United States District Court, E.D. Kentucky, Northern Division, Covington
COLONY NATIONAL INS. CO., Plaintiff
SORENSON MEDICAL, INC., ET AL., Defendants.
MEMORANDUM OPINION AND ORDER
WILLIAM O. BERTELSMAN, District Judge.
This matter is before the Court on plaintiff's motion for summary judgment on defendants' counterclaims for bad faith. (Doc. 124). The Court previously heard oral argument on this motion, after which it took the matter under submission.
Having further reviewed the record, the Court now issues the following Memorandum Opinion and Order.
Factual and Procedural Background
A. The Insurance Policies at Issue
Sorenson Medical, Inc. ("SMI") manufactured pain pumps which were used, as relevant here, in the shoulders of patients following surgery. SMI ceased operations in 2007, but a related entity - Sorenson Medical Products, Inc. ("SMPI") - continued manufacturing and marketing the pain pumps.
SMI obtained both primary and excess insurance policies for the periods July 1, 2007 to July 1, 2008 (the "Year One" policies), and July 1, 2008 to July 1, 2009 (the "Year Two" policies). The primary carrier was Columbia Casualty Company ("Columbia"), and the excess carrier was Colony National Insurance Company ("Colony"). Both policies had limits of $10 million, and both were "claims made and reported" policies.
The Columbia Year One policy had a per claim deductible of $25, 000. The Columbia Year Two policy had a $250, 000 per claim deductible.
The Year One Columbia and Colony policies were issued only to SMI. The Year Two Colony policy was also issued only to SMI. The Year Two Columbia policy, however, included as insureds numerous other Sorenson-related entities, including SMPI.
B. The Pain Pump Cases and Coverage Issues
On February 14, 2008, the first of numerous product-liability cases involving the pain pumps manufactured by Sorenson was filed in this court. Ritchie, et al. v. SMI Liquidating, Inc., Cov. Civil Action No. 08-19. Ultimately, a total of thirty-seven claims were filed in Kentucky, Minnesota, Utah, California, and Mississippi.
Although these claims spanned the Year One and Year Two policy periods, in August 2008, Columbia determined that it would treat all the shoulder-pump claims as "related" and thus constituting a single claim under the Columbia Year One policy, subject to a single $25, 000 deductible. Columbia thus began paying defense costs for all shoulder-pain-pump claims under its Year One Policy.
Meanwhile, shortly after Columbia informed Sorenson of its "related claims" decision, Colony - who had been notified of some of the Kentucky pain-pump cases by Columbia - began reviewing possible coverage issues. Colony claims adjuster John Reitwiesner authored a report dated September 30, 2008, detailing the pain-pump cases. Colony also retained outside coverage counsel.
On November 17, 2008, Colony issued a reservation of rights letter to Sorenson. (Doc. 28-36). The letter stated, among other things, that any request for coverage was premature because the underlying coverage through Columbia had not yet been exhausted. The letter also recited other provisions of the Colony policy, including the "claims first made and reported" requirement. Further, the letter stated:
Some of the underlying claims were filed against SMI Liquidating, Inc. f/k/a Sorenson, Medical, Inc. Please explain the relationship between SMI Liquidating, Inc. and Sorenson Medical, Inc. Argonaut reserves the right to deny coverage to any entity that does not qualify as an insured under the Argonaut policies.
(Id. at 10). In addition, the letter contained a chart showing the eight claims for which Colony had received notice, as well as the approximate claim dates. (Id. at 3).
For the next year, Colony continued to monitor the pain pump cases and review coverage issues.
In early November 2009, a multiple-day mediation of the Kentucky pain-pump cases was held. Several of the higher-value claims were settled and paid by Columbia under its Year One policy, including a claim by Amber Cornett. Reitwiesner attended the mediation on behalf of Colony. At this mediation, Sorenson expressed its disagreement with Columbia's "related claims" position. (Gregory Taylor Depo., Doc. 124-5, at 83).
In late 2009, Colony retained an outside consultant, Jack Murphy, to evaluate Colony's obligation to provide coverage to Sorenson.
A second mediation was scheduled for March 2-4, 2010. In advance of that date, Columbia tendered to Sorenson the remaining estimated balance of $3.7 million under Columbia's Year One policy. Columbia also restated its "related claims" position, advised Sorenson that it would not take the lead at the settlement conference, and advised Sorenson that, once Columbia's Year One policy was exhausted, it would pass defense and indemnity obligations for all remaining claims to Colony.
On February 23, 2010, Colony's counsel wrote a letter to Sorenson's counsel, stating its position in anticipation of the mediation. (Doc. 129-4). Colony stated that: Sorenson entities other than the named insureds would have to contribute to the settlements; Colony needed to understand Sorenson's position on the "related claim" issue in order to know when its policies would be triggered; and Colony had become aware of possible misrepresentations in Sorenson's policy applications. (Id. ).
At the March 2010 mediation, the parties disagreed about which policy should cover Year Two claims that were part of the proposed settlement. Columbia, having tendered the remaining limits of its Year One policy, took the position that its Year Two policy did not cover the claims. Sorenson demanded that Colony fund the portion of the settlements not covered by the remaining Columbia funds. Ultimately, several claims were settled with Columbia's remaining $3.7 million, $3.56 million from Colony, and $1 million from another carrier that insured a related Sorenson entity. The settled claims included those of Kentucky plaintiffs Spencer Morgan, Cassie Voges, and Jeffrey Wera.
After the March 2010 mediation, Columbia and Sorenson refused to fund Sorenson's defense in the numerous pain-pump cases still pending, and Sorenson argued it would be bad faith if Colony refused to do so.
Thus, on April 1, 2010, Colony sent another reservation of rights letter to defendants' counsel, for the first time identifying "gaps" in the coverage. (Doc. 27-15). The letter opened:
Now that Colony National will be funding the defense of some (but not all) of the Sorenson entities in connection with certain lawsuits, we write to formally set forth the reservation of rights under which those costs will be reimbursed.
The letter then set forth specific issues:
1. Because both the Zink and Cornett claims were made in the 2007-2008 policy period but not reported to Colony until the 2008-2009 policy period, and because the Colony policies are "claims first made and reported" policies, neither claim triggers a coverage grant. Consequently, the Cornett settlement payment also does not erode the underlying limit of the [Columbia] policy for the purpose of reaching the Colony excess coverage.
2. Because the [Columbia] underlying policies contain a "relate back" provision, [Columbia's] position is that the many pain pump claims made in the 2008-2009 period "relate back" and fall within the coverage of the underlying [Columbia] 2007-2008 policy. However, the Colony policies contain no such "relate back" clause. Therefore, claims first made and reported in 2008-2009 would be covered only under the 2008-2009 Colony policy. However, because those claims are covered only under the 2007-2008 underlying coverage, they cannot erode the underlying coverage for purposes of the 2008-2009 Colony excess policy.
(Id. ) The letter summarized these points:
For practical purposes, this means that, if claims "relate back" under the 2008-09 [Columbia] policy, but not under the 2008-09 Colony National policy, the insureds have a substantial gap in coverage for both years. Unless and until liability and defense costs - for claims first made in the 2007-08 or the ...