Essex Ins. Co. v. Hoffman, CIV. A. JFM-99-300.

• Decision Date: 15 October 2001
• Docket Number: No. CIV. A. JFM-99-300.,CIV. A. JFM-99-300.
• Citation: 168 F.Supp.2d 547
• Parties: ESSEX INSURANCE COMPANY, Plaintiff, v. Allen HOFFMAN, et al., Defendants.
• Court: U.S. District Court — District of Maryland

168 F.Supp.2d 547

ESSEX INSURANCE COMPANY, Plaintiff, v. Allen HOFFMAN, et al., Defendants.

No. CIV. A. JFM-99-300.

United States District Court, D. Maryland.

October 15, 2001.

Scott D. Goetsch, Moore and Jackson LLC, Towson, MD, for Essex Insurance Co.

Michael E. Marr, Baltimore, MD, for Allen Hoffman, T-Up, Inc.

Michael Patrick Smith, Israelson Salsbury Clements and Bekman, Baltimore, MD, for Sue Lowery and Wendy Daley.

David Freishtat, Freishtat & Sandler, Baltimore, MD, Stacie F. Dubnow, Freishtat and Sandler, Baltimore, MD, for Neal Deoul.

MEMORANDUM

MOTZ, Chief Judge.

Plaintiff Essex Insurance Company seeks summary judgment in a suit alleging that the insurance policy it issued to T-Up Inc. ("T-Up") is void ab initio because of misrepresentation. Essex contends that it therefore need not defend T-Up officers in a wrongful death suit involving T-Up's products. Defendants, T-Up and its officers,¹ have filed a cross-motion for summary judgment. Defendants assert that they did not misrepresent T-Up's products and that the Essex policy covered the alleged injuries giving rise to the wrongful death suit and a second suit that later was filed. For the reasons stated below, both Plaintiff's Motion for Summary Judgment and Defendant-Intervenor's Cross-Motion for Summary Judgment will be denied.

I.

Plaintiff Essex Insurance Co. ("Essex") is what is known in the insurance industry as a "surplus lines carrier." It sells insurance that other insurers consider high risk because of the nature of the company or product to be insured. (Dep. William Bradley Dickler at 10); see also United Capitol Ins. Co. v. Kapiloff, 155 F.3d 488, 491 (4th Cir.1998) (noting that surplus lines are "substandard risks that standard [insurance] markets generally do not handle"). This case revolves around whether Essex understood the risks when it agreed to underwrite products liability insurance for T-Up, a distributor of "immune enhancers" that later was sued by the families of cancer victims that took T-Up's products.

Officials of T-Up began seeking insurance to cover products liability risks in late 1996. (Mem. of Law in Supp. of Cross-Mot. for Summ. J. ¶ 4.) The Maryland-based T-Up distributed two main products: an aloe vera concentrate called T-Up and capsules of cesium chloride, a mineral. (Id. ¶ 2.) The president and vice-president of T-Up, Allen Hoffman and Neal Deoul, met with an insurance agent to discuss obtaining coverage for T-Up's products. (Id. ¶ 4.) That agent, William Keenan of Hay & Langrall, later said he understood from the meeting that T-Up distributed naturally occurring "food supplements" and not medicinal products.² (Dep. William C. Keenan at 24-25.)

After meeting with T-Up officials, either Keenan or his assistant prepared an insurance application for T-Up on a standard industry "Acord" form. (Id. at 39-40.) The form classified T-Up's business as "mail order health foods" and described the nature of its operations as "mail order distribution of aloe vera and cesium chloride, natural substances capable of enhancing and strengthening the human immune system." (Id. at 41-44.)

Keenan's initial efforts to secure insurance for T-Up's products were futile, as several insurance companies declined the risk. (Id. at 11-12.) Keenan then approached a Maryland surplus lines broker, Horan, Goldman & Co. ("Horan Goldman"). (Mem. of Law in Supp. of Cross-Mot. ¶ 10.) It is not unusual in the insurance industry for one insurance agent to approach another insurance agent or broker in an attempt to secure specialized insurance for a client or to secure insurance after several other insurers have declined to accept that client's account. Horan Goldman, the broker Keenan contacted about T-Up, is the Maryland broker for Essex. (Dep. William Bradley Dickler at 15.)

Keenan supplied Horan Goldman with the Acord form for T-Up, along with photocopies of product packaging he had collected from T-Up, typed versions of the labels on the bottles,³ and a general application in which Hoffman, T-Up's president, stated that T-Up sells "neutraceutical products (aloe vera and cesium chloride) for health."⁴ (Mem. of Law in Supp. of Cross-Mot. Ex. 30.) Horan Goldman then contacted Essex, which agreed to insure T-Up provided that T-Up obtained a certificate of insurance from the manufacturer of T-Up's products,⁵ a standard condition that T-Up satisfied. (Mem. of Law in Supp. of Cross-Mot. ¶ 15, Dep. William C. Keenan at 49.) Horan Goldman subsequently issued a 45-day binder,⁶ stating that it had obtained "Products/Completed Operations" coverage for T-Up effective April 1, 1997. (Pl.'s Mot. for Summ. J. Ex. 4.)

The policy Essex wrote covering T-Up was effective for one year, from April 1, 1997 to April 1, 1998. It was a commercial general liability policy providing coverage for bodily injury or property damage claims to which the insurance applied.⁷ (Id.) The policy covered several different types of risks T-Up might encounter. In a summary of the policy to Keenan, a Horan Goldman broker described the policy as "General Liability to include Products[,] Personal Injury and Fire ...." (Mem. of Law in Supp. of Cross-Mot. Ex. 18.) The policy was later renewed for one year, to April 1, 1999, although the premium basis was reduced from $5 million to $3 million to account for reduced sales of T-Up products.⁸ (Pl.'s Mot. for Summ. J. Ex. 4.)

As part of the commercial liability coverage provided by Essex, Horan Goldman ordered, on April 9, 1997, an inspection of T-Up's premises that was designed to detect physical hazards there. (Mem. of Law in Supp. of Cross-Mot. ¶ 20.) The inspection was performed by a company called Regional Underwriters sometime between April 30, 1997, and May 7, 1997. (Id. ¶ 25.) Regional Underwriters later filed a report that was found in Horan Goldman's file on T-Up. (Id. ¶ 34.) A narrative attached to the report stated that "[t]he insured is a wholesale distributor of aloe based health remedies" and that "[c]ustomers include medical doctors, veterinarians, [and] oncology specialists." (Id. Ex. 44.) It appears that, included with the premises inspection report, was a T-Up brochure entitled "Boost Your Immune System" that contains repeated references to the use of aloe products in fighting cancer and AIDS. Other promotional literature also was found in Horan Goldman's T-Up file, including a so-called "Dear Friend" letter and product instructions.⁹

The parties dispute when various items of T-Up promotional literature appeared in T-Up's file at Horan Goldman, what was forwarded by Horan Goldman to Essex, and to what extent Horan Goldman served as Essex's agent.¹⁰ Essex asserts that the "Boost Your Immune System" brochure, "Dear Friend" letter, and instruction cards were grouped in Horan Goldman's file with the premises inspection report, indicating that they accompanied that report, and that Horan Goldman received no other T-Up materials until after Essex's policies with T-Up had been canceled. (Aff. Thomas Alfano ¶¶ 3, 5-6.) Essex further contends it never received any of these materials. (Essex's Reply to Def.'s Mot. for Summ. J. at 4.) T-Up, on the other hand, argues that its agent, Keenan, sent a copy of the "Boost Your Immune System" brochure and other promotional materials to Horan Goldman independently of the premises inspection report. (Neal Deoul's Supplemental Mem. of Law at 2.) T-Up acknowledges that it is unknown whether Horan Goldman sent to Essex the brochure and other promotional items. (Mem. of Law in Supp. of Cross-Mot. at 9.)

One thing, however, is clear: T-Up and Essex's relationship as insured and insurer ended in April of 1999, after Essex learned of a state investigation regarding T-Up's products. (Dep. Dennis Rusch at 7.) Essex had Horan Goldman send T-Up a notice stating that the policy would not be renewed because of "misrepresentation" as to the nature of T-Up's products. (Id.) T-Up and Hoffman, its president, subsequently were named as defendants in a lawsuit filed in federal court in Alabama.¹¹ Deoul, T-Up's vice president and secretary, was named along with T-Up and Hoffman as defendants in another lawsuit filed in state court in Virginia.¹² The plaintiffs in these cases allege that relatives suffered bodily injury and death from using T-Up products that they had been led to believe were cures for cancer.

II.

Essex moves for summary judgment,¹³ seeking a declaration that the policy it issued to T-Up is void ab initio on the ground that T-Up misrepresented the nature, use, and method of administering its products, and that this misrepresentation materially altered the risk Essex thought it was assuming in providing insurance to T-Up. (Pl.'s Mot. for Summ. J. ¶¶ 3-6.) To prevail, Essex must establish two elements, misrepresentation and materiality. See Fitzgerald v. Franklin Life Ins. Co., 465 F.Supp. 527, 534-35 (D.Md. 1979), aff'd 634 F.2d 622 (4th Cir.1980). To show misrepresentation, Essex must demonstrate that T-Up represented that its products¹⁴ were dietary supplements that were ingested orally, not medicinal products that could be used, among other ways, intravenously.¹⁵ To prove materiality, Essex must establish that it would not have provided T-Up coverage had it understood that T-Up's products were being marketed for use by those with diseases such as cancer.

The materiality of how the T-Up products were marketed and used is clear. In an uncontested affidavit, the Essex vice president in charge of underwriting the T-Up policy testified that Essex would not have ensured T-Up had it understood that T-Up was representing its products as possessing medicinal or pharmaceutical qualities. (Aff. Brad Dickler ¶¶ 10-12.) This is adequate to find materiality as a matter of law. See Bryant v. Provident Life and Accident Ins. Co., 22 F.Supp.2d 495, 499 (D.Md.1998) (accepting as sufficient to establish materiality an uncontradicted affidavit of an insurer indicating it would not have provided...