McNeilab, Inc. v. North River Ins. Co.

• Decision Date: 31 October 1986
• Docket Number: Civ. A. No. 82-3934.
• Citation: 645 F. Supp. 525
• Parties: McNEILAB, INC., Plaintiff, v. NORTH RIVER INSURANCE CO., et al., Defendants.
• Court: U.S. District Court — District of New Jersey

645 F. Supp. 525

McNEILAB, INC., Plaintiff, v. NORTH RIVER INSURANCE CO., et al., Defendants.

Civ. A. No. 82-3934.

United States District Court, D. New Jersey.

September 17, 1986.

As Amended October 31, 1986.

Smith, Stratton, Wise, Heher & Brennan P.C., Princeton, N.J. by Wendy L. Mager, Patterson, Belknap, Webb & Tyler P.C., New York City by Gregory L. Diskant, Linda Novak, Frederick B. Campbell, for plaintiff.

Tompkins, McGuire & Wachenfeld P.C., Newark, N.J. by William B. McGuire, William J. Prout, Jr., Mendes & Mount P.C., New York City by Richard M. Seybold, James A. McGuire, for defendants North River Ins. Co., Transit Cas. Co., Employers Ins. of Nausau, and First State Ins. Co.

Feinberg, Feinberg & Tritsch P.C., Rahway, N.J. by Bruce A. Tritsch, for defendant Northbrook Excess & Surplus Ins. Co.

Stryker, Tams & Dill P.C., Newark, N.J. by Richard T. Philips, for defendant American Centennial Ins. Co.

Hoagland, Longo, Oropollo & Moran, New Brunswick, N.J. by Michael B. Oropollo, for defendant Aetna Cas. & Surety Co.

De Gonge, Garrity & Fitzpatrick P.C., Bloomfield, N.J. by Francis X. Garrity, for defendant Granite State Ins. Co.

OPINION

BARRY, District Judge.

Plaintiff in this action, McNeilab, Inc., is and has been since 1959 a whollyowned subsidiary of Johnson & Johnson,¹ a multi-national, multi-billion dollar corporation involved primarily in the health care business. Since 1955, plaintiff has been engaged in the manufacture and sale of acetaminophen, an internal analgesic for temporary relief of pain and fever, which it has marketed under the trade name "Tylenol".

The nation was stunned when, between September 29 and October 1, 1982, seven persons in the Chicago area died after ingesting Extra Strength Tylenol capsules laced with cyanide. Acting swiftly and efficiently to protect the public, to dissipate fear, and to clear the shelves of Tylenol so that it could quickly remarket a product in which the public would have confidence, Johnson & Johnson, between September 30 and October 7, 1982 and without consultation at any time with its insurers, undertook and funded a host of actions. Tylenol capsules and certain other McNeilab products were withdrawn from the market in the United States and seven foreign countries; the withdrawn Tylenol capsules were tested; the source of the tampering was investigated; non-tamper resistant packaged products were destroyed; tamper resistant packaging was developed; consumer studies and surveys were performed; an enormous number of reassurance messages were placed in print and on television and teleconferences were conducted; and a consumer research and exchange campaign as well as a campaign which enabled consumers to redeem coupons for tablet products issued during the crisis were launched. These actions were so successful that Tylenol not only regained but in short order exceeded its former share of the market. Without exception, those who have studied what took place during this period of time have concluded that, whatever the motive, no further deaths occurred² and Johnson & Johnson with its brilliant marketing strategy scored a major business coup.

This action began as a two-count complaint in which plaintiff, a named insured under the policy issued to Johnson & Johnson, sued nine of its insurers to recover costs related to the recall. Those costs have at various times been estimated from $40,000,000 to $150,000,000 and it now appears that the appropriate figure is approximately $100,000,000, a figure which plaintiff proclaims, rather proudly, "spared" the insurers from having to assume the defense of additional liability actions with potential recoveries in untold millions of dollars. I note, albeit parenthetically at this juncture, that Johnson & Johnson spent this $100,000,000 to mitigate damages on a liability it has claimed from day one does not exist. Stated somewhat differently, not believing it was liable, Johnson & Johnson could not have believed it was mitigating damages.

The first count of the complaint, the count before me now, seeks a determination that Johnson & Johnson's excess and umbrella liability insurers—defendants North River Insurance Company, Transit Casualty Company, Employers Insurance of Wausau, Aetna Casualty and Surety Company, American Centennial Insurance Company, Granite State Insurance Company, First State Insurance Company, and Northbrook Excess & Surplus Insurance Company (hereinafter "defendants")—are required to reimburse plaintiff for those recall-related costs to the extent of their respective layers of excess insurance coverage.³ Defendants North River, Transit Casualty, Employers of Wausau and First State, denying coverage, have moved for summary judgment, in which motion the remaining defendants have joined.

Plaintiff, arguing that coverage exists, has cross-moved for summary judgment as to liability⁴ relying essentially on two theories. First, it argues that the language of the excess liability insurance policy at issue here, as construed by the courts, clearly and unambiguously covers recall and recall-related expenses even though neither recall nor anything akin to it is mentioned in the coverage provision of the policy. Second, it argues that if there be ambiguity in the policy, it must be resolved in favor of the insured without resort to extrinsic evidence.

This aversion to extrinsic evidence may perhaps be explained by the fact that at no time until counsel became involved following the recall was there any thought, belief, or intent on the part of Johnson & Johnson or of any party that recall and expenses related thereto, which were neither sought nor paid for, were covered. Rather, in the years preceding the recall, Johnson & Johnson's Corporate Insurance Department, in Annual Reports to the Board of Directors, unequivocally stated that it maintained no recall coverage whatsoever. Johnson & Johnson, which at one time carried recall coverage, knew such coverage could be purchased, elected not to purchase it because the cost was prohibitive, and now claims that it enjoys recall coverage anyway. These and all other material facts are undisputed and it is similarly undisputed that the issue as to whether recall and recall-related expenses are within the scope of the policy is ripe for summary resolution on the cross motions of the parties.

There are, no doubt, a host of reasons— legal, commercial, and moral—for the massive recall campaign and its various permutations. The question before the court, however, is whether Johnson & Johnson can quite literally "pass the buck" to its insurers and require them to compensate it, through plaintiff, for the actions which it took. To that question, which itself is proof positive of the adage "nothing ventured, nothing gained," the answer must be "No".

I. THE INSURANCE CONTRACT

In 1977, Johnson & Johnson signed on behalf of itself and its subsidiaries an excess insurance policy with representatives of defendant North River Insurance Company, policy number JU 1081. The terms of the policy with North River are identical to those of the other defendant excess and umbrella insurers, each of which subscribed to an additional layer of coverage. The policies were renewed annually, and the North River policy applicable here was executed on May 13, 1982.⁵

The parties contend that the policy language clearly supports their respective positions. The relevant policy language provides as follows:

COVERAGE OR CONDITIONS UMBRELLA LIABILITY

* * * * * *

1. COVERAGE

The Company North River hereby agrees, subject to the limitations, terms and conditions hereinafter mentioned, to indemnify the insured Johnson & Johnson and its subsidiaries for all Sums which the insured shall be obliged to pay by reason of the liability

(a) imposed upon the insured by law, or

(b) assumed under contract or agreement by the Named Insured and/or any officer, director, stockholder, partner or employee of the Named Insured, while acting in his capacity as such.

for damages on account of—

(i) Personal Injuries

(ii) Property Damage

(iii) Advertising Liability

caused by or arising out of each occurrence happening anywhere in the world.

* * * * * *

THIS POLICY IS SUBJECT TO THE FOLLOWING DEFINITIONS:

* * * * * *

5. OCCURRENCE

The term "Occurrence" where ever used herein shall mean an accident or happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury, property damage or advertising liability during the policy period. All such exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed one occurrence.

* * * * * *

THIS POLICY IS SUBJECT TO THE FOLLOWING EXCLUSIONS:

This Policy shall not apply:—

* * * * * *

(c) to claims made against the Insured:

* * * * * *

(iv) for the withdrawal, inspection, repair, replacement, or loss of use of the Insured's products or work completed by or for the Insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.

A. THE COVERAGE PROVISION

1. The Impact of Precedent

Plaintiff states that the coverage provision of the policy clearly covers first-party recall expenses or "first-party mitigation expenses", as plaintiff prefers to call them, presumably because that is the description used in the cases on which it relies. Defendants contend that the coverage provision only contemplates certain third party claims against the insured. Clearly the coverage provision by its terms does not include recall and recall-related expenses whether those expenses are denominated as "recall", "withdrawal", or "mitigation". Indeed, Exclusion (c)(iv) (the so-called "sistership" provision, discussed below), which specifically excludes coverage for third-party "withdrawal claims", is the only point in...