American Home Assur. Co. v. Merck & Co., Inc.

• Decision Date: 09 September 2005
• Docket Number: No. 03 Civ. 3850 VMJCK.,03 Civ. 3850 VMJCK.
• Citation: 386 F.Supp.2d 501
• Parties: AMERICAN HOME ASSURANCE COMPANY, Plaintiff, v. MERCK & CO., INC., Defendant, v. A.I. Marine Adjusters, Counterclaim Defendant.
• Court: U.S. District Court — Southern District of New York

386 F.Supp.2d 501

AMERICAN HOME ASSURANCE COMPANY, Plaintiff, v. MERCK & CO., INC., Defendant, v. A.I. Marine Adjusters, Counterclaim Defendant.

No. 03 Civ. 3850 VMJCK.

United States District Court, S.D. New York.

September 9, 2005.

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John Nicoletti, Nooshin Namazi, Nicoletti Hornig Campise & Sweeney, New York, NY, for Plaintiff, American Home Assur. Co. Jerold Oshinsky, Joseph F. Fields, Paul C. Sullivan, Paul O. Sullivan, Dickstein, Shapiro, Morin & Oshinsky, L.L.P. New York, NY, Anthony J. Pruzinsky, Hill, Rivkins and Hayden LLP, New York, NY, for Merck & Co., Inc.

DECISION AND ORDER

MARRERO, District Judge.

This dispute between insurer American Home Assurance Company ("American Home"), and its insured, pharmaceutical manufacturer Merck & Co., Inc. ("Merck"), primarily concerns American Home's denial of liability for certain losses to shipments of products that Merck claims under an insurance policy bound and issued by American Home effective July 1, 2000 (the "Policy"). As described in numerous opinions that this Court and Magistrate Judge Francis have issued in the action,¹ Merck and American Home have agreed to select for review on motions for summary judgment several of the disputed claims as prototypes (hereinafter, the "Prototype Claims") in order to facilitate the settlement or more efficient litigation of remaining claims. Each of the Prototype Claims concerns finished pharmaceutical products or Active Pharmaceutical Ingredients ("APIs") that were allegedly damaged or exposed to harmful conditions during transit.

Merck and American Home have now filed cross-motions for summary judgment on several of the Prototype Claims, Merck on Prototype Claims 1-6 and American Home on Prototype Claims 1, 2 (in part), 3, and 6. Each party puts forth starkly different interpretations of the "Control of Damaged Goods" clause (the "CDG Clause") of the Policy under which Merck seeks coverage for the losses claimed in the Prototype Claims, dramatically different views of many of the facts surrounding the Prototype Claims, and widely varying interpretations of those facts.

Upon review of the parties' voluminous submissions in this matter, the Court concludes that while it may develop a definitive interpretation of the CDG Clause and other relevant contractual provisions at this stage of the litigation, the Court cannot determine as a matter of law whether or to what extent Merck is entitled to coverage under the CDG Clause for any of the losses claimed in Prototype Claims 1-6. Consequently, it grants in part the parties' cross-motions for summary judgment and denies them in part.

I. BACKGROUND²

A. THE POLICY

The CDG Clause under which Merck claims coverage for Prototype Claims 1-6 states as follows:

The Assured [i.e., Merck] shall have full right to the possession of all goods involved in any loss under this policy and shall retain control of all damaged goods. The Assured, exercising a reasonable discretion, shall be the sole judge as to whether the goods involved in any loss under this policy are fit for use as originally intended or in any other capacity, and no goods so deemed by unfit for use shall be sold or otherwise disposed of except by the Assured or with the Assured's consent, but the Assured shall allow this Company [i.e., American Home] any salvage obtained by the Assured on any sale or other disposition of such goods.

In addition, property insured by this policy shall be deemed to have suffered an insured loss if, as a result of a fortuitous event:

Said property is deemed unfit for use by any government regulatory body and/or agency, anywhere in the world, or as a result of reasonable interpretation of regulations promulgated by said bodies and/or agencies;

or

the only means of determining the existence or extent of damage is through "destructive testing."

(Policy at 10.) Neither of the parties claims that coverage is available to Merck under the first paragraph of the CDG Clause. Moreover, no "government regulatory body and/or agency" has actually deemed "unfit for use" any of the pharmaceutical products that are the subject of Prototype Claims 1-6. Merck instead asserts that the Prototype Claims are covered under an interpretation of the CDG Clause that would insure Merck "if, as a result of a fortuitous event: Said property is deemed unfit for use" as a result of its "reasonable interpretation of regulations promulgated by said [government regulatory] bodies and/or agencies." In the alternative, Merck argues that it is entitled to coverage under the "destructive testing" provision of the CDG Clause. American Home, while acknowledging that coverage is available to Merck under the CDG Clause, disputes Merck's proffered interpretation of the clause.

Unlike the parties' dispute over the interpretation of the valuation clause of the Policy, in which each side put forth facts supporting the conclusion that its interpretation of the clause was proper, see American Home Assurance Co. v. Merck & Co., Inc., No. 03 Civ. 3850, 2005 WL 1153723 (S.D.N.Y. Apr.13, 2005) ("American Home R & R"), the parties' dispute over the CDG Clause is not informed by substantial factual evidence. The parties instead rely on various interpretive guides available under Pennsylvania law, which governs this action, see id., to assist the Court in developing a proper interpretation of the CDG Clause.

The Court also must interpret the "Sue and Labor" Clause ("Sue and Labor Clause") of the Policy. The clause states as follows:

In case of any imminent or actual loss or misfortune, it shall be lawful and necessary to and for the Assured, his or their factors, servants, and assigns, to sue, labor and travel for, in and about the defense, safeguard, and recovery of the said goods and merchandise, or any part hereof, without prejudice to this insurance; to the charges whereof, this Company will contribute according to the rate and quantity of the sum hereby insured; nor shall the acts of the Assured or this Company, in recovering, saving and preserving the property insured, in case of disaster, be considered a waiver or an acceptance of abandonment.

(Policy at 7.) American Home argues that Merck violated its obligations under this clause, which is of ancient origin,³ to salvage the pharmaceuticals that are the subjects of the Prototype Claims. The parties present no extrinsic evidence to aid the Court in interpreting this provision.

B. THE PROTOTYPE CLAIMS

1. Prototype Claim 1

In Prototype Claim 1, Merck seeks insurance coverage under the CDG Clause for losses allegedly sustained to a shipment of the Merck vaccines VAQTA, COMVAX, and thimoserol-free RECOMBIVAX (collectively, the "Vaccines"), which are used to protect recipients from various forms of hepatitis.⁴ The federal Food and Drug Administration ("FDA"), which regulates all of the products that are the subjects of the Prototype Claims, licensed Merck to sell the Vaccines subject to certain conditions. These conditions included the requirement that Merck distribute along with the Vaccines product circulars that direct purchasers to store the Vaccines at 2-8 Celsius ("C"), and state, with varying levels of emphasis, "do not freeze since freezing destroys potency."

The shipment at issue in Prototype Claim 1 departed from Merck's West Point, Pennsylvania facility in a refrigerated truck owned by independent trucking company Prime, Inc. ("Prime"), for delivery to a Merck distribution facility in Reno, Nevada. The bill of lading for the shipment directed Prime to maintain the set point of the refrigeration unit inside the truck at 42 Fahrenheit ("F"), which corresponds to a temperature of 5.5C.⁵ Merck placed a TempTale3 ("TempTale") temperature monitor inside the truck to ensure that the proper temperatures for the vaccines were maintained. Merck has introduced evidence indicating that the accuracy of the TempTale unit was validated by its manufacturer, Sensitech Inc. ("Sensitech"), both before and after the shipment. (See Merck Rule 56.1(a) Statement ¶¶ 35-36.) Several other temperature measures were taken throughout the truck's journey to Reno. The ThermoKing refrigeration unit that cooled the Vaccines were located throughout the truck contained two gauges that recorded ambient temperatures; a Qualcomm Communications remote satellite data acquisition system (the "Qualcomm system") recorded ambient temperatures within the truck and sent them via satellite to Prime's offices, and the drivers of the truck allegedly recorded temperatures within the truck on a log book, using a readout on the ThermoKing refrigeration unit.

While the parties strongly dispute the accuracy and significance of the various temperature measurements taken during the course of the trip, it is undisputed that the TempTale and at least one of the ThermoKing temperature sensors recorded temperatures at or below 0 C (32F) for approximately 2.5 hours while the truck was in transit.⁶ For at least one hour of that time, the two sensors recorded temperatures below 31.1F, which Merck asserts is the freezing point of the Vaccines. The remaining temperature gauges recorded above-freezing temperatures throughout the trip, and the remaining measurements on the TempTale and the ThermoKing sensor registered temperatures that were above freezing.

After the shipment was received in Reno, Merck reviewed the readouts from the various temperature gauges on the truck and determined that the vaccines were unfit for use due to the possibility that they had frozen in transit. Merck claimed that the goods could not be sold pursuant to its reasonable interpretation of an FDA regulation, 21 C.F.R. § 211.208 ("Section 211.208"), which states in its entirety as follows:

Drug products that have been subjected to improper storage conditions including extremes in temperature, humidity, smoke, fumes, pressure, age, or radiation due to natural disasters, fires,...