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The Charter Oak Fire Co. v. American Capital Ltd.

United States District Court, D. Maryland

August 3, 2017

THE CHARTER OAK FIRE COMPANY, et al.
v.
AMERICAN CAPITAL LTD., et al.

          MEMORANDUM OPINION

          DEBORAH K. CHASANOW, UNITED STATES DISTRICT JUDGE.

         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 Company (“Charter Oak”) and Travelers Property Casualty Company of America (“Travelers”) (collectively, “Plaintiffs”) breached the duty to defend Defendants/Counter-Plaintiffs American Capital, Ltd. (“American Capital”) and Scientific Protein Laboratories LLC (“SPL”) (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 (“CGL” or “Primary”) insurance policies issued by 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 2008-2009 coverage years (PTX 166 (2006); PTX 167 (2007)).[2] A bench trial was held from March 8 to April 18, 2017. 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 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. The court will decline to issue declaratory judgments. Accordingly, the court will enter judgment in favor of Defendants as described herein and award damages in the amount of $62, 717, 069.00 plus interest.

         I. Factual Background

         A. The Parties

         At all relevant times, American Capital was a publicly traded private equity firm incorporated under the laws of Delaware, with its principal place of business in Bethesda, Maryland.[4] 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 Capital Financial Services (“ACFS”). In August 2006, American Capital formed and acquired an interest in SPL Acquisition Corp., which acquired SPL Holdings, LLC, which wholly owned SPL. SPL, which manufactures and distributes active pharmaceutical ingredients (“API”) in Waunakee, Wisconsin, was a portfolio company of American Capital.

         Charter Oak and Travelers are subsidiaries of The Travelers Companies, Inc. They are incorporated under the laws of the State of 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 Marsh. Marsh sent Plaintiffs' proposal, along with proposals from 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 is a blood-thinning drug, commonly used in surgeries, which is derived from pig intestines. SPL manufactured Heparin Sodium, USP. Under a supply 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 venture”), an entity created pursuant to a joint venture agreement between Changzhou 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. From the crude heparin, CZSPL manufactured Heparin Sodium, USP in China, which it sold to SPL and SPL resold to Baxter. SPL also received crude heparin directly from consolidators and manufactured 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. The parties agree that it is now evident that the contaminated heparin which was administered to patients had been sourced through CZSPL. 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 for contamination, but was not administered to patients. 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 multi district litigation before the United States 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). The “heparin litigation” refers to these 1, 064 suits. As calculated by the insurers in this case, American Capital was sued in approximately 68% of the heparin litigation suits. (PTX 628; PTX 631). Only 3% of the heparin litigation suits were brought against Baxter without naming American Capital or SPL. (PTX 628; PTX 631). 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. Although the heparin products were recalled in early 2008, 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. American Capital had acquired its interest in SMG in 2007.

         E. Notice and Claims Handling

         American Capital first provided notice of the heparin litigation to Plaintiffs on August 20, 2008. It did so through a submission by Marsh, and did not 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. On November 6, American Capital, through Marsh, provided notice of another heparin suit and requested Plaintiffs' coverage position “as to American Capital, Ltd and any entity 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. (PTX 480). The Agreement, which did not settle the underlying heparin litigation, functioned in part as a joint defense agreement. Plaintiffs were informed of the 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 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. (ECF No. 1). 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 unilateral mistake (ECF No. 536), three counts remain: rescission of the six insurance contracts, against 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' Third Amended Counterclaims (ECF No. 380) consist of fourteen counts: six declaratory 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 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. (ECF Nos. 557; 558). 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. (ECF Nos. 536; 545; 557; 558). 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 reconsideration of the joint venture exclusion ruling)). A jury trial was scheduled for the four-week period beginning March 7, 2017. (ECF No. 565).

         On December 16, 2016, Plaintiffs filed a supplemental motion for summary judgment, arguing that Defendants would be unable to prove all or most of their alleged damages. (ECF No. 584). 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 kind to obtain alternative litigation funding with Baxter. Defendants were not foreclosed from seeking an appropriate measure of damages available under Maryland law. (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, as a matter of law, that those fees were not recoverable. (Id. at 16).

         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.” (ECF No. 690, at 72:8-11; accord ECF No. 615, at 10-17). 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; see Id. at 6-8).[7] 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. (Id. at 7-8).[8]

         C. 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] After Plaintiffs completed their case-in-chief, Defendants 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; 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, and there is overlap between the claims and counterclaims. 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.

         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. Plaintiffs seek a declaration that the policies do not provide defense or indemnity coverage for the heparin lawsuits, the Nationwide Arena lawsuit, or other current or future lawsuits “against American Capital or its purported subsidiaries relating to the subsidiaries, joint ventures, or other entities.” (ECF No. 67 ¶ 160). In the Third Amended Counterclaims, Defendants conversely 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. (ECF No. 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 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. Co. v. Blackstone Int'l Ltd., 442 Md. 685, 694-95 (2015). Determining whether an insurer has a duty to defend under an insurance policy is a two-step process. Nautilus Ins. Co. v. REMAC Am., Inc., 956 F.Supp.2d 674, 680 (D.Md. 2013) (citing St. Paul Fire & Marine Ins. Co. v. Pryseski, 292 Md. 187 (1981)). “First, the policy must be reviewed to determine the scope of, and any limitations on, coverage.” 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. 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.” (PTX 163, at TRAV0041559). “‘Suit' means a civil proceeding in which damages 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). The policies include a $2, 000, 000.00 general aggregate 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. (Id. at TRAV0041555). The “products-completed operations 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 whose business or assets you have acquired[.]” (Id. at TRAV0041573). “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) The providing of or failure to provide warnings or instructions.” (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. (Id.). The policies include the “XTEND Endorsement, ” a Travelers' trademark generally included in package policies. (Drennen Dep., at 261:9-18; ECF No. 784, at 80:24-81:3). The XTEND Endorsement “broadens coverage” in several ways, including by expanding the definition of Named Insured. Under the endorsement:

The Named Insured in Item 1. of the Declarations is as follows:
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.

(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 insured's indemnitee if certain conditions have been met. (Id. at TRAV0041566).

         The policies 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.

         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 litigation in the absence of an applicable exclusion. American Capital is named as an insured, and the policies provide liability insurance coverage against bodily injury suits, including those alleging bodily injury arising out of products-completed operations. Heparin complaints named American Capital as a defendant in civil suits alleging bodily injury under theories of negligence, strict liability, gross negligence, and failure to warn. (See, e.g., DTX 33 (“Skidmore complaint”)).[11] 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 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 was entered against Plaintiffs on this question. Despite the “broad nature of the joint venture exclusion, ” the court nevertheless concluded that, given the allegations of at least some of the heparin complaints, there was a potential for judgment against Defendants “completely unrelated to heparin originating with Changzhou.” (ECF No. 545, at 25-26). 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. Pryseski, 292 Md. at 193-94. Accordingly, the court held that the joint venture exclusion does not preclude coverage of the heparin litigation and did not relieve Plaintiffs of their duty to defend American Capital.

         Plaintiffs have repeatedly challenged this holding, twice moving for reconsideration. (ECF Nos. 541; 672). Most recently, Plaintiffs have argued for the entry of 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. Instead, the court entered judgment in favor of Defendants 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.

         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 for injuries resulting from contaminated heparin. (See, e.g., DTX 33). 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. It does not preclude coverage of the heparin claims 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.

         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. The XTEND endorsement expands the policy declarations to 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. Lloyd E. Mitchell, Inc., 324 Md. at 56-57. 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' intent, including dictionaries, the history of the parties' negotiations, the parties' conduct and 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 trier of fact decides the proper interpretation.” 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 19). As noted above, “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.'” Blackstone Int'l, 442 Md. at 695 (quoting Dutta, 363 Md. at 556-57).

         The XTEND endorsement was drafted by Plaintiffs and included in the policies by Plaintiffs' underwriters. 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 is used in the insurance industry in an insuring clause. (ECF No. 802, at 38:5-10). 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. Plaintiffs have shown that its underwriters did not 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[.]”)). They have not shown, however, that this narrower definition of “majority interest” was intended when the widely-used endorsement was drafted. The term would be superfluous if it required absolute ownership, and there is insufficient evidence to conclude that it must be construed to require control, as the term “subsidiary, ” which is used elsewhere in the policies, does. 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 Non-Voting 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, LLC, which in turn held all 1, 000 units authorized, issued, and outstanding of SPL. (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. (Id. at 6:13-20, 7:16-23). In October 2007, SPL Holdings LLC was dissolved (id. 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 was “unconditionally convertible” into voting common stock. (ECF No. 816, at 8:17-9:9; see ECF No. 823, at 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. (ECF No. 823, at 25:20-27:21). During the relevant time period, American Capital had a majority of the total equity value in SPL Acquisition Corp. on both a fully-diluted and a non-diluted basis. (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. American Capital clearly held a majority interest in SPL Acquisition Corp., the holding company it formed, which in turn held all units of SPL. American Capital maintained this interest from August 10, 2006, until at least July 1, 2009. The heparin complaints named SPL as a defendant in civil 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.

         3. Coverage of SPL Under the 2006 Umbrella Policy

         The 2006 Umbrella Policy provides: “Any organization you newly acquire or form, other than a partnership or joint venture, and over which you maintain ownership or majority interest, will be deemed to be a Named Insured.” (PTX 166, at TRAV0042139). The Umbrella Policy provides commercial excess liability 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 ...


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