United States District Court, D. Maryland
THE CHARTER OAK FIRE COMPANY, et al.
AMERICAN CAPITAL LTD., et al.
DEBORAH K. CHASANOW, UNITED STATES DISTRICT JUDGE.
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
“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.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)). 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).
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
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. 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.
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.
Insurance Purchase and Renewals
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
Underlying Heparin Litigation
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.
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
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.
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.
Underlying Nationwide Arena Litigation
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.
Notice and Claims Handling
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).
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.
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.
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).
facts will be discussed as relevant to the various legal
Claims and Counterclaims
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).
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),
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).
Motions for Summary Judgment and Supplemental Motion for
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). 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).
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).
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). 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).
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. 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
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.
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
Findings of Fact and Conclusions of Law
Breach of Contract and Declaratory Judgment
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.
Maryland Contract Law
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
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
material terms of these policies are the same. 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).
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
The Named Insured in Item 1. of the Declarations is as
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
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.
Coverage of American Capital
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”)). 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
Joint Venture Exclusion
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.
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.
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.(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. 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.
Financial Services Exclusion
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.
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.
Coverage of SPL
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.
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).
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
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%.
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
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.
Coverage of SPL Under the 2006 Umbrella Policy
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).
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 ...