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

• Decision Date: 27 October 2006
• Docket Number: No. 03 Civ. 3850(VM)(JCF).,03 Civ. 3850(VM)(JCF).
• Citation: 462 F.Supp.2d 422
• 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

462 F.Supp.2d 422

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

No. 03 Civ. 3850(VM)(JCF).

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

October 27, 2006.

Joseph F. Fields, Jerold Oshinsky, Dickstein, Shapiro, Morin & Oshinsky, L.L.P., New York, NY; Barry J. Fleishman, Dickstein Shapiro Morin & Oshinsky LLP, Washington, DC, for Merck & Co. Inc., Counter Claimant.

Nooshin Namazi, Nicoletti, Horning, Campise, Sweeney & Paige, New York, NY, for American Home Assurance Company Plaintiff.

John Anthony Vincent Nicoletti, Nicoletti Hornig Campise & Sweeney, New York NY, for American Home Assurance Company, Counter Defendant.

Anthony J. Pruzinsky, Hill, Rivkins and Hayden, NY, NY, for A.I. Marine Adjusters, Inc., ThirdParty Defendant.

Paul C. Sullivan, Paul O. Sullivan, Dickstein Shapiro Morin & Oshinsky LLP, New York, NY, for Merck & Co. Inc., Defendant.

DECISION AND ORDER

MARRERO, District Judge.

Plaintiff American Home Assurance Company ("American Home") filed this action¹ against its insured, pharmaceutical manufacturer Merck & Co., Inc. ("Merck"), seeking a declaratory judgment that American Home was not required to indemnify certain losses to shipments of products that Merck claims under a transit insurance policy bound and issued by American Home effective July 1, 2000 (the "Transit Policy"). To facilitate settlement and more efficient litigation, the parties' agreed to select for review on motions for summary judgment several of the disputed claims as prototypes (hereinafter, the "Prototype Claims"). Most recently, the Court considered the parties cross-motions for summary judgment regarding the proper interpretation of various clauses in the Policy with respect to Prototype Claims 1 to 6.² See American Home V, 386 F.Supp.2d. at 501.

While American Home V considered whether the contract entitled either party to judgment as a matter of law with respect to Prototype Claims 1 to 6, Merck also asserts additional extra-contractual counterclaims³ against both American Home and counterclaim defendant A.I. Marine Adjusters ("A.I.Marine"), the entity responsible for claim adjustment services under the Transit Policy. Specifically, Merck charges American Home and A.I. Marine with bad faith (Merck's Fourteenth Counterclaim), as well as negligence (Merck's Twelfth Counterclaim) and breach of fiduciary duty (Merck's Thirteenth Counterclaim) (collectively, the "Extra-Contractual Claims"). American Home and A.I. Marine have now separately moved for summary judgment dismissing the Extra-Contractual Claims.⁴ For the reasons set forth below, American Home's motion is granted, and A.I. Marine's motion is granted in part, and denied in part.

I. BACKGROUND⁵

A. MERCK'S BAD FAITH ALLEGATIONS AGAINST AMERICAN HOME

Merck alleges that with respect to the Prototype Claims⁶ at issue, American Home acted in bad faith by (1) ignoring the merits of the Prototype Claims and denying them based on an unreasonable reading of the "Control of Damaged Goods clause" (the "CDG Clause") that was inconsistent with American Home's prior claims practices under the Transit Policy; (2) requiring Merck to provide American Home with manufacturing costs information on Active Pharmaceutical Ingredients ("APIs") involved in the inter-company shipments between Merck subsidiaries, contrary to established procedures; and (3) denying claims without first conducting a reasonable investigation.

1. Denial Based on the CDG Clause

The CDG Clause governs the circumstances in which Merck could recover for products lost in transit. See American Home V, 386 F.Supp.2d at 505-07. Merck alleges that the parties both understood the clause to allow Merck to determine when specific products potentially compromised in transit were in fact unfit for use under applicable government regulations. Further, Merck claims that under the Transit Policy, American Home had paid numerous claims, on facts similar to the Prototype Claims, based solely on Merck's own determination that the product was unfit for use as a result of damage suffered in transit. However, Merck asserts that in early 2002 American Home unreasonably changed its position on the CDG clause in order to avoid paying several losses that involved high value pharmaceuticals.

In March of 2002, in response to notice of two high-value claims (Prototype Claims 2 and 3), American Home instructed its claims adjusters handling them to do some "damage control" and get "fussy" about covering the claims. (See Merck Rule 56.1 Opp. Statement ¶¶ 549-50.) In July of 2002, American Home issued a revised `Instructional Handling Advice" after what the Advice describes as "a rash of heavy claims," (See American Home 56.1 Statement, Ex. 39), which does in fact take a much firmer stance on the CDG clause than the initial "Worldwide Claim Handling instructions" issued in July of 2000. (See American Home 56.1 Statement, Ex. 33.) According to Merck, American Home effectively rewrote the CDG clause and began to require, in order to claim a total loss, that Merck either get a ruling from the FDA that the product was in fact unfit for use, or do the necessary testing to determine that the entirety of the product was physically damaged.

2. Requiring Manufacturing Cost Information

According to Merck, American Home unreasonably required the manufacturing costs of APIs involved in the inter-company shipments between Merck subsidiaries in Prototype Claims 2, 4 and 5, even though the parties understood, based on Merck's prior coverage with a different insurer, and the premiums negotiated under the Transit Policy, that these APIs would be valued at sales price. Merck argues that American Home paid other high-value claims involving similar facts at sales price, and did not even request manufacturing cost information for Prototype Claims 2, 4 and 5 until long after those claims had been denied.

3. Failure to Conduct a Reasonable Investigation

Merck also asserts that American Home denied the Prototype Claims without first investigating whether the drugs were in fact fit for use under applicable government regulations and then used the discovery process to attempt to discredit Merck's initial determinations that the products were unfit. Merck claims that the surveyors American Home hired to review the Claims had no knowledge of FDA regulations and were specifically instructed to limit their investigation to whether physical damage had occurred.

B. AMERICAN HOME'S GROUNDS FOR DENYING CLAIMS

American Home asserts that coverage was denied on the Prototype Claims for several legitimate reasons. Regarding the CDG clause in particular, American Home responds that it believed Merck did not use "reasonable discretion" in determining that the goods at issue were unfit for use under applicable government regulations. American Home claims that Merck refused to point out the specific government regulations that allegedly informed Merck's determinations or in any way explain its interpretation of those regulations.

American Home further asserts that the Transit Policy placed certain obligations on Merck to undertake sufficient loss control and that Merck repeatedly disregarded American Home's instructions in this regard. Specifically, American Home claims that extensive discussions were under taken during the negotiation of the Transit Policy regarding Merck's loss control efforts and Merck made specific representations that it would cooperate in implementing reasonable standards of care and upgrade its packaging to reduce the losses sustained in transit.

With respect to Prototype Claims 2, 4, 5 and 6 (the "Fiberboard Drum Claims"), see American Home V, 386 F.Supp.2d at 509-11, American Home argues that Merck was repeatedly advised to switch to more durable shipping containers for high value APIs to avoid unnecessary transit losses. (See American Home Rule 56.1 Statement ¶ 122.) Thus, American Home asserts that its denial of Prototype Claims 2, 4, 5 and 6 was based in part on Merck's failure to cooperate on loss control.⁷

Finally, American Home contends that Merck had obligations under the Transit Policy's Sue and Labor Clause, See American Home IV, 386 F.Supp.2d at 520, to determine whether any or all of the pharmaceuticals at issue could be salvaged before claiming a total loss, and that Merck made no efforts to salvage any of the pharmaceuticals involved in the Prototype Claims.

C. MERCK'S ADDITIONAL EXTRA-CONTRACTUAL CLAIMS

Merck alleges that A.I. Marine, the entity responsible for providing claim service under the SIR, "conspired with" American Home and engaged in bad faith by miscalculating the SIR, failing to maintain adequate records relating to Merck's claims, delaying the processing of claims, and misinforming Merck as to the status of claims. (See Merck's Amended Answer and Counterclaims, ¶ 138). Merck asserts A.I. Marine, at the "behest" of American Home, improperly eroded the SIR only with regard to amounts for which Merck had established physical loss or governmental intervention, and that A.I. Marine tracked only American Home's version of losses.

Merck relies on the same allegations in alleging breach of fiduciary duty and negligence against A.I. Marine, and also asserts these counterclaims against American Home, stating that the duties owed Merck were breached by A.I. Marine at the "behest" of American Home.

Merck asserts that the Transit Policy created a separate contractual relationship between Merck and A.I. Marine, and that this contract established certain duties owed Merck by A.I. Marine, duties which form the basis of its claims. The Transit Policy was negotiated by American International Marine Agency, Inc. ("AIMA"), and the parties do not dispute that AIMA was acting as American Home's agent, with the authority to issue contracts on behalf of American Home, and that it did in fact negotiate and issue the Transit Policy on behalf of...