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Steadfast Ins v. Purdue Frederick

Connecticut Superior Court, Judicial District of Stamford-Norwalk Complex Litigation Docket at Stamford
Sep 1, 2004
2004 Ct. Sup. 13127 (Conn. Super. Ct. 2004)

Opinion

No. X08 CV 02 0191697 S

September 1, 2004


MEMORANDUM OF DECISION RE MOTION FOR PARTIAL SUMMARY JUDGMENT (164.00)


Steadfast Insurance Company (Steadfast) commenced this lawsuit in 2002 seeking, inter alia, certain declaratory relief on issues that arise out of a products/completed operations liability insurance binder it issued to The Purdue Frederick Company (Purdue) covering the period October 1, 2000 to October 1, 2001.

Specifically, by the motion under consideration, Steadfast seeks a declaration that its payment of $2,000,000, to Purdue has exhausted the binder's liability limits and that Steadfast owes no further duties or obligations to Purdue.

Steadfast has filed two motions for partial summary judgment. In addition to the motion which is the subject of this memorandum (164.00) a second motion, relating to Purdue's rights to select counsel, is pending before the court.

I. Background

This lawsuit and related cases arose out of a large number of civil actions, including putative class action claims, against Purdue which were filed beginning in April 2001, alleging that the ingestion of Purdue's pharmaceutical product, OxyContin, caused injuries and death. Additional claims and lawsuits have been filed against another pharmaceutical company, Abbott Laboratories, Inc. (Abbott) which, by means of a Co-Promotion Agreement with Purdue, has marketed and promoted OxyContin. Abbott has claimed indemnification from Purdue for its defense costs related to these suits and claims, pursuant to the Co-Promotion Agreement. The court refers to the law suits against Purdue and Abbott collectively as the OxyContin cases.

Purdue and Abbott have defended the various law suits against them vigorously. It appears undisputed that in the OxyContin cases no judgments have been entered against Purdue or Abbott and no settlements agreed to. Thus neither Purdue nor Abbott have been held liable and no money damage awards have been entered against them. In so doing Purdue and Abbott have incurred very significant litigation defense costs including attorneys fees, which Purdue represents to be in excess of $250 million.

Apparently, no actual insurance policy was ever issued by Steadfast to Purdue. However, it is undisputed that the Casualty Coverage Binder (Binder) issued by Steadfast makes reference to Products/Completed Operations Liability Coverage Form number CG 00 38 10 93 (Coverage Form). The Binder is subject to an aggregate limit of $2 million with a deductible of $250,000. The Insuring Agreement portion of the Coverage Form Insuring Agreement reads as follows.

The Coverage Form is copyrighted by the Insurance Services Office, Inc. (ISO) which provides suggested insurance policy language and forms to insurers.

1. Insuring Agreement.

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of "bodily injury" or" property damage" included within the "products-completed operations hazard" to which this insurance applies. We will have the right and duty to defend any "suit" seeking those damages. We may at our discretion investigate any "occurrence" and settle any claim or "suit" that may result. But:

(1) The amount we will pay for damages is limited as described in LIMITS OF INSURANCE (Section III); and

(2) Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements.

In the Co-Promotion Agreement between Purdue and Abbott, Purdue agreed to indemnify and hold Abbott harmless from and against "all suits, claims, liabilities . . . (including, but not limited to, legal expenses) incurred in connection with [OxyContin]." Both Steadfast and Purdue agree that for the purposes of this motion that the Co-Promotion Agreement is an "insured contract" under the "Exclusions" set forth in the Coverage Form. The relevant Exclusion reads as follows.

This insurance does not apply to:

. . .

b. Contractual Liability.

Bodily injury or "property damage" for which the insured is obligated to pay damages by reason of the assumptions of liability in a contract or agreement. This exclusion does not apply to liability for damages:

(1) Assumed in a contract or agreement that is an "insured contract" [provided the injury or damage occurred after the contract was executed].

Abbott, in a letter dated July 24, 2001, sought payment from Purdue for its defense costs arising from the OxyContin cases. The Abbott defense bills were forwarded by Purdue to Steadfast. On June 4, 2002 Steadfast had received over $2 million in defense attorneys' invoices from Purdue and Abbott. On June 24, 2002 Steadfast sent Purdue a check in the amount of $2 million claiming that this payment represented the full indemnity limit under the Coverage Form and stating that its obligation to indemnify and defend Purdue had been exhausted. This law suit was commenced thereafter. Steadfast has not cashed the check.

In the operative complaint Steadfast seeks a declaratory judgment as to its and Purdue's rights and obligations under the Binder. Among other things Steadfast asserts that its obligation under the Binder have been exhausted. In its Fourth and Fifth Counterclaims Purdue, for its part, seeks declaration that Steadfast has a duty to pay the costs of defending the OxyContin cases until the policy indemnity limits have been exhausted and that Steadfast has a continuing duty to indemnify Purdue for any judgments and settlements in the OxyContin cases. Steadfast has moved for partial summary judgment dismissing these counterclaims.

II. Summary Judgment Motion and Standard of Review

Steadfast has moved for partial summary judgment declaring that it has no obligation to pay any further amounts in connection with the OxyContin cases due to the exhaustion of the aggregate limit of liability contained in the Binder. Specifically, Steadfast contends that its payment to Purdue for its and Abbott's defense costs is an indemnity payment which exhausts the indemnification limit of $2 million under the Binder. Steadfast contends that the defense costs which Purdue was obligated to pay because of the Co-Promotion Agreement are "sums that the insured [Purdue] becomes obligated to pay as damages" as set forth in the insuring agreement contained in the Coverage Form.

Summary judgment shall be rendered if the pleadings, affidavits and other proof show there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Practice Book § 17-49. A genuine issue as to a material fact requires more than just an assertion that there is a triable issue; it requires an evidentiary foundation. Appleton v. Board of Education, 254 Conn. 205, 209 (2000). A fact is material when its existence or not would make a difference in the result of a case. Union Oil Co. v. Urban Development Commission, 158 Conn. 364, 378 (1969). The party seeking summary judgment has the burden of proving the absence of any genuine issue as to a material fact. Appleton v. Board of Education, supra. In deciding a summary judgment motion the trial court must view the evidence in the light most favorable to the non-moving party. Id. Finally, the trial court, in the context of a summary judgment motion, may not decide issues of material fact but only determine whether such genuine issues exist. Nolan v. Borkowski, 206 Conn. 495, 500 (1988).

III. Discussion

Indemnity payments by an insurance company are distinct from its payment of defense costs. The former arise from the insurer's obligation to indemnify the insured for losses which are covered by the obligation undertaken in the coverage provisions of the insurance contract. The latter arise through the insurer's duty to defend the insured in litigation related to the losses. These two obligations and duties are spelled out in the first two sentences of the insuring agreement contained in Coverage Form CG 00 38 10 93 quoted above; i.e. "We will pay those sums that the insured becomes legally obligated to pay as damages . . ." and "We will have the right and duty to defend any `suit' seeking these damages."

The Connecticut Supreme Court has consistently and regularly recognized that an insurer's duty to defend is distinct from its duty to indemnify and that the duty to defend is considerably broader than the duty to indemnify. See e.g. DaCruz v. State Farm Fire and Casualty Co., 268 Conn. 675, 687-88 (2004); Smedley Co. v. Employers Mutual Liability Ins. Co., 143 Conn. 510, 516-17 (1956). Generally, the two obligations are treated separately in an insurance policy, and costs incurred by an insurer in fulfilling its duty to defend are a separate obligation unaffected by the indemnity limitation, unless otherwise set forth in the policy. That is the case here where the Coverage Form states that the duty to defend will "end" when the applicable limit of insurance has been "used up" by the "payment of judgments or settlements."

A. Steadfast Arguments

The major thrust of Steadfast's motion is based upon its agreement in the Binder to "pay those sums that [Purdue] becomes legally obligated to pay as damages because of `bodily injury' or `property damage' . . ." Steadfast contends that Purdue's agreement to pay Abbott's defense costs was based on Purdue's legal obligation to Abbott under the Co-Promotion Agreement. Therefore, according to Steadfast, its payment of $2 million to Purdue for Abbott's defense costs is an indemnity payment which reduces, and in this case exhausts, the $2 million limit of Steadfast's indemnity liability under the Binder.

In support of its position Steadfast argues that numerous cases have held that payment of an indemnitee's defense costs, such as those of Abbott, constitute "damages" to the insured and therefore Steadfast's reimbursement to Purdue of these costs are payment of damages which exhausts the liability limit of the Binder.

Opposing the Steadfast motion Purdue contends that Abbott is an additional insured under the vendors endorsement to the Binder. Second, Purdue contends that the plain language of the Binder obligates Steadfast to pay Abbott's defense costs under its duty to defend.

All parties appear to agree that there are no controlling Connecticut cases on the subject of whether an indemnitee's defense costs are considered damages. Steadfast points to several out of state cases on the issue. In R.W. Beck Assoc. v. City and Borough of Sitka, 27 F.3d 1475 (9th Cir. 1994), a federal court of appeals, applying Alaska law, dealt with the issue of whether attorneys fees incurred by a contractual indemnitee in defending a wrongful death action against it, and quoted with approval from the district court decision that such costs and fees "are more properly characterized as `damages' which fall within the $500,000 limits [of the primary insurance policies]" Id., 1484. The Ninth Circuit went on to say: "This liability to [the indemnitor-insured] is best characterized as `damages' suffered by [the indemnitee] because of breach of the indemnity agreement." Id., 1485. The "breach" was by the indemnitor (Sitka) who apparently had not defended nor paid the defense costs of the indemnitee (Beck) and indeed had sought indemnification from Beck. Id. 1478.

In Barton Protective Services, Inc. v. Coverx Corp., 615 So.2d 438 (La.App. 4 Cir. 1993) the court held that Barton, a security guard company, was entitled to be reimbursed by its insurer for attorneys fees incurred by Barton in defending a suit against Folger Coffee Company which Barton was contractually required to defend. The court held that such fees were "damages because of bodily injury" since the suit against Folgers arose from a rape of one of Barton's employees on Folger's premises which was settled. The court did not discuss, because it did not have to, the issue of whether Barton's insurer would be obligated to pay if the employee's suit had not been successful, and no injury established. The Barton court relied on an earlier decision Kelloch v. SH Subwater Salvage, Inc., 397 F.Sup. 742 (E.D.La. 1973), which similarly involved a successful lawsuit against an indemnitee.

A California case recently held that an indemnitee's defense costs are considered damages. In Golden Eagle Insurance Co. v. Insurance Co. of the West, 99 Cal.App.4th 837, 121 Cal.Rptr.2d 682 (2002). The court appeared to rely on the fact that the indemnitor had breached the indemnity agreement saying "it is established that the indemnitee's attorney fees constitute an item of damages for the indemnitor's breach." 99 Cal.App at 852, 121 Cal.Rptr. at 691. In this respect it was influenced by the Beck case. The Golden Eagle court appears also to have relied on an insurance industry bulletin which allegedly favored insureds and a newer form of the CGL form which is markedly different than the form at issue in this case. See discussion, infra.

The court is not persuaded by these cases primarily because they do not deal precisely with the issues contested by Steadfast and Purdue. As noted, at least two involved circumstances where an indemnitor had breached the obligation to indemnify or the duty to defend, a situation not present in this case where Purdue has, to date, sought to comply fully with its obligations under the Co-Promotion Agreement. Additionally, several of the decisions were guided by rules of contract construction which were explicitly stated to favor interpretation expanding insurance coverage in favor of the insured. See e.g. Barton, 615 So.2d at 441; Golden Eagle, 99 Cal.App. at 848, 852, 121 Cal.Rptr. at 688, 692. Unlike the cases above the insurer here, Steadfast, seeks an expansive definition of damages in the indemnity provision so as to avoid the more expensive result under its duty to defend obligation.

C. Purdue Arguments — Additional Insured

In opposing the Steadfast motion, Purdue contends that Abbott's defense costs are payable by Steadfast under its duty to defend because Abbott is an additional insured party under the Binder pursuant to an "Additional Insured-Vendors" endorsement. That endorsement reads:

Who is an insured (Section II) is amended to include as an insured any person or organization (referred to below as vendor) shown in the Schedule, but only with respect to" bodily injury" or "property damage" arising out of "your products" shown in the Schedule which are distributed or sold in the regular course of the vendor's business . . .

The Co-Promotion Agreement called for Abbott to perform promotional efforts on behalf of OxyContin. These included sales presentations, maintenance of a sales force to promote OxyContin and best efforts to obtain sales of the product. Abbott's promotional efforts were sales presentations to anesthesiologists, surgeons, hospitals, acute care facilities and ambulatory care facilities. Abbott was to provide incentives such as additional compensation or prizes to its agents for achieving sales volume goals, and Purdue agreed to pay Abbott a substantial commission on net sales.

The word "vendor" is not defined in the Binder. Most standard dictionaries define vendor as seller or one who sells. See Webster's Ninth New Collegiate Dictionary; The Random House Dictionary 2d Ed. Unabridged; Black's Law Dictionary (8th ed.). The verb sell includes the meaning to persuade or induce someone to buy ( Random House Unabridged) and to influence or induce to make a purchase ( Webster's Ninth New Collegiate). The activities of Abbott under the Co-Promotion Agreement perhaps would fall within these latter definitions.

Steadfast objects strenuously to this contention pointing out first that Purdue has advanced it for the first time in its papers opposing summary judgment in April 2004 and that Abbott has never claimed to be an additional insured under the Binder. Steadfast has also produced evidence in the form of affidavits submitted by Abbott while defending itself in some of the OxyContin cases. One such affidavit, by Gerald Eichorn, a National Sales Director of Abbott states:

Abbott is not and has not been at any time a manufacturer, packager, distributor, supplier or seller of OxyContin. Abbott did not develop this medication, design, formulate, undertake clinical trials, or present any application for approval to the Food and Drug Administration for this medication. Abbott did not prepare the label, submit the label to the FDA or interact with the FDA with respect to this medication. Abbott has not ever been part of the chain of distribution by which OxyContin leaves the manufacturer and is distributed to the pharmacies which actually dispense the medication pursuant to prescription. Abbott has never bought or sold OxyContin.

Abbott's role with respect to OxyContin has been the limited one of co-promoting OxyContin to specific categories of physicians and hospitals such as orthopedic surgeons and anesthesiologists, pursuant to Abbott's written contract with Purdue.

The court concludes there are unresolved material facts relevant to the proper determination of whether Abbott would fall within the definition of an additional insured under the Steadfast Binder. Among these undeveloped facts are exactly what Abbott sales representatives did to promote OxyContin. The Co-Promotion Agreement includes a requirement (Art. 1.2) that Abbott seek to have hospital "purchasing personnel" list OxyContin on their institution's "formulary." A hospital formulary is a compilation of approved pharmaceuticals reflecting the current clinical judgment of the hospital medical staff to be so listed makes it almost certain that the product would be sold (by prescription) within that hospital, and the failure to be listed makes it highly unlikely such a sale would occur. Another issue is whether Steadfast itself may have concluded Abbott was an additional insured but backed away from that interpretation at a later date. Finally, there is the argument, unbriefed so far, as to whether Purdue has the requisite standing to assert that Abbott is an additional insured.

Despite the fulsome affidavits and exhibits submitted for and against this motion there are genuine issues as to the above questions and therefore summary judgment is precluded.

D. Purdue Argument — Language of Insuring Agreement

Both Steadfast and Purdue contend that the language of the Coverage Form supports their respective positions. As noted, Steadfast takes the position that Abbott's defense costs are "damages" suffered by Purdue and Steadfast's payment of $2 million toward those defense costs exhausts the indemnity limits of the Binder.

Purdue, relying on the same portion of the Coverage Form, contends that Steadfast in the insuring agreement undertook the defense of Abbott in the OxyContin cases. For the purposes of this motion both Steadfast and Purdue agree that the Co-Promotion Agreement is an insured contract and that under the Co-Promotion Agreement Purdue agreed to assume and indemnify Abbott for losses sustained as a result of bodily injury. In the coverage form Steadfast agreed "to pay those sums that [Purdue] becomes legally obligated to pay as damages because of `bodily injury.' "Steadfast further agreed that it had "the right and duty to defend any `suit' seeking those damages." Purdue contends that the OxyContin cases against Abbott are precisely such suits and that Steadfast has undertaken the duty to defend them.

Under Connecticut law the interpretation of an insurance contract is based on the intent of the parties, that being the coverage the insured expected to receive coupled with the coverage the insurer expected to provide, as that intent is expressed by the language of the entire policy. Wentland v. American Equity Ins. Co., 267 Conn. 592, 600-01 (2004). The language of the policy is given its natural and ordinary meaning, and any ambiguity is resolved in favor of the insured. Id. Ordinarily the question of intent is a question of fact; however, in the absence of any ambiguity the interpretation is a matter of law. Nationwide Mutual Ins. Co. v. Allen, 83 Conn.App. 526, 537 (2004). A contract is ambiguous if the intent of the parties is not clear and certain from the language of the policy itself Id., quoting Detels v. Detels. 79 Conn.App. 467, 472 (2003). The fact that parties advance different interpretations does not necessarily mean the language is ambiguous. United Illuminating Co. v. Wisvest — Connecticut, LLC, 259 Conn. 665, 670 (2002).

After a careful review of the subject Coverage Form the court makes the following determinations. First, the $2 million payment by Steadfast to Purdue in June 2002 was not a payment "for damages" which could be credited against the $2 million limit on aggregate damages set forth in the Binder. The court has already alluded to what it considers distinguishing factors in the cases relied on by Steadfast for the proposition that its payment to Purdue represented damages. The most telling factor, however, is simply that payment of Abbots' attorneys' bills do not look or feel like a payment for damages. Abbott did not sue Purdue for failing to abide by the obligations of the Co-Promotion Agreement. Abbott did not suffer damages as a result of any dereliction of Purdue in fulfilling its obligations under the agreement. The Abbott attorneys' bills were costs to defend, not damages.

Second, Steadfast agreed in Section I.1(a)(2) that its duty to defend would end only when it had paid out the $2 million aggregate limit "in the payment of judgments and settlements." On the face of it the $2 million payment was not a payment of a judgment or settlement. The payment was made solely on the initiative of Steadfast, which immediately thereafter sought a declaration that its obligations to Purdue were fulfilled, and uniquely, neither Steadfast nor Purdue received a release, a standard component when a payment is made to satisfy a judgment or settlement. Steadfast argues that an agreement reached between Abbot and Purdue in early August 2001 as to how and whom they would select as national and local counsel to defend Abbott in the OxyContin cases was a "settlement" within the meaning of Section II.1(a)(2) of the Coverage Form. This argument is a strained one and the court does not accept it. In fact, Abbott made its initial, and only, demand on Purdue for indemnification and payment of defense costs for the OxyContin cases in a letter dated July 24, 2001. Another letter from Abbott dated August 2, 2001 and a two sentence confirmation letter from Purdue on August 3, 2001 set out the arrangements for counsel selection which were worked out around July 20, 2001. See Affidavit of Julia Stern, dated June 21, 2002, ¶¶ 6-7, Exs. D-H. At worst, there might have been a brief misunderstanding as to how these two drug companies would respond to the cascade of law suits against them, but there was no claim, no adversary posturing, and certainly no settlement as that word is used in the Coverage Form. Indeed, the Co-Promotion Agreement contained a very detailed procedure for resolving genuine disputes between Purdue and Abbott (see Art. 15.9 and Exhibit D), and this procedure was never initiated. Moreover, the Abbott bills were submitted to Steadfast in "the latter months of [2001]" according to Steadfast claims specialist Julia Stern. Stern Aff., Ex. J. If the Steadfast payment in June 2002 was in payment of a settlement, it was very slow.

Third, the court determines the plain language of Section I.1a of the Coverage Binder, entitled the "Insuring Agreement," which states that "We [Steadfast] will have the right and duty to defend any `suit' seeking [bodily injury and property] damages" requires Steadfast to pay the defense costs of the OxyContin cases against Abbott. The Coverage Binder says "any" suit and the court concludes that includes the litigations against Abbott seeking damages for bodily injury and as to which Purdue has agreed to hold Abbott harmless and therefore is legally obligated to pay.

Steadfast argues that this interpretation would make it the insurer of Abbott and points to cases cautioning against that. However, the interpretation only protects Purdue's interests, not Abbott's, because Purdue is legally liable for any damages assessed against Abbott in the OxyContin cases.

The court is persuaded that the above interpretation is the proper one because it is consistent with its earlier interpretations regarding whether the payment by Steadfast was for damages as well as what constitutes a settlement or judgment. In addition, the interpretation appears to be consistent with an objective analysis of the reasonable expectations of both the insured and insurer. Here Purdue sought insurance, both indemnity and costs to defend responsibility, for its drug products, including OxyContin. Since both parties agree the Co-Promotion Agreement was an insured contract Purdue could reasonably expect the indemnity and defense cost coverage to extend to its liabilities under the agreement. On the other hand Steadfast could reasonably expect in drug cases as in other widespread litigations that the cost of defense might well exceed the cost of actual judgments or settlements. Whether the costs of defense in this particular instance were reasonable is an issue not before the court at this time. Steadfast's position would allow an insurer, faced with defense costs exceeding the indemnity limits to cut off any further obligations to its insured by paying defense costs up to the indemnity limit.

The court concludes that "any suit" is unambiguous. However, other parts of the Coverage Form might not be clearly unambiguous. Ambiguity, after all, is often in the eye of the beholder. To the extent there is any ambiguity a court may examine extrinsic evidence to assist in interpretation. One such piece of extrinsic evidence is ISO Form CG 00 38 07 98, copyrighted by ISO in 1997, and available to insurance companies in 1998. This form is essentially the same as the Coverage Form at issue in this case except for two significant changes. CG 00 38 07 98 (the 1998 form) changes the "we will have the right and duty to defend any suit" language to "we will have the right and duty to defend the insured against any suit." (Emphasis added.) In the contract exclusion section the 1998 form added the language "solely for the purposes of liability assumed in an `insured contract' reasonable attorney fees and necessary litigation expenses incurred by or for a party other than an insured are deemed to be damages because of `bodily injury' or `property damage.'"

The above two language changes set forth explicitly the position which Steadfast espouses in its motion. Steadfast contends that the 1998 form simply "updates" the earlier form, the Coverage Form. In this court's view, however, the language changes represent either a significant difference in coverage, or at the very least, a clarification of the form's coverage to resolve uncertainties or ambiguities in the earlier language contained in the Coverage Form. Both the Coverage Form at issue in this case and the 1998 form were available to Steadfast in 2000 when the Binder was issued to Purdue. For whatever reason, the former was included in the Binder, not the latter, and Steadfast is bound by its terms. To the extent the Coverage Form is ambiguous, the court construes such ambiguities in the fashion set forth above.

Conclusion

Because there are material facts at issue on the subject of whether Abbott is an additional insured and because the court's interpretation of the Coverage Form does not support Steadfast's contention that its Binder limits have been exhausted, the motion for partial summary judgment is denied.

Taggart D. Adams

Superior Court Judge


Summaries of

Steadfast Ins v. Purdue Frederick

Connecticut Superior Court, Judicial District of Stamford-Norwalk Complex Litigation Docket at Stamford
Sep 1, 2004
2004 Ct. Sup. 13127 (Conn. Super. Ct. 2004)
Case details for

Steadfast Ins v. Purdue Frederick

Case Details

Full title:STEADFAST INSURANCE COMPANY v. THE PURDUE FREDERICK COMPANY ET AL

Court:Connecticut Superior Court, Judicial District of Stamford-Norwalk Complex Litigation Docket at Stamford

Date published: Sep 1, 2004

Citations

2004 Ct. Sup. 13127 (Conn. Super. Ct. 2004)
37 CLR 793