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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