Clausen Miller Helps Excess Insurers Reverse $155 Million Judgment -- No Advertising Or Personal Injury Coverage For Alleged Defamation Or Disparagement Of Third Parties Not Plaintiffs In Underlying Lawsuits

In BASF AG v. Great American Assurance Co., et al., 2008 WL 1701864 (7th Cir. April 14, 2008)(applying Illinois law), the Seventh Circuit held that excess/umbrella insurance carriers had no duty to defend a pharmaceutical company with respect to lawsuits brought by consumers and health insurers seeking economic damages for claims of monopolization, racketeering, fraud, and deceptive business practices, reversing a $155 million-plus judgment entered against the insurers by the district court.  

Knoll Pharmaceutical (“Knoll”), the predecessor to BASF AG (“BASF”), manufactured the synthetic thyroid drug Synthroid.  In 1996 and 1997 lawsuits were brought by consumers of the drug Synthroid and health insurers claiming that they had overpaid for the drug.  Central to these suits were allegations based upon a Wall Street Journal article which reported that a 1990 study commissioned by BASF had concluded that there were cheaper bioequivalents to Synthroid which could cut U.S. healthcare costs by millions of dollars if a switch was made to cheaper alternatives.  BASF allegedly prevented the publication of the study and attempted to discredit its author.

In 2000, Knoll sued its primary carriers seeking coverage for these lawsuits.  The district court found that the underlying complaints alleged a covered offense of disparagement under the primary carriers’ policies.  See, Knoll Pharmaceuticals v. Automobile Ins. Co. of Hartford, 152 F.Supp.2d 1026 (N.D. Ill. 2001) ("Knoll I").  The primary carriers did not defend Knoll in the Synthroid claims. 

The district court focused upon the policies’ definition of “advertising injury” which included “injury arising out of oral or written publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products, or services.”  The court held that the underlying Synthroid complaints had alleged an “advertising injury” as that term was defined in the policies.  The court also concluded that since the primary carriers did not defend BASF they were estopped from asserting coverage defenses with respect to any duty to indemnify.  The primary carriers were ordered to indemnify BASF up to their respective policy limits, pay $39.4 million in BASF’s defense costs plus prejudgment interest.  All of the primary carriers ultimately settled during appeal, before a decision was rendered by the Seventh Circuit.

In 2004, BASF filed a second coverage action against its umbrella carriers in the Northern District of Illinois in which BASF sought both declaratory and monetary relief.   BASF asserted that the umbrella carriers also had breached a duty to defend BASF with respect to the Synthroid claims and that the umbrella carriers should be estopped from refusing to indemnify BASF.  BASF sought over $110 million in fees and costs from the Synthroid litigation which it claimed not to have recovered from the primaries.  

The umbrella carriers filed summary judgment motions on four separate coverage defenses: (1) the Synthroid litigation did not give rise to an offense of disparagement covered by the policies because the underlying plaintiffs (consumers and third-party health care payors) were not themselves disparaged; (2) there was no actionable disparagement under the facts and circumstances of the underlying cases; (3) there was no offense or injury during the policy periods; (4) BASF’s late notice and voluntary assumption of its settlement obligation precluded coverage under the policies.

The district court concluded that the umbrella carriers had breached their contractual duties to defend BASF, denying the insurers’ motions for summary judgment and granting summary judgment in favor of BASF.  The court also found that the insurers were estopped from asserting defenses to any duty to indemnify.  In reaching this decision, the court relied heavily upon the Knoll I decision, adopting the rationale that the claims “may have had their origin in slander, libel, or disparagement” and thus, fell under the umbrella policies’ definitions of advertising injury.  The Knoll I court had recognized that the underlying complaints did not allege libel, slander or disparagement against the underlying plaintiffs but “grew out of various disparaging, defamatory, and libelous statements” such as BASF’s claims that its drug was superior to other thyroid drugs.

The district court ordered the case to proceed to a jury trial to set damages.  The jury awarded $90 million to BASF, allocating $50 million to Federal, $30 million to Westchester and $10 million to Great American, each of the carrier’s full limits.  The jury also found that the carriers were jointly and severally liable for $21.4 million in defense costs, the amount BASF claimed not to have recovered due to settlements with the primary carriers.  The district court added $45 million in prejudgment interest to the jury award.

On appeal, the insurers argued, inter alia, that the Synthroid claims did not fall under the umbrella policies’ definitions of personal and advertising injury.  The insurers maintained that no duty to defend was ever triggered and that summary judgment should have been entered in the insurers’ favor.  Applying Illinois law, the Seventh Circuit agreed with the insurers that the facts in the Snythroid litigation complaints were insufficient to state a claim for the offense of libel, slander, or disparagement.  The court noted that under Illinois law, these claims require that the false statement be made about the plaintiff.  Since the underlying plaintiff consumers and health insurers did not claim that BASF made any defamatory, libelous, slanderous, or disparaging statements about the class members or their products, the complaints did not state claims for libel, slander or disparagement.  Further, the court concluded that the class plaintiffs did not have standing to bring claims for libel, slander or disparagement against BASF.  The parties injured by the allegedly disparaging statements, the author of the 1990 study and her affiliates, were not members of the Synthroid plaintiff classes.  

The Seventh Circuit specifically rejected the rationale of the Knoll I district court decision that a claim did not need to allege every element of an offense delineated by the umbrella policies in order to trigger the insurers’ duty to defend.  The Seventh Circuit stated that “this approach would unmoor coverage determinations from the factual allegations of the complaint - something that Illinois law will not permit us to do.”  The court declined to adopt the sweeping definition of “arising out of” that the district court employed.  Thus, the Seventh Circuit reversed the judgment of the district court and remanded the case for entry of summary judgment in favor of the defendants.  

The Seventh Circuit’s ruling guts Knoll I, a decision frequently relied upon by insureds attempting to broaden the scope of coverage by expanding policies’ “arising out of” language beyond all reasonable bounds.  The Court instead correctly focused on the claims alleged by the underlying plaintiffs (not tangential background facts) -- which simply did not assert an enumerated offense against the insured and thus did not give rise to any potential or actual coverage under the subject policies.    

On behalf of Great American, this case was handled at the trial level by CM partners Margaret J. Orbon, James J. Berdelle and Colleen A. Brown. The case presented significant litigation challenges ranging from the court’s overly restrictive discovery rulings which precluded review and use of key BASF documents and limited the number of depositions which could be taken, to the court’s rulings on motions in limine and jury instructions which effectively gutted key damages defenses.  The trial team was assisted by CM partner and Appellate Practice Group Co-Chair Melinda S. Kollross, who reviewed all significant rulings from an appellate perspective and provided invaluable guidance in creating and preserving the best record for appeal.  The entire team worked to delineate the issues at trial and on appeal.  Melinda wrote and presented strong cogent arguments which ultimately prevailed and resulted in the Seventh Circuit ordering that judgment be entered in favor of our client, Great American.  The synergistic approach taken by the litigation team greatly enhanced our client’s opportunities to present and prevail upon the strong defenses which were rejected by the trial court, but ultimately accepted by the Seventh Circuit.