by a specific date
prior to judgment so that the effect of the
debtor’s withholding payment was to deprive
the creditor of the use of a fixed amount as
of a known date.”
First Va. Bank v.
Settles, 322 Md. 555, 564 (1991); State
Highway Admin. v. Kim, 353 Md. 313, 326
(1999); United Cable v. Burch, 354 Md. 658,
668 (1999). As we explained in I.W. Berman
Props. v. Porter Bros., 276 Md. [1,] 16–17
[(1975)], the right to pre-judgment interest
as of course arises under written contracts
to pay money on a day certain, such as bills
of exchange or promissory notes, in actions
on bonds or under contracts providing for
the payment of interest, in cases where the
money claimed has actually been used by the
other party, and in sums payable under
leases as rent.
Pre-judgment interest has
been held a matter of right as well in
conversion cases where the value of the
chattel converted is readily ascertainable.
See Robert C. Herd & Company v. Krawill
Machinery Corp., 256 F.2d 946 (4th Cir.
1958), aff’d, 359 U.S. 297 (1959).
On the other hand, in tort cases where
the recovery is for bodily harm, emotional
91
Buxton v.
distress, or similar intangible elements of
damage not easily susceptible of precise
measurement, the award itself is presumed to
be comprehensive, and pre-judgment interest
is not allowed. In Taylor v. Wahby, 271 Md.
101, 113 (1974), we held that, in a tort
action in which the claim is unliquidated
and not reasonably ascertainable until the
verdict, interest runs from the time of
verdict.
Between these poles of allowance
as of right and absolute non-allowance is a
broad category of contract cases in which
the allowance of pre-judgment interest is
within the discretion of the trier of fact.
See Crystal v. West & Callahan, 328 Md. 318,
343 (1992); I.W. Berman Props. v. Porter
Bros., supra, 276 Md. 1.
Id.
Defendants
argue
that
prejudgment
interest
should
be
awarded as a matter of right because Plaintiffs were obligated
to pay reasonable defense cost invoices as they were issued and
came due and the dates and amounts of these obligations can be
ascertained
Plaintiffs
from
the
argue
that
ascertainable
produced
the
until
invoices.
the
(ECF
amount
at
least
defense
cost
the
due
No.
was
date
invoices
697,
not
on
and
at
3-11).
liquidated
which
or
Defendants
their
damages
calculations to Plaintiffs, and that any common law award of
prejudgment interest therefore would be discretionary.
Defendants are entitled to prejudgment interest as a matter
of right.
The court has found that Plaintiffs had an obligation
to fund the defense of the Defendants in the heparin litigation,
and the costs of that defense were “calculable, and thus fixed
92
and ascertainable,” Harford Cty. v. Saks Fifth Ave. Distribution
Co.,
399
Md.
73,
95
underlying invoices.
n.20
(2007),
as
of
the
dates
of
the
“An unliquidated claim is ‘one, the amount
of which has not been fixed by agreement or cannot be exactly
determined
law.’”
Lodge
by
the
application
of
rules
of
arithmetic
or
of
Balt. Cty. v. Balt. Cty. Fraternal Order of Police,
No.
4,
220
Md.App.
596,
664
(2014)
(quoting
3
Samuel
Williston & Richard A. Lord, A Treatise on the Law of Contracts
§ 7:34 (4th ed. 2008)), aff’d sub nom. Balt. Cty. v. Fraternal
Order of Police, Balt. Cty. Lodge No. 4, 449 Md. 713 (2016).
Here, the costs of the defense Plaintiffs were obligated to fund
can be exactly determined.
Plaintiffs argue that
they
did not know the amount due
until they received the invoices, but that is irrelevant to
whether the amount due was fixed and ascertainable.
See Ash
Grove Cement Co. v. Liberty Mut. Ins. Co., No. 09-00239, 2014 WL
837389, at *20 (D.Or. Mar. 3, 2014), aff’d, 649 F.App’x 585 (9th
Cir.
2016).
Plaintiffs
knew
that
that
defense
costs
were
accruing, and they did not know the specifics of those costs
only because they breached their duty to defend.
“The purpose
of the allowance of prejudgment interest is to compensate the
aggrieved
party
for
the
loss
of
the
use
of
the
principal
liquidated sum found due it and the loss of income from such
funds.”
I. W. Berman Props., 276 Md. at 24.
93
Plaintiffs were
obligated
to
fund
the
heparin
litigation
pendency of the heparin litigation.
defense
during
the
By denying that defense,
Plaintiffs not only deprived their insureds of their defense
costs
but
had
the
use
of
that
amount
and
its
income
for
themselves during the years of litigation that followed.
An
award of prejudgment interest is allowable as a matter of right.
The legal rate of prejudgment interest under Maryland law
is six percent per annum.
Md. Const. Art. III § 57.
Defendants
argue for a rate of eighteen percent under the Texas Insurance
Code section 542.060 because the Primary Policies contain Form IL
TO 16 08 04.
This form states: “Underwriters at The Travelers
Lloyd’s Insurance Company have complied with the laws of the
State
of
Texas
regulating
Lloyd’s
plan
insurance
statutes are hereby made part of this policy.”
TRAV0041484).
the
Texas
and
said
(PTX 163, at
Chapter 941 of the Texas Insurance Code contains
statutes
regulating
Lloyd’s
plan
insurance.
The
“Prompt Payment of Claims” statute under which Defendants seek
prejudgment
542.051-.061.
interest
is
codified
as
Chapter
542,
sections
Because the subchapter applies to “any insurer
authorized to engage in business as an insurance company or to
provide
insurance
in
this
state,
including . . . a
Lloyd’s
plan,” Tex. Ins. Code § 542.052(6), Defendants argue that it too
is
a
“law[]
of
the
State
of
Lloyd’s
plan
insurance” and was incorporated into the Primary Policies.
They
94
Texas
regulating
contend
that
the
parties
have
made
“Texas’s
prompt-payment
requirements and interest rate ‘part of the policy’ terms and
conditions.”
(ECF No. 697, at 16).
Defendants admit they did not plead a claim under the Texas
prompt-payment statute, which is a distinct substantive cause of
action that must be separately pleaded.
See Classic Performance
Cars, Inc. v. Acceptance Indem. Ins. Co., 464 F.Supp.2d 652, 665
n.4 (S.D.Tex. 2006); Int’l Sec. Life Ins. Co. v. Redwine, 481
S.W.2d 792, 793 (Tex. 1972).
Moreover, although the Supreme
Court of Texas has held that the prompt-payment statute can be
applied to an insured’s claim under a defense benefit, “the
insured would have to submit his legal bills to the insurance
company, as received, to mature its rights under the promptpayment statute.”
Lamar Homes, Inc. v. Mid-Continent Cas. Co.,
242 S.W.3d 1, 19 (Tex. 2007).
Instead, Defendants argue that,
if they prevail on their Maryland law claims, then they are
entitled to prejudgment interest at the rate set under the Texas
statute.
(ECF No. 697, at 16).
Defendants’ arguments are unpersuasive.
While the parties
could have made a prejudgment interest rate part of the policy
terms
and
conditions,
they
did
not
do
so
here.
Defendants
cannot cherry-pick the remedy from a substantive state law claim
they have neither pleaded nor proven.
The generic language in
the policy form relating to Texas statutes regulating Lloyd’s
95
plans
is
far
contracted
from
for
an
sufficient
eighteen
evidence
percent
that
prejudgment
the
parties
interest
rate
found in an unmentioned statute.
Accordingly, the court will award Defendants prejudgment
interest calculated at the legal rate of six percent per annum,
accruing
from
the
date
of
each
invoice
until
the
date
of
judgment.
5.
Conclusion
For the foregoing reasons, the court will award breach of
contract damages to American Capital and SPL in the amount of
$62,717,069.00,
plus
prejudgment
interest
calculated
as
described above, for the attorneys’ fees and litigation expenses
they incurred to defend against the heparin litigation between
January 18, 2009, and June 14, 2016.
IV.
The Parties’ Motions in Limine
In advance of trial, the parties filed motions in limine,
many
of
which
were
February 28, 2017.
more
than
entirely
[]
resolved
a
(ECF No. 764).
preliminary
within
at
the
or
pretrial
of
held
on
The court’s rulings were “no
advisory
discretion
hearing
the
opinion[s]
that
district
court.
[fell]
The
primary purpose of an in limine ruling is to streamline the case
for
trial
and
to
provide
evidentiary issues.”
554, 558 (D.Md. 2001).
guidance
to
counsel
regarding
Adams v. NVR Homes, Inc., 141 F.Supp.2d
Some motions constituted objections to
96
proposed evidence and were reserved for further discussion at
trial.
Many of those and other objections were raised during
trial and resolved.
Other objections were not made or renewed
at trial and are waived.
A few evidentiary objections remained
at the conclusion of trial.
have
not
been
addressed
To the extent that those objections
above,
they
rulings announced in this opinion.
are
not
germane
to
the
Accordingly, to the extent
any pending motions or objections remain, they are denied as
moot.
V.
The Parties’ Motions to Seal
There are 65 pending and uncontested motions to seal.
As
ordered at the pretrial motions hearing on February 28, 2017,
the motions to seal related to the motions in limine will be
granted.
(ECF No. 764, at 170).
The court found that there
were specific factual representations to justify the sealing and
no
alternative
to
sealing
that
would
provide
protection, in accordance with Local Rule 105.11.
sufficient
The parties
have also filed three uncontested motions to seal the briefing
and
exhibits
related
to
judgment (ECF No. 584).
finds
that
there
are
the
supplemental
motion
(ECF Nos. 585; 616; 652).
sufficient
factual
for
summary
The court
representations
to
justify the sealing and no alternative to sealing that would
provide
sufficient
protection,
in
accordance
with
Local
105.11, and the parties’ motions to seal will be granted.
97
Rule
VI.
Conclusion
For
the
foregoing
reasons,
judgment
will
be
entered
in
favor of Defendants/Counter-Plaintiffs American Capital and SPL
on
some
of
their
breach
of
contract
rescission and reformation claims.
counterclaims
and
the
Judgment will be entered in
favor of Plaintiffs/Counter-Defendants Charter Oak and Travelers
on the lack of good faith and promissory fraud counterclaims.
The declaratory judgment claim of the Second Amended Complaint
and the declaratory judgment counterclaims of the Third Amended
Counterclaims
will
be
dismissed.
The
motion
to
certify
a
question of law to the Court of Appeals of Maryland filed by
Plaintiffs/Counter-Defendants Charter Oak and Travelers will be
denied.
The parties’ motions to seal will be granted, and the
motions in limine, Plaintiffs’ motion to strike the jury demand,
and any other outstanding motions will be denied as moot.
separate order will follow.
/s/
DEBORAH K. CHASANOW
United States District Judge
98
A
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