ILNews

COA: Duty to defend not triggered

Jennifer Nelson
January 1, 2008
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Frustrated with the parties involved in the litigation, the Indiana Court of Appeals April 17 reversed a trial court's ruling in a case involving public-access laws, fraud, and an insurer's duty to defend.

In Allianz Insurance Company, et al. v. Guidant Corporation, et al., No. 49A05-0704-CV-216, Chief Judge John Baker wrote the unanimous opinion regarding the "monstrosity of a litigation that has crossed state lines" is a straightforward dispute about when and whether an insurer's duty to defend had been triggered. The judge cited the court's frustration that the parties forced Indiana courts to take part in a race to the finish with Illinois courts.

Allianz began providing insurance to Guidant and its subsidiaries (the policyholders) in 1997. In 1999, the Food and Drug Administration approved the Ancure Device, a Y-shaped graft inserted inside the major aortic blood vessel to support a weakened vessel wall; it was made by a Guidant subsidiary.

When Guidant provided its application for coverage from Sept. 1, 2000, to Sept. 1, 2001, it noted it was unaware of any defects in its products that would give rise to liability claims. Allianz approved the year's insurance coverage, including any entitlement to a defense from its insurers is subject to a self-insured retention (SIR). Once Guidant absorbs the expenses up to the amount of the SIR, the insurer's obligation is then triggered.

Guidant's policy had a SIR of $5 million per occurrence and $8 million in the aggregate. A batch clause included in the policy said when all losses come from one batch - products with the same known defect identified by the same advisory memorandum sent to health professionals warning of such defects - then all losses will be considered one occurrence.

In March 2001, Guidant announced a voluntary recall of the Ancure Device, and the FDA investigated the company's failure to make certain disclosures about the device's performance. In November 2003, Allianz filed a complaint against Guidant in Illinois seeking damages and rescission of the policy for fraud. That same month, Guidant filed a complaint in Indiana against the insurers alleging they breached their duty to defend and that Guidant is entitled to coverage for those losses.

In Indiana, the trial court denied Allianz's motion for partial summary judgment on coverage issues relating to the SIR because Guidant proved the applicable $5 million SIR had been met for the year through the batch clause; Allianz didn't appeal this decision.

The trial court also entered an order striking the John P. Killacky affidavit, which supported the insurer's fraud defense. The court granted Guidant's motion for partial summary judgment against Allianz on its claim for breach of duty to defend. The insurer appealed these two rulings.

Guidant appealed the trial court denial of its motion for judgment on the pleadings on Allianz's fraud defense, which ruled the alleged fraud is best answered by a trier of fact.

Before ruling on the issues on appeal, Chief Judge Baker first addressed the public-access issue of this case. The trial court entered a protective order sealing the case from public view, which would have been allowed had the trial court followed Administrative Rule 9(H)(2) and conducted a public hearing first. Sealing the case was improper and violated Indiana's public-access laws regarding court records, he wrote. And because there is no confidential information in the record, briefs, or issues, the appellate court did not hold back from giving a full description of the facts, arguments, or resolution of the issues.

On the issue of Allianz's fraud defense, Guidant argued because the insurer did not rescind the policy and retained the premiums received, it can't argue the policy is void because of fraud. Allianz incorrectly relied on Indiana and Illinois caselaw to show it has the right to partial rescission by retaining all the premiums and rescinding only part of the policy. Neither Indiana nor Illinois provides the option of partial rescission to a party asserting fraud, and thus, the trial court should have granted Guidant's motion for judgment on the pleadings on Allianz's fraud defense, wrote Chief Judge Baker.

Also, because this defense is no longer a part of the appeal, the court didn't address Allianz's challenge of the trial court order striking the Killacky Affidavit, which supported the fraud defense.

Allianz argued summary judgment in favor of Guidant on its duty to defend claim was an error because its duty to defend was suspended when Allianz filed the Illinois action. Chief Judge Baker wrote while it is true the act of filing a declaratory action protects the insurer's right to raise coverage defenses, and it's free to disassociate itself from the case and seek reimbursement for its expenses incurred up to that point in time, the mere act of filing a declaratory action doesn't suspend the duty to defend. If such a rule existed, insurers would file a declaratory action in every case, he wrote.

However, the trial court did err in granting partial summary judgment in favor of Guidant on this issue. Indiana law states that only after a SIR is exhausted does an insurer's duty to defend kick in. The trial court erred in concluding the mere potential for coverage is enough. Guidant argued that the batch clause was satisfied for the year in question and they reached their $5 million SIR. The company had mailed "Dear Doctor" letters in March 2001 and May 2001 informing doctors about issues raised regarding the Ancure Device and various recalls, but the letters sought to ensure the medical community the products were safe, not warning of dangers. As such, the letters don't qualify as advisory memorandum needed to trigger the batch clause, Chief Judge Baker wrote.

The appellate court reversed the grant of partial summary judgment on the duty to defend claims; however, because Allianz did not appeal the order, the court is unable to direct summary judgment in the insurer's favor.

The appeals court reversed the trial court and remanded for further proceedings.
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  1. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

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