Lantheus Med. Imaging, Inc. v. Zurich Am. Ins. Co.

• Decision Date: 28 April 2015
• Docket Number: No. 10 Civ. 9371(KPF).,10 Civ. 9371(KPF).
• Citation: 255 F.Supp.3d 443
• Parties: LANTHEUS MEDICAL IMAGING, INC., Plaintiff, v. ZURICH AMERICAN INS. CO., Defendant.
• Court: U.S. District Court — Southern District of New York

255 F.Supp.3d 443

LANTHEUS MEDICAL IMAGING, INC., Plaintiff,

v.ZURICH AMERICAN INS. CO., Defendant.

No. 10 Civ. 9371(KPF).

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

Signed April 28, 2015.

Andrew Arthur Ruffino, Covington & Burling LLP, New York, NY, Jessica Vance Sutton, Joanne B. Grossman, Rukesh A. Korde, William F. Greaney, Covington and Burling LLP, Washington, DC, for Plaintiff.

Philip C. Silverberg, William D. Wilson, Mound Cotton Wollan & Greengrass, New York, NY, for Defendant.

REDACTED OPINION AND ORDER

KATHERINE POLK FAILLA, District Judge:

Plaintiff Lantheus Medical Imaging, Inc. ("Lantheus") initiated this action against Zurich American Insurance Company ("Zurich") on December 16, 2010. The lawsuit challenges Zurich's denial of coverage, under a commercial property insurance policy purchased by Lantheus, for business income loss related to a 15–month shutdown of the nuclear reactor at Chalk River Laboratories in Ontario, Canada (the "NRU Reactor"). The NRU Reactor supplied a radioactive isotope used in Lantheus's diagnostic medical imaging products, and Lantheus alleges that it incurred more than $70 million in losses as a result of the shutdown. Zurich contends that Lantheus's losses are not covered under the policy because (i) Lantheus did not experience a total cessation of business activity, and (ii) the shutdown was caused in whole or in part by the excluded peril of corrosion. Zurich now moves for summary judgment on these two grounds. For the reasons set forth in this Opinion, Zurich's motion is granted.

BACKGROUND ¹

A. Factual Background

1. Lantheus and the NRU Reactor

Lantheus is a specialty pharmaceutical company that manufactures and distributes, among other things, diagnostic medical imaging products. (Def. 56.1 ¶ 1). Molybdenum–99 ("Moly–99"), a radioactive isotope resulting from the fission of uranium–235 in a nuclear reactor, is a key component in one of Lantheus's products, the TechneLite Generator. (Id.at ¶ 2). Prior to May 2009, Lantheus obtained Moly–99 from Nordion, Inc. ("Nordion"), which in turn was supplied by the NRU Reactor. (Id.at ¶ 4). The NRU Reactor is operated by Atomic Energy of Canada Limited ("AECL"). (Id.at ¶ 6). As of May 2009, the NRU Reactor supplied approximately 40% of the world's medical isotopes. (Id.at ¶ 5).

2. The Policy

Zurich issued to Lantheus an all-risk property insurance policy (the "Policy")² that was in effect from January 8, 2009, through January 8, 2010. (Def. 56.1 ¶ 23). Of particular relevance to the instant motion, the Policy covers Lantheus's "Contingent Business Income Loss" ("CBI") according to the following specifications:

We will pay for the actual Business Income Loss you sustain and necessary Extra Expense you incur resulting from the necessary suspension of your business activitiesoccurring at a premises described in the Declarations Schedule if the suspension is caused by direct physical loss of or damage caused by a covered cause of loss to a Contingent Property (of the type insured) not owned, occupied, leased or rented by you or insured under this Policy and that property is located within the Covered Territory. We will pay no more than the applicable sub-limit of insurance.

(Silverberg Decl., Ex. G at 28 (emphasis added)). Lantheus's Billerica, Massachusetts facility where TechneLite Generators are produced (the "Billerica Facility") is one of the premises described in the Declarations Schedule. (Id.at 18).

The Policy defines "Contingent Property" to include "[a] property from which you or others on your account receive the delivery of manufactured materials or services if those materials or services are essential for the continuation of your business activities." (Silverberg Decl., Ex. G at 28). Endorsement 6, in turn, amends the Policy to provide a $70 million sub-limit of insurance for "Contingent Time Element f[ro]m [AECL]—Chalk River Reactor as a supplier of ... Nordion." (Id.at 76).³ "Extra Expenses" are covered under the CBI provision beginning on the date of the loss, and continuing "during the period of restoration to resume and continue as nearly as practicable your normal business activities at [the] premises[.]" (Id.at 28).

The Policy distinguishes between "covered" causes of loss and "excluded" causes of loss. "Covered Cause of Loss" is defined broadly, to include "all risks of direct physical loss of or damage (including machinery breakdown) from any external cause unless excluded." (Silverberg Decl., Ex. G at 50). Conversely, exclusions are detailed in "Causes of Loss Not Covered," with corrosion being the exclusion relevant to the instant dispute:

We will not pay for loss or damage resulting from any of the following; such loss or damages is excluded regardless of any cause or event that contributes concurrently or in any sequence to the loss or damage, except as specifically provided.

* * *

5. Developing, Latent and Other Causes The effects or cause of:

* * *

b. Deterioration, depletion, rust, corrosion,erosion, loss of weight, evaporation[,] or wear and tear[.]

* * *

But if any of these results in a covered cause of loss, this exclusion does not apply to the loss or damage caused by the covered cause of loss.

(Id.at 24–25 (emphasis added)). The corrosion exclusion is bookended by two provisions that bear separate mention. First, the Policy contains a so-called "anti-concurrent cause" provision, which bars coverage where a claimed loss is caused by a combination of covered and excluded perils. Second, the Policy contains an "ensuing loss" exception, which provides coverage if an excluded peril causes a second, covered peril to occur; in that eventuality, coverage is provided only for the loss or damage that proximately results from the covered peril.

3. The Structure of the NRU Reactor and the Weakening of the Vessel Wall

The NRU Reactor consists of a cylindrical aluminum alloy reactor vessel and light water reflector, uranium fuel rods, and a cooling system. (Pl. 56.1 ¶ 36). The light water reflector surrounds the reactor vessel, and a gas-filled space of about six inches, called an "annulus," separates the two. (Id.at ¶¶ 37–38). Within the reactor vessel, uranium undergoes nuclear fission, producing up to 135 megawatts of mechanical power in the form of heat. (Id.at ¶ 45). Pumps, ordinarily powered by the electrical grid, drive "heavy water" through the vessel and into a series of heat exchangers to cool the uranium fuel rods. (Id.at ¶¶ 39–43).⁴

As of May 2009, the wall separating the annulus and reactor vessel was weakening (or thinning) to varying degrees in several places. The parties agree on this fact, but disagree on the types and causes of this weakening; for purposes of this motion, the Court will focus on the Plaintiff's account of the weakening. (SeePl. 56.1 ¶¶ 47–53). The first manner of weakening is referred to by both parties as corrosion, and, solely to avoid confusion, the Court will use Plaintiff's term for this form of thinning: "General Corrosion." (Id.at ¶ 53; see alsoSt. Pierre Decl., Ex. 1 at 11 (describing the "general slow corrosion rate thinning of the reactor vessel on the annulus side")). This General Corrosion caused solids to accumulate near the base of the annulus. (Pl. 56.1 ¶ 53; see alsoSt. Pierre Decl., Ex. 1 at 11 ("The spongy solids that built up at the bottom of the annulus included [redacted].")). The second form of thinning to the wall was a highly localized pitting or weakening (referred to by Plaintiff as "[redacted] Penetration") that occurred approximately four centimeters above the base. (Pl. 56.1 ¶ 49; see alsoSt. Pierre Decl., Ex. 1 at 11 (describing the thinning as "a highly localized attack in the form of [redacted]")).⁵

4. The May 2009 Shutdown

On May 14, 2009, the NRU Reactor lost power. (Pl. 56.1 ¶ 63).⁶ [Redacted]. (Id.at ¶¶ 66–67). AECL acted to [redacted]. (See id.at ¶¶ 66–70). When the vessel was refilled, the vessel wall failed where the [redacted] Penetration had occurred, causing a through-wall breach. (Id.at ¶¶ 72–75). Heavy water containing a radioactive substance called tritium was released within the NRU Reactor facility, which caused AECL to take the NRU Reactor out of service until it could investigate the source of the leak and complete repairs. (Def. 56.1 ¶ 8). The shutdown lasted for approximately 15 months.

Both sides offer expert testimony concerning the cause of the through-wall breach. Again, given the current procedural posture, the Court focuses on the evidence submitted by the non-movant. Lantheus offers opinions from two expert witnesses, metallurgist George R. St. Pierre and nuclear engineer John H. Bickel. The witnesses make clear that their reports are to be read in tandem. (See, e.g.,Bickel Decl., Ex. 1 at 5 (noting that the cause of the weakening in the vessel wall "will be explained by another expert")).⁷

St. Pierre considered the metallurgic properties of the aluminum reactor vessel and the changes in that metal that allowed it to be susceptible to a breach. He focuses on a confluence of chemical processes in the annulus that led to the [redacted] Penetration, which he claims to be a causal factor in the breach and—perhaps more significantly for Plaintiff's coverage arguments—which he seeks to distinguish from General Corrosion. Specifically, St. Pierre links the formation of the [redacted] Penetration to an "electrochemical cell" (alternately referred to as a "differential aeration cell" or an "aeration cell") that resulted from the interaction of waters with two different electric potentials at the base of the NRU Reactor. (Pl. 56.1 ¶ 52; see generallySt. Pierre Decl., Ex. 1 at 11–15).⁸ Water flowing down the side of the light water reflector to the base of the reactor vessel became trapped in the insoluble materials that had accumulated near the base of the annulus during the General Corrosion process and remained aerated; water flowing down the reactor wall in the annulus became de-aerated. (Pl. 56.1 ¶¶ 54–55; see alsoSt. Pierre Decl., Ex. 1 at...