U.S. Specialty Insurance Company v. Catalent, Inc.

Filing 45

OPINION AND ORDER....USSICs October 28 motion for judgment on the pleadings is granted. The Clerk of Court shall enter judgment for the plaintiff and close the case. (Signed by Judge Denise L. Cote on 2/24/2017) (gr)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
U.S. SPECIALITY INSURANCE COMPANY,
:
:
Plaintiff,
:
:
-v:
:
CATALENT, INC.,
:
Defendant.
:
:
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16cv4414 (DLC)
OPINION AND ORDER

APPEARANCES:
For the Plaintiff:
Jeffrey S. Weinstein
Emilie Bakal-Caplan
Sara F. Lilling
Mound Cotton Wollan & Greengrass LLP
One New York Plaza, 44th Floor
New York, NY 10004-1486
For the Defendant:
Elizabeth A. Edmondson
Jenner & Block LLP
919 Third Avenue
New York, NY 10022-3908
John H. Mathias, Jr.
David M. Kroeger
Jenner & Block LLP
353 N. Clark Street
Chicago, IL 60654
DENISE COTE, District Judge:
This declaratory judgment action arises out of an insurance
claim filed by the defendant Catalent, Inc. (“Catalent”) for
financial losses it sustained during a government-mandated
suspension of manufacturing at Catalent’s softgel manufacturing
facility in Beinheim, France.

A five month suspension of

operations followed the discovery of softgel capsules “out-ofplace” in the manufacturing facility.

U.S. Specialty Insurance

Company (“USSIC”) denied coverage and filed the instant action
seeking a declaration that there is no coverage under the
insurance policy (the “Policy”).
The parties have cross-moved under Rule 12(c) for judgment
on the pleadings based on their competing readings of the Policy
terms.

They agree that the financial damage to Catalent caused

by the suspension of manufacturing is not a defined “LOSS” under
the Policy.

Catalent, however, proffers several arguments in

favor of finding coverage.

For the reasons that follow, USSIC’s

motion is granted.
Background
USSIC issued a “Special Coverages Policy” to Catalent
effective June 9, 2014 to June 30, 2017.

On January 4, 2016,

Catalent submitted an initial notification of a claim under the
Policy for business interruption losses.
Events Leading to Suspension of Operations
Between January and October of 2015, 1 Catalent’s
The parties disagree in their pleadings as to the exact
timeline during which the “out-of-place” capsules were
discovered. USSIC alleges several instances between January and
November 2015 based on a report from the National Agency for the
Safety of Medicines and Health Products. Catalent alleges that
it discovered several instances of “out-of-place” capsules on or
about July 2015 and October 2015.
1

2

manufacturing facility in Beinhem, France detected several
instances of “out-of-place” capsules during the execution of its
quality control procedures, 2 including incidents in which a
capsule from one batch of product was found in another product
batch, as well as instances of capsules found on an empty shelf
or the floor.

In particular, Andriol capsules, 3 which are

normally processed on a dedicated line, were found in groupings
of other capsules.

Catalent concluded that the incidents could

be due to deliberate, malicious acts.

Because of the

contaminations, the National Agency for the Safety of Medicines
and Health Products (“ANSM”), the primary French pharmaceutical
regulatory agency, suspended operations at Catalent’s
manufacturing facility on November 13, 2015.
The parties disagree as to whether ANSM concluded that these
contaminations could be considered malicious in nature or were
malicious in nature.

The person or persons that may have caused

the contaminations have not been identified.

ANSM lifted the

suspension on manufacturing on April 28, 2016.
Catalent sustained losses in excess of $10,000,000 related
to the five-month suspension in manufacturing.
2

Catalent never

The “out-of-place” capsules were removed prior to distribution.

Andriol is the brand name for a drug used to replace
testosterone in males who have conditions caused by low
testosterone levels.
3

3

received a written or oral demand for money related to the
contamination and admits that it has not identified a “sum of
monies or the monetary value of any other consideration
surrendered by or on behalf of the INSURED as an extortion
payment” arising from these events.
The Policy
The Policy is organized into three sections.

Section I

includes a Declarations page and several endorsements that add
coverage to the Policy.

The Declarations page states that

“insurance afforded is only with respect to such of the hazard
parts and coverages indicated below.”
Applicable: 1, 2, 3, 4.”
Loss” is $10,000,000.

Below is listed: “Hazard

The “Limit of Liability” for “Each

Section I also contains Endorsements 5 &

6, which amend Section III, paragraph 6, and are described below.
Section II, titled “LOSS DEFINED AND SCOPE OF COVERAGE,”
begins with a preamble:
The Company hereby agrees, subject to the terms,
limitations and conditions set forth herein, to
indemnify the Named Insured specified in Item 1 of the
Declarations for LOSS (as hereinafter defined):
Section II then sets out descriptions of Hazards 1, 2, and 3,
which are for “Kidnap/Ransom,” “Extortion Bodily Injury,” and
“Detention,” respectively.

The following paragraph defines

“LOSS” for Hazards 1 and 2, and separately for Hazard 3. 4
4

The

The subsection titled “DEFINITION OF LOSS” reads “[f]or the
4

next page, titled “EXTORTION PROPERTY DAMAGE,” sets out Hazard 4.
It is Hazard 4 that is at issue here.
Hazard 4 covers extortion payments.

It reads:

DESCRIPTION OF HAZARD 4
Hazard 4. Extortion Property Damage:
by reason of the receipt of a threat, communicated directly
or indirectly to the INSURED to cause physical damage
or loss to PROPERTY, 5 including:
(1)

the pollution, contamination or alteration of stock
and/or raw materials and/or finished goods, or

. . .
(4)

the production of publicity that the Named Insured’s
products will be or have been contaminated, polluted or
altered by persons who demand payment as a condition
for not carrying out such a threat;

provided always that:
(b)

such threat is first made during the period
of this Policy, and

(c)

the threat is made specifically against the
INSURED and

(d)

at the time of the threat, such money or
other consideration is not being carried by,

purpose of Hazard 1 and 2, LOSS means the sum of monies or the
monetary value of any other consideration surrendered by, or on
behalf of the INSURED as a ransom or extortion payment arising
from one event or connected series of events involving one or
more Insured Persons, RELATIVES OR GUESTS. For the purpose of
Hazard 3, LOSS means the SALARIES and COSTS resulting from the
DETENTION of an Insured Person, RELATIVE OR GUEST.”
PROPERTY is defined in the Policy as “all real and personal
property owned, controlled or leased by the INSURED or for which
the INSURED is legally liable including fixtures, fittings,
machinery and electronic data processing equipment and other
contents.”
5

5

transported by, or otherwise in the
possession of, the Insured Person, RELATIVE
or GUEST so threatened, or is not on the
premises where the threat first occurred.
. . .
DEFINITION OF LOSS
For the purpose of Hazard 4, LOSS means the sum of monies or
the monetary value of any other consideration surrendered by
or on behalf of the Insured as an extortion payment arising
from one event or connected series of events.
(Emphasis supplied.)
Section III, titled “ADDITIONAL COVERAGE,” identifies those
circumstances under which additional sums are to be paid in the
event an incident is covered by one of the four Hazards.

It

begins with a preamble:
The Company shall indemnify the INSURED for the
following expenses (Items 1-7) incurred directly and
solely as a result of an incident covered by any of the
Hazards as shown in Item 3 of the Declarations. 6
(Emphasis supplied.)

Following the preamble are seven types of

expenses.
The sixth paragraph, titled “Other Expenses,” reads:
Other Expenses: any other reasonable expenses incurred
by the INSURED in investigating or paying a LOSS
covered by this Policy, including but not limited to:
Beneath “Other Expenses” are letters (a)-(j).
Section I amends this list to include (k):

6

The Hazards listed in Item 3 are Hazards 1-4.
6

Endorsement 5 in

[T]he loss of EARNINGS 7 . . . resulting from the
necessary interruption of business, caused directly and
solely by an incident covered by any of the Hazards . .
. up to 120 consecutive days, commencing 6 hours after
the actual interruption of EARNINGS up to a maximum
Limit of Liability of $10,000,000. any one LOSS. [sic]
(Emphasis supplied.)

Endorsement 6 of Section I “extend[s]”

Endorsement 5 to
[i]nclude the actual loss of EARNINGS sustained by the
Named Insured solely and directly as the result of an
order by a civil authority to cease, wholly or in part,
the Named Insured’s business as a result of an
extortion threat to damage property contiguous to the
Named Insured’s premises.
Procedural History
In its June 13, 2016 complaint, USSIC brings three causes of
action, seeking a declaratory judgment that: (1) there is no
coverage under the Policy because Catalent has not established
that Hazard 4, an “EXTORTION PROPERTY DAMAGE,” has occurred; (2)
there is no “LOSS” as defined under Hazard 4, which requires an
extortion payment; and (3) there is no coverage for “Other
Expenses” under Section III of the Policy, because coverage under
Section II is a necessary trigger to coverage under Section III.
Catalent answered on July 20 and filed a counterclaim alleging a
breach of contract for failure and refusal to indemnify Catalent
for its business interruption loss.

USSIC answered the

“EARNINGS” is defined in Endorsement 5 as “net profit plus
payroll expenses, taxes, interest, rents and all other operating
expenses earned and uncured by the business.”
7

7

counterclaim on August 13 and moved for judgment on the pleadings
on October 7.

Catalent cross-moved on October 28.

The motions

became fully submitted on November 21.
Discussion
A judgment on the pleadings pursuant to Rule 12(c) is
“appropriate where material facts are undisputed and where a
judgment on the merits is possible merely by considering the
contents of the pleadings.”

Sellers v. M.C. Floor Crafters,

Inc., 842 F.2d 639, 642 (2d Cir. 1988).

In deciding such a

motion, the court may consider the facts alleged in the complaint
as well as “any written instrument attached to the complaint as
an exhibit or any statements or documents incorporated in it by
reference.”

Stratte-McClure v. Morgan Stanley, 776 F.3d 94, 100

(2d Cir. 2015) (citation omitted).
When deciding a Rule 12(c) motion, “we employ the same
standard applicable to dismissals pursuant to Fed. R. Civ. P.
12(b)(6).”

Hayden v. Paterson, 594 F.3d 150, 160 (2d Cir. 2010).

Thus, the court must “accept all allegations in the complaint as
true and draw all inferences in the non-moving party’s favor.”
LaFaro v. New York Cardiothoracic Grp., PLLC, 570 F.3d 471, 475
(2d Cir. 2009) (citation omitted).

“To survive a motion to

dismiss under Rule 12(b)(6), a complaint must allege sufficient
facts which, taken as true, state a plausible claim for relief.”
Keiler v. Harlequin Enterprises Ltd., 751 F.3d 64, 68 (2d Cir.
8

2014); see Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

A claim

has facial plausibility when “the factual content” of the
complaint “allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged.”

Tongue v.

Sanofi, 816 F.3d 199, 209 (2d Cir. 2016) (citation omitted).

At

the same time, “conclusory allegations or legal conclusions
masquerading as factual conclusions will not suffice to defeat a
motion to dismiss.”

Achtman v. Kirby, McInerney & Squire, LLP,

464 F.3d 328, 337 (2d Cir. 2006) (citation omitted).
While the Policy does not contain a choice of law provision,
the parties agree that the Court should apply New York law for
purposes of this motion.

Under New York law, insurance contracts

are interpreted “to give effect to the intent of the parties as
expressed in the clear language of the contract.”

Ment Bros.

Iron Works Co., Inc. v. Interstate Fire & Cas. Co., 702 F.3d 118,
122 (2d Cir. 2012) (citation omitted).

The court should read the

integrated contract as a whole in order to determine whether
ambiguities exist, and to ensure that undue emphasis is not
placed upon particular words and phrases.

L. Debenture Trust Co.

of New York v. Maverick Tube Corp., 595 F.3d 458, 468 (2d Cir.
2010).

“Generally, it is for the insured to establish coverage

and for the insurer to prove that an exclusion in the policy
applies to defeat coverage.”

Consol. Edison Co. of N.Y. v.

Allstate Ins. Co., 98 N.Y.2d 208, 218 (2002).
9

Section II of the Policy indemnifies Catalent for a “LOSS”
as defined by each Hazard.
“EXTORTION PROPERTY DAMAGE.”

The only relevant Hazard is Hazard 4,
The elements of a claim under

Hazard 4 are (1) a threat 8 (2) of damage to property and (3) an
extortion payment. 9
The parties agree that no “Extortion Property Damage” or
“LOSS” as defined in Hazard 4 of the Policy has occurred.

USSIC

contends there is no coverage under the Policy without “Extortion
Property Damage” or “LOSS.”

Catalent argues that coverage exists

because Section III is an independent and “separate insuring
agreement.” 10
The “Other Expenses” provisions under Section III of the
USSIC argues that the Court should decide on the pleadings that
the misplaced capsules, by themselves, cannot constitute a
threat. The Policy does not define “threat,” but USSIC argues
from a definition of the word threat, that misplacement alone
does not suffice, because a threat reflects an intent to inflict
harm in the future. The facts interpreted most favorably to
Catalent demonstrate repeated instances of maliciously misplaced
capsules. Catalent has plausibly alleged through its pleadings
that this could constitute a threat communicated by conduct, for
example, to continue to contaminate Catalent’s production lines.
Because Catalent is not entitled to coverage for other reasons,
however, this question is immaterial.
8

Moreover, the definition of “LOSS” specific to Hazard 4
requires an extortion payment, which the parties agree has not
been made.
9

Catalent moves as to Counts II and III, but not Count I, which
regards ultimate coverage under the Policy, because it
acknowledges that the issue as to whether the “out-of-place”
capsules constituted a “threat” is a mixed question of law and
fact that cannot be resolved at this stage.
10

10

Policy do not provide a basis for coverage in the absence of
coverage under Hazard 4.

While Section III of the Policy

provides “additional coverage” for certain expenses, including
business interruption expenses, that coverage is only available
if the elements of a claim for a Hazard 4 “LOSS” are present.
This limitation is unambiguous.

It appears in the preamble to

Section III and in the other relevant provisions in Section III.
For example, the expenses listed in paragraph 6, which is titled
“Other Expenses,” together with Endorsements 5 and 6 to the
Policy, provide coverage for “reasonable expenses incurred by the
INSURED in investigating or paying a LOSS” such as “the loss of
EARNINGS . . . resulting from the necessary interruption of
business,” but limits coverage to a “loss of EARNINGS . . .
caused directly and solely by an incident covered by any of the
Hazards.”

(Emphasis supplied.)

Thus, the plain language of the Policy is unambiguous that
coverage for these additional expenses is predicated on the
existence of an event that qualifies as a Hazard 4 event.
Catalent is therefore not entitled to coverage.
Catalent makes a litany of arguments, none of which succeed
in overcoming the unambiguous Policy language that restricts
coverage for extortion to those instances in which a payment due
to the extortion was made.

The most prominent of Catalent’s

arguments are addressed below.
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Catalent argues that Section II (which defines “LOSS”) and
Section III (which defines other covered expenses) must be
independent because the Policy refers to a “LOSS” and other
expenses separately in setting forth the time by which a claim
must be submitted.

The Policy provides that “[w]ritten proof of

LOSS and/or expense claim must be furnished to [USSIC] within
ninety (90) days after the date of such LOSS and/or expense
payment.”

Catalent reasons from this that an expense claim must

be an allowable claim that is independent of a “LOSS” claim.
This notice provision merely provides the time period to submit a
claim.

It does not override the unambiguous language in the

Policy regarding the scope of coverage.
Catalent also argues that Section III applies to an
“incident covered by any of the Hazards shown in Item 3 of the
Declarations,” not an incident covered by Section II.
distinction without a difference.

This is a

Item 3 lists the “Hazard[s]

Applicable” as only Hazards “1, 2, 3, 4.”

As described above,

without a payment due to an extortionate threat, Catalent has not
experienced Hazard 4.

Additionally, the category of “Other

Expenses” requires that the expenses be incurred in
“‘investigating’ or ‘paying’ a ‘LOSS.’”

It is also undisputed

that no “LOSS,” as defined in the Policy, exists here.
Catalent makes various arguments to the effect that the
“loss of EARNINGS” coverage is an enumerated expense, and so it
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need not conform to the general limitations of the Policy that
the incident be covered by a Hazard.

This argument must fail.

A

specific subcategory of coverage cannot expand the overall
coverage of the Policy.
Catalent argues as well that because it has advanced a
reasonable construction of the Policy, it is entitled to judgment
on the pleadings.

It is true that, where an insurance contract

is ambiguous, the ambiguity must be construed against the
insurer.

Dalton v. Harleysville Worcester Mut. Ins. Co., 557

F.3d 88, 93 (2d Cir. 2009).

Here, however, the Policy is

unambiguous.
Conclusion
USSIC’s October 28 motion for judgment on the pleadings is
granted.

The Clerk of Court shall enter judgment for the

plaintiff and close the case.
Dated:

New York, New York
February 24, 2017

__________________________________
DENISE COTE
United States District Judge

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