Charter Oak Fire Co. v. Am. Capital Ltd.

• Decision Date: 03 August 2017
• Docket Number: Civil Action No. DKC 09-0100
• Parties: THE CHARTER OAK FIRE COMPANY, et al. v. AMERICAN CAPITAL LTD., et al.
• Court: U.S. District Court — District of Maryland

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

Civil Action No. DKC 09-0100

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

August 3, 2017

MEMORANDUM OPINION

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 byCharter 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 PrimaryPolicies; (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 toMarsh. 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 multidistrict litigation before the United States District Court for theNorthern 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 entityalleged in the pleadings to be a direct or indirect affiliate of American Capital." (PTX 461).

During this time,...