Case No: 1997 Folio No 2248
IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 18th April 2000
|JOHN WYETH & BROTHER LIMITED||Claimant|
|- v -|
|(1) CIGNA INSURANCE COMPANY OF EUROPE SA/NV
(2)HOME INSURANCE COMPANY LIMITED
(3) ST PAUL MERCURY INSURANCE COMPANY
(4) CIGNA PROPERTY & CASUALTY INSURANCE COMPANY
(5) AETNA INSURANCE COMPANY
(6) CIGNA INTERNATIONAL CORPORATION
(7) CIGNA INTERNATIONAL HOLDINGS LIMITED
(8) CIGNA CORPORATION
(9) CIGNA INTERNATIONAL INSURANCE COMPANY LIMITED/CIGNA INTERNATIONAL INSURANCE MANAGERS LIMITED
(10) INA CORPORATION
The Hon. Mr Justice Langley
COPIES OF THIS JUDGMENT ARE AVAILABLE IN WORD 6 for WINDOWS 3.1 ON PROVISION OF A CLEAN DISC. APPLY TO THE CLERK TO THE HONOURABLE MR JUSTICE LANGLEY Telephone 0171-936-6395
Mr Justice Langley:
This judgment relates to three preliminary issues ordered to be tried in these proceedings in which the claimant ("Wyeth") is seeking to recover from the defendant insurers (companies to which I will refer collectively as "Cigna") substantial sums (said to be some £17.5 million) incurred by Wyeth in legal costs in defending claims brought against Wyeth by third parties for damages for alleged negligence in the manufacture and sale of certain drugs in the Benzodiazepine class.
The defendant companies provided product liability insurance for Wyeth over the period from May 1, 1972 to October 31, 1980. Wyeth claims that the terms of the relevant covers entitle it to recover the costs. Cigna say they do not.
In order to address the preliminary issues (which are set out in the Appendix to this judgment) it is necessary to consider some of the provisions of the various covers in detail and to consider the nature of the third party claims but by way only of setting the scene and based very substantially on the statement of facts provided for the trial of the issues the general context can be stated fairly shortly.
There are essentially two types of cover and two overall periods of cover which are material. As to the types of cover I propose to use the language of local primary covers and worldwide excess covers albeit the correct characterisation of the covers is a matter of some dispute.
Although in general all the relevant policies ran from year to year, during the period between May 1, 1972 and October 31, 1977 local primary cover for Wyeth in the United Kingdom, Northern Ireland and the Republic of Ireland was provided by a group of companies led by the Guardian Royal Exchange ("GRE"). Those covers are referred to cumulatively as "the GRE policies" and the companies are referred to as "the GRE insurers". The GRE policies are governed by English law. The GRE insurers, unlike all the other insurance companies involved in the covers, were not part of what may now be called "the Cigna group". Under the GRE policies the GRE insurers had the right, on payment of the maximum limit of indemnity under the covers (£200,000 in each year of cover), and payment of legal costs incurred to date, to bring any further exposure under the policies to an end. This provision is called a "cap on liability" by Mr Kendrick and "a buy-out clause" by Mr Slater. I shall use the latter.
From November 1, 1977 to October 31, 1980 the GRE policies were replaced by local primary covers with Home Insurance Co Ltd ("Home"). These covers are referred to cumulatively as "the AFIA local policies". "AFIA" because Home was then a member of AFIA (the American Foreign Insurance Association). The AFIA local policies are also governed by English law. They too contained a buy-out clause.
Over the whole period from May 1, 1972 to October 31, 1980 Wyeth also bought worldwide excess covers. From May 1, 1972 until the end of July 1975 these covers were provided by St. Paul Mercury Insurance Company ("St Paul") and thereafter until October 31, 1980 by Aetna Insurance Company ("Aetna"). These covers are referred to cumulatively as "the AFIA Worldwide policies", and separately as "the St Paul covers" and "the Aetna covers". "AFIA " again because both St Paul and Aetna were members of AFIA.
The AFIA Worldwide policies are governed by New York law. It is the proper construction and effect of their terms which is the major issue before the court, hence the expert evidence on New York law which was before the court both in writing and orally. Indeed, in the event, that evidence was the only oral evidence adduced at the hearing but the parties sensibly agreed that the documents to which I make reference were to be admissible as evidence not only of their existence and authenticity but also as to the truth of their contents.
For the purposes of this judgment one or more of the other defendant companies ( from about January 1984) is to be taken as having acquired the relevant interests of St Paul, Home, and Aetna in the covers, hence the collective reference to the defendants as Cigna. For the purposes of this litigation only, the first defendant has accepted any liability found against any defendant under the Afia Worldwide Policies.
From about 1987 onwards claims were made against Wyeth in England and Wales, Scotland, Northern Ireland and the Republic of Ireland in what has been referred to generally as "the Benzodiazepine litigation". There were some 11,000 claims in all.
In England the litigation was conducted as a group claim in which the claimants were required to adopt a Master Statement of Claim (served in November 1990) so far as applicable to their particular circumstances. There were also orders made in November 1991 for the provision of individual Particulars of Claim in each case dealing with such matters as limitation issues and the injuries alleged to have been suffered. The result was that when these particulars were served it became possible to ascribe a date when it was alleged that the particular claimant had first ingested the drug in question and to calculate when it was alleged that the claimant had become dependent on the drug (which was a major feature of the claims).
Paragraph 27B (c) of the Re-Amended Points of Claim in these proceedings alleges that:
On 18th March 1994, following service of a Master Statement of Claim and particulars by the claimants in the Benzodiazepine litigation in the English action, it became apparent for the first time that only 61.05% of the claims were alleged to fall within the period 1 May 1972 to 31 October 1980 ....
That period is the aggregate coverage period for the AFIA Worldwide policies. Although this paragraph of the Claim is not accepted to be accurate by Cigna, at least as to the date relied upon, for the purposes of the preliminary issues the important feature is that it is not in issue that at some date it became apparent that nearly 40% of the claims in the English action fell outside the period of any relevant insurance cover.
The Benzodiazepine litigation has been defended by Wyeth throughout. To date none of the claims has been successful in any jurisdiction, and no payment has been made to any claimant. The group action in England collapsed at the end of July 1997 when the House of Lords refused the plaintiffs leave to appeal against a judgement striking out the last individual claims. The vast majority of claims have been discontinued. There are now 324 pursuers in Scotland, but proceedings in Scotland were stayed pending developments in the group action in England and the Scottish Legal Aid Board has discharged legal aid certificates where granted. One plaintiff remains in Northern Ireland and 88 in the Republic of Ireland. Wyeth has made virtually no recoveries of the costs it has incurred because the great majority (some 95%) of claimants were legally aided.
THE GRE BUY-OUT
On various dates between October 5, 1990 and February 21, 1991, the GRE insurers paid Wyeth their respective proportions of the limit of indemnity under the buy-out clauses in the GRE policies. On August 12, 1991 the GRE insurers paid a further total sum of £750,000 in satisfaction of their liabilities for legal costs in the Benzodiazepine litigation up to the date of payment of the limit of indemnity.
The buy-out in the Afia (Home) local policies has not been exercised.
THE PRELIMINARY ISSUES
The first issue depends on the construction of the Afia Worldwide policies. It raises two questions. First whether or not those policies provide any cover at all in circumstances where GRE exercise the buy out in the GRE policies. Cigna submits that they do not because the cover is excess of the actual limits in the GRE policies and requires that those limits have in fact been paid to, or on account of actual payments to, third parties of which there have been none. The second question is whether, even if Cigna is wrong on the first, the existence or exercise or exercise without replacement of the GRE buy-out was, as Cigna contends, a breach of an express clause in the Afia Worldwide policies (until July 1978) known as "the Maintenance Clause" and if it was whether the effect of such a breach is that Cigna is not liable for the costs under the policies. The Maintenance Clause needs to be considered in full but in simple terms it contained a warranty by Wyeth to maintain in force "underlying policies".
The second Issue raises questions which, to an extent, overlap with the first but the thrust of the Issue is to address the questions (applying New York law) of which claims are covered by the Afia Worldwide policies and whether, and if so how, the costs of defending the claims in the Benzodiazepine litigation are to be apportioned where they extend over more than one policy year and to years in which Wyeth had no cover at all, and what, if any, cover applies where the costs are incurred before it is clear or known whether or not the claims do fall in any policy year or years or outside the years of cover. In the course of the hearing this Issue has been expressed in terms such as whether it suffices to trigger the obligation to pay legal costs that a given claim if made out might be within the cover (Wyeth's case) or whether it must be (Cigna's case) and if it covers both covered and uncovered periods whether and if so on what basis the insured has to accept an allocation of part of the exposure. Cigna's case is that if it is liable for costs at all and it is not possible to find a particular date on which the claimant's injury can be said to have occurred all insurers and the insured when uninsured in that time are liable and the cost falls to be apportioned on a time on risk basis. Wyeth's case is that if and for so long as the pleaded claims arguably come within the period of cover then insurers have agreed to and must pay the costs and it is no concern of the insured that insurers may have rights to seek contribution from other insurers but they have no rights against the insured.
The third Issue raises a discrete question on another express term in the Afia Worldwide policies included in them until 1975. The clause is referred to as "the Efficacy Exclusion". Again the terms of the Clause must be considered in full but in summary it excluded cover for bodily injury resulting from the failure of Wyeth's products to "perform the function or serve the purpose intended". Cigna say the claims in the Benzodiazepine litigation are excluded from cover by the Efficacy Exclusion. Wyeth say they are not. Hence the need also to consider the claims, albeit fortunately 10 sample claims have by agreement been placed before the court and very few of them have in the event been referred to during the hearing. The existence of the Master Statement of Claim also helps to alleviate the task.
Wyeth's case is that the Efficacy Exclusion is intended only to exclude simple cases where a drug is not fit for its purpose because it does not work whereas the Benzodiazepine claimants alleged that the drug caused them injury by inducing physical and chemical dependency which manifested itself in painful withdrawal symptoms as well as other complaints. As Mr Kendrick put it in opening the complaint was "you made me worse" not "you failed to make me better". Cigna's case (as it developed and was expressed in Mr Slater's closing submissions) is that although the claims alleged causation of bodily injury by both ingestion of and withdrawal from the drugs that injury was caused by the failure of the drug to serve its purpose by reason of "a deficiency in the printed instructions" (one of the matters expressly referred to in the clause).
Apart from evidence concerning substantive New York law on the question of apportionment (Issue 2) the relevance of New York law is limited to matters of construction of the Afia Worldwide policies. The extent to which foreign law is relevant on construction issues was, as is agreed, succinctly put by Lord Greene M.R. in Rouyer Guillet v Jackson Knowland  1 All ER 244:
On a matter of French law the decision of a French court would be most persuasive. On the other hand, evidence on the construction of a private document, such as articles of association, is admissible so far as it deals with French rules of construction or French rules of law or the explanation of French technical terms, but evidence as to its meaning after these aids have been taken into account Is not admissible. It is for the court to construe the document, having fortified itself with the relevant evidence.
Both expert witnesses (Judge Milonas for Wyeth and Mr Wollan for Cigna) were very well qualified to and did provide helpful and impressive expert evidence on New York law. The line between admissible and inadmissible evidence as drawn by Lord Greene is easier to state than to apply and inevitably (with cross-examination) each strayed over the line on occasion. Although there was radical disagreement on the conclusion a New York court would reach, on the rules of construction there was not, on analysis, much more than a difference of emphasis. Essentially the rules come to this:
(1) The policies must be interpreted as a whole to give effect to the intentions of the parties.
(2) If the words used are unambiguous then effect must be given to them, and it is not legitimate to "create" an ambiguity where none exists.
(3) If there is ambiguity, evidence is permitted to explain and establish the intention of the parties. The evidence may include evidence of negotiations, drafting history, correspondence and statements prior to contract and conduct and statements subsequent to the contract. The experts were at issue as to whether evidence of uncommunicated intentions would ever be admissible, but in the event there is no need to try to resolve the conflict.
(4) If the evidence remains inconclusive so that ambiguity remains, the doctrine of contra proferentem is applied. The experts were also at issue as to the extent of the application of the doctrine where the parties are both sophisticated commercial entities, the contract may have been jointly drafted or fully negotiated and overall, in the specific context of insurance, whether it is right to say that New York courts construe policies to provide coverage, and not to deny coverage. Judge Milonas' evidence was that the doctrine was applied rigorously in favour of the insured; Mr Wollan's evidence was that its application was much more circumscribed.
In the event I have not felt the need to resort to the doctrine and so it is unnecessary to resolve this conflict, but I am satisfied that the weight of authority clearly favours the views of Judge Milonas. I was referred to a paper entitled "the Rules of Insurance Policy Construction and the Myth of the Sophisticated Insured" published in 1989 which indeed seeks to explode the myth of the title. In 1983 a New York District Court in American Home Products v Liberty Mutual Insurance 565 F Supp. 1485 considered the doctrine was applicable where Wyeth's parent company was the insured. In 1988 another District Court in Ogden Corporation v The Travellers' Indemnity Company 681 F Supp. 169 applied the doctrine in favour of the insured in a case where the insured's broker was primarily responsible for drafting the insurance provisions at issue (which is not suggested in this case). Thus insofar as I have decided questions in favour of Wyeth, had it been relevant and permissible to refer to the doctrine it would have served to confirm my conclusions.
The wording of these policies was (so far as is material) the same throughout the period to which they applied. The first full-year policy ran from November 1, 1972 to October 31, 1973.
The policies covered Public Liability, Products Liability and Employers' Liability. The first two were subject to a £200,000 "limit of indemnity" in each year. There was no limit of indemnity for Employers' Liability. The terms were printed standard terms.
The material insuring clause provided that:
[GRE] will subject to ... the conditions of this Policy indemnify the insured against all sums which the Insured becomes legally liable to pay as damages in respect of ... bodily injury to any person .... happening ... during the Period of Insurance and caused by [pharmaceutical products] sold, supplied ... in Great Britain ... in connection with Wyeth's business.
[GRE] will also pay Legal Costs and Solicitors' Fees.
The Limit of Indemnity was expressed to be:
The liability of [GRE] for all damages in respect of all bodily injury loss or damages happening in any one Period of Insurance shall not in the aggregate exceed the limit of indemnity.
"Legal Costs" were defined to mean "legal costs and expenses recoverable by any claimant and all costs and expenses incurred with the written consent of [GRE]".
So far as material the "Conditions" provided:
CLAIMS 4 (a) The Insured shall give written notice to [GRE] of any bodily injury loss or damage or claim or proceeding immediately the same shall have come to the knowledge of the insured or his representative.
(b) The insured shall not admit liability for or negotiate the settlement of any claim without the written consent of [GRE] which shall be entitled to conduct in the name of the Insured the defence or settlement of any claim ... and shall have full discretion in the conduct of any proceedings and in the settlement of any claim ....
(d) In connection with any one claim or number of claims other than in respect of claims ... [for] Employers' Liability occurring in any one Period of Insurance [GRE] may at any time pay to the Insured the amount of the Limit of Indemnity (after deduction of any sum or sums already paid as compensation) or any less amount for which such claim or claims can be settled and thereafter [GRE] shall be under no further liability under this Policy in connection with such claim or claims except for Legal Costs incurred prior to the date of such payment.
Condition 4(d) is the buy-out clause. I was told that such clauses are and were at the time to be found in the standard wordings of many English product liability insurers but were not commonly available in the United States of America. None of the American authorities cited (there were over 100 in the Bundles) involved or referred to such a clause.
On October 5, 1990 when the first GRE insurers exercised the buy-out their solicitors wrote to Wyeth's then solicitors:
Pursuant to Condition 4(d) of the Policy our clients hereby terminate their liability to your clients in respect of Product Liability by paying their proportion of the Limit of Indemnity under the Liability Policy for each of the five years and we enclose a cheque ... payable to John Wyeth & Brother Limited.
The letter continued by asking a number of questions about the amount of defence costs and expenses in the context of the costs indemnity in the condition.
The Excess cover during the period of the GRE policies was provided by the St Paul covers (from May 1972 to July 1975) and by the Aetna covers (from August 1975 to October 31 1977). Before turning to the Excess wording I will set out the terms of the Afia local policies with Home which replaced the GRE policies as the local primary covers.
The policies were in the same (standard) terms for each of the 3 years from November 1, 1977 to October 31, 1980.
The indemnity (subject to the conditions) was "against all sums which the Insured shall become legally liable to pay as compensation in respect of Accidents" occurring during any one period of insurance.
It also provided that:
The Company will in addition in respect of a claim for compensation to which the Indemnity expressed in this Policy applies, indemnify the insured against:
(a) all costs and expenses of litigation recovered by any claimant from the Insured and
(b) all costs and expenses of litigation incurred with the written consent of the Company.
The Limits of Indemnity were expressed as:
The Liability of the Company for all compensation payable
(a) to any claimant or number of claimants in respect of or arising out of any one Accident or all Accidents of a series consequent on one original cause shall not exceed US $500,000.
(b) in respect of all Accidents happening during any one period of Indemnity shall not exceed" US $500,000.
"Accident" included bodily injury to or illness of any person caused by any article supplied by Wyeth.
The applicable "Special Clauses" included an "Efficacy Exclusion" as follows:
This policy shall not apply to liability incurred by the Insured in respect of ... bodily injury resulting from the failure of the ... insured's products ... to perform the function or serve the purpose intended by the ... insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specification, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury ... resulting from the active malfunctioning of such products ....
The printed "Conditions" included (Condition 3) a claim notification clause which entitled Home "if it so desires to take over and conduct in the name of the Insured the defence or settlement of any claim".
Condition 4 was a buy-out clause. Its terms were to the same effect as the GRE buy-out clause:
In connection with any claim or claims against the Insured arising out of one accident or all accidents of a series consequent on or attributable to one source or original cause the Company may at any one time pay to the Insured the amount of the Limit of Indemnity (after deduction of any sum or sums already paid in compensation) or any lesser amount for which any such claim or claims can be settled and upon such payment the Company shall relinquish conduct and control of and be under no further liability under the Policy in connection with such claim or claims except for costs and expenses of litigation recoverable incurred in respect of matters prior to the date of such payment.
The excess cover during the period of the Afia Local policies was provided by the Aetna covers. There was no Efficacy Exclusion in the Aetna covers.
(1) THE ST PAUL COVERS
The policy was described as a "Comprehensive General Liability Policy". The Insured was American Home Products (AHP) and all Subsidiary and/or Affiliated Companies (one of which is and was Wyeth). Coverage under "Indemnifying Agreements " was for Bodily Injury Liability and Property Damage Liability combined, the former expressed as:
To indemnify the insured for all sums which the insured shall become obligated to pay by reason of the liability imposed upon him by law for:
Damages, including damages for care and loss or services because of bodily injury, sickness, or disease, including death at any time resulting therefrom, sustained by any person or persons and caused by accident.
Indemnifying Agreement II referred to "Defence, Settlement, Supplementary Payments."
It is further agreed that as respects insurance afforded by this policy the company shall:
(a) pay for the costs of legal expenses incurred with the consent of the company or at its sole option, defend any suit, even if groundless, false or fraudulent, brought against the insured on account of loss coming within the purview of this policy; but the company may make such investigation, negotiation and settlement of any claim or suit as it deems expedient.
(b) pay or reimburse the insured for all premiums on bonds to release attachments ....
The company agrees to pay or reimburse the insured for the amounts incurred under this Insurance Agreement No II in addition to the applicable limit of liability of this policy.
The policy applied only to occurrences (as defined) during the policy period in certain designated countries excluding the United States of America itself, China and certain East European countries among others. The Limit of Liability under Indemnifying Agreement I was $1.3m each occurrence and $1.3m in the aggregate both for product liability and for bodily injury. The same aggregate limit also applied to property damage.
It is Insuring or Indemnifying Agreement II which is at the heart of the present issues.
The Conditions of the Policy included:
4. Other Coverage. If the insured carries coverage other than that which is provided under this policy, coverage hereunder shall apply only as excess over and above the total amount of such other coverage.
8. Notice of Claim or Suit. If claim is made or suit is brought against the insured the insured shall immediately forward to the company ... every demand ...received ....
Condition 4 is an important provision underlying Cigna's submissions.
Three Endorsements to the St Paul covers must be set out. The "Maintenance Clause" was contained in the "Special Provisions" in paragraph 9 of Endorsement 9 as follows:
A reduced rate, to be determined per 1000 of sales shall apply in those countries where local admitted underlying products liability insurance is maintained at a minimum of the equivalent to US $25,000 each person
$50,000 Each Accident
$50,000 Aggregate Bodily Injury Liability
$10,000 Each Accident
$25,000 Aggregate Property Damage Liability
In consideration of the reduced premium for which this endorsement is written, it is warranted that underlying policies, or renewal or replacements thereof not more restricted, shall be maintained in force, except for any reduction of the aggregate limits contained herein solely by payment of claims. It is further agreed however, that if applicable limits of insurance in this policy are in excess of the limits provided by such other insurance, this policy shall provide excess insurance [in an amount sufficient to give the insured a combined amount of protection equal to the limits of the policy].
It is further agreed that the Insured will furnish the company with copies of underlying policies and the amount of sales by country for adjustment purposes.
Other terms and conditions of the policy not in conflict herewith remain unchanged.
The words in square brackets were subsequently deleted with retrospective effect.
Endorsement 11 provided that where local foreign insurance was not "afforded" "the insurance under this policy shall be primary insurance".
Finally the Efficacy Exclusion was contained in Endorsement 6. It was in substantially the same terms as the Efficacy Exclusion in the Afia Local policies. It read (so far as material):
This insurance does not apply to bodily injury ... resulting from the failure of the named Insured's products ... to perform the function or serve the purpose intended by the named insured, if such failure is due to a mistake or deficiency in any design, formula, plan, specification, advertising material or printed instructions prepared or developed by any insured; but this exclusion does not apply to bodily injury ... resulting from the active malfunctioning of such products ....
St Paul was aware of the countries (including England) in which Wyeth and AHP had underlying local cover because they were expressly told as much. St Paul also at least had the means of knowing the precise terms of the GRE insurances, as it was entitled to copies of them under the Maintenance Clause.
THE AETNA COVERS
Both parties eschewed any suggestion that the Aetna covers, which replaced the St Paul covers in July 1975, were to be construed in any different way from the St Paul covers, save that they contained no Efficacy Clause. However there were some differences in the wordings to which I should refer if only because on occasion there was some temptation for the parties, in particular Mr Slater, to submit that a particular point was especially clear in one wording if not the other. The major reason why both parties took the stance they did is that it was the intention of the parties that the replacement of St Paul by Aetna (which was for Aetna's internal reasons) was not intended to affect the essentials of the cover afforded and certainly there is nothing to suggest the contrary which one would expect if anything else was intended.
The first Aetna cover ran from July 1 1975 to July 1 1976. It expressly included, which the St Paul cover did not, contractual liability insurance. The printed insuring clause read:
The company will [pay on behalf of the insured] all sums which the insured shall become legally obligated to pay as damages because of ... A. bodily injury or ...B. property damage to which this insurance applies caused by an occurrence and the company shall have the right and duty [to defend] any suit against the insured seeking damages on account of such bodily injury or property damage even if any of the allegations of the suit are groundless, false or fraudulent, and may make such investigation and settlement of any claim or suit as it deems expedient, but the company shall not be obligated to pay any claim or judgment or to defend any suit after the applicable limit of the company's liability has been exhausted by payment of judgments or settlements.
I have placed square brackets round two passages in the clause because they were deleted and replaced by other words from the outset of the cover by paragraph 1 of what was called the "Foreign Coverage Endorsement".
The words "pay on behalf of the insured" were deleted and substituted with the words "indemnify the insured for or, at its sole option, pay on behalf of the insured". The effect seems to have been merely to enable insurers to pay Wyeth or a third party (at their option) for the liability cover itself.
The words "to defend" were deleted and substituted with the words "to reimburse the insured for costs to defend". The effect was that insurers' right and obligation actually to conduct the defence of a relevant suit against Wyeth was replaced with a right and obligation to reimburse Wyeth for the costs of doing so, insurers retaining the right to investigate and settle suits and claims.
There is nothing to give any indication as to the reasons for either of these changes. Mr Slater did suggest that the change from a duty "to defend" to a duty to "reimburse" costs must have reflected an understanding that the former imposed a wider obligation on insurers than the latter. I do not accept that and there is no evidence to support it save of course to the extent it follows from the words themselves.
The limits of liability under the Aetna covers applied only to the third party indemnity not to the costs cover. They began at $1.3m each occurrence and in the aggregate. In 1976 the limits were reduced to $500,000 and in 1978 increased to $1m.
Paragraph 5 of the Foreign Coverage Endorsement provided:
If the insured carries insurance other than that which is provided under this policy, against a loss covered by this policy, insurance hereunder shall apply only as excess cover and above the total amount of such other insurance.
Endorsement 3 contained a Maintenance Clause in the same terms as the Maintenance Clause in the St Paul covers. The clause was, however, deleted in its entirety from July 1, 1978 to expiry on October 31, 1980. Again, there is nothing to indicate why this occurred, save that in October 1977, during the currency of the 1977/8 Aetna policy, Home had replaced GRE as the local primary insurer. It is difficult to believe that the parties could have had any different intentions in the two periods.
In writing in June 1978 to AHP about the renewal of the Afia Worldwide policies, the brokers described the policies as "the AFIA D.I.C. policy" and referred to a proposal (which was taken up) that the policy should respond to the difference between local underwriters (if any) and $1m. The brokers wrote:
One factor with which I would like to deal specifically is the matter of the underlyers abroad. Although in the past Afia has been supplied with the details on these policies, they are now intimately and fully aware of the terms and conditions; the experience they have enjoyed on these policies has been excellent as well.
Of course by this date the UK "underlyer" was provided by Home so it is no surprise that Afia was "intimately and fully" aware of its terms. The reference to a "D.I.C. policy" is to a "difference in conditions policy" which is shorthand to describe a situation in which a company which operates internationally (such as AHP) with a number of local policies covering similar risks also effects a master cover intended to provide indemnity for claims which may be excluded by conditions found in the local covers. There are also documents which show that Cigna described the covers as "D.I.C." or "Excess DIC". Mr Kendrick used the expression "seamless" cover which conveys something of the same notion but it is clear that the covers had an excess content as well.
Because the nature of the claims made is specifically in issue in relation to the Efficacy Exclusion and because it helps to put the nature of the disputes in context I should set out in more detail the salient features of the Benzodiazepine litigation. In doing so I shall limit myself to those documents and extracts from them to which counsel made express reference. Mr Slater's target was to demonstrate that the allegations and injuries covered years when there was and when there was not cover and that the claims were fundamentally predicated on a failure to warn those who might prescribe or be prescribed the drugs of the dangers and in particular the dangers of dependency. That he submitted was excluded from cover by the Efficacy Exclusion. Mr Kendrick's target was to demonstrate that the claims were not alleging that the drugs "failed to perform the function intended" and that they were alleging that they had caused actual injury.
The Amended Master Statement of Claim served on November 21, 1990 contains 102 paragraphs over 63 pages. Rather than continually refer to what was "alleged" I propose to set out what I see as the significant parts of the claim with the overall caveat that the allegations have never been established or tried.
Wyeth promoted the drugs in data sheets as suitable for the treatment of anxiety and insomnia, and was under and in breach of a duty of care to see that the drugs were safe for use or continued use "when used in accordance with the advice and warnings accompanying" their supply (paragraphs 4.1 and 5). The breaches "caused or contributed to the injuries loss and damage set out in the individual Statements of Claim" consisting of one or more of the symptoms in Paragraph 7, namely:
During chronic use
(1) Physical and/or psychological and/or social and/or intellectual impairment.
(2) Symptoms ... similar to the early symptoms of complete withdrawal.
(3) A drug withdrawal syndrome arising from and indicating dependence.
(4) mental distress consequent upon ... awareness of such dependence ....
The expressions used were further defined. In particular "withdrawal syndrome" included psychological symptoms such as anxiety, panic attacks, and aggression and neurological symptoms such as muscle pains, headache and convulsions.
Paragraph 74 of the claim (on which Mr Slater relied) alleged that Wyeth knew or ought to have known before making the drugs generally available for prescription that "there was no reliable evidence that use ... for long periods and certainly for periods of 4 months or more, was efficacious for the treatment of anxiety," that there was a risk they could lead to dependence, that "in the circumstances it was important for prescribers to be warned" not to prescribe for long-term use and "to taper off any treatment" to minimise withdrawal symptoms and to supervise patients closely. Paragraph 81 alleged failures "to provide any or any proper instructions or warnings save by way of Data Sheets" which were themselves defective in failing to give the same warnings and guidance. Paragraph 82 pointed to "warnings " which were given in 1989/90 Data Sheets alleging that they should have been given from 1972 onwards. Those warnings included a statement that the drug was recommended for short-term use of approximately 2-4 weeks. Paragraph 86 alleged negligence in "failing to provide tablets of a sufficiently small strength" and subsequent paragraphs negligence "in respect of dosage recommendations".
The pleading concluded:
By reason of the said negligence, the Plaintiff suffered injury for which Wyeth are liable in damages.
I was referred only to two of the 10 individual sample claims. They were claims by a Mrs Burke and a Mr Masters.
Mrs Burke's claim was that she had first been prescribed one of the relevant drugs in 1968 for insomnia. A schedule was annexed giving "particulars of adverse effects" of the drug. The schedule was in two parts relating to the period of "chronic use" of the drug and the period following reduction or cessation of use.
During chronic use there were severe intermittent physical symptoms (palpitations, sweating, shakiness) and severe continuous psychological symptoms (tiredness, zombification, lethargy, panic/agoraphobia) in each case said to have commenced in 1970 (before any relevant covers incepted) and to have lasted for 20 years (so for some 10 years after any relevant covers expired). Intellectual impairment (poor short term memory) was also alleged to have endured for 10 years since 1980.
Following reduction or cessation of use, severe intermittent symptoms of palpitations, sweating, shakiness and insomnia were alleged starting in 1989 and lasting for 2-3 years, thus outside any relevant period of cover.
Mr Masters' claim was in respect of a drug prescribed to him for depressive anxiety from 1973 until October 1989. In short his claim advanced most of the physical and psychological impairments in the Master Statement of Claim supported by a medical report which expressed the opinion that "the undoubted adverse effects" upon him related to the drug, both whilst taking it and whilst withdrawing from it, and "were the result of inadequate warnings to the doctors involved about the potential dangers" of the drug.
There can, I think, be no room for doubt that the claimants were alleging that the drugs had caused them positive harm in the form of both physical and mental distress and injury. They were also alleging that inadequate warnings had been given about the risks of harm.
The first question which arises is whether or not the Afia Worldwide policies provide any indemnity at all in circumstances where GRE has exercised the buy-out under the local GRE insurances.
The answer to the question depends in the first place upon the proper construction of the St Paul and Aetna Covers, and in particular Condition 4 of the St Paul covers and paragraph 5 of the Foreign Coverage Endorsement to the Aetna policies (which are to the same effect) and the effect of the litigation or costs coverage in Indemnifying Agreement 11 of the St Paul covers and the insuring clause in the Aetna covers.
Condition 4 of the St Paul covers provided that where coverage such as that provided by the GRE insurances was in place "coverage hereunder shall apply only as excess over and above the total amount of such coverage". The "total amount of such coverage" in any given year when the GRE insurances were in force was £200,000 and an exposure to legal costs which was unlimited save that it could be terminated by operation of the buy-out clause. There is nothing in Condition 4 itself which requires any particular type of limit on the amount of the primary coverage or which precludes a limit arising from a buy-out clause and, unless one can be spelt out from other provisions of the Afia Worldwide policies, I see no basis on which one could be spelt out from the words used. The total amount of coverage under the GRE insurances was, in the event, £1m and £750,000 in costs. Thus, I do not think the correct question is the one phrased by Mr Slater: "did the claims fall within the St Paul layer" but rather "in excess of what did the St Paul cover attach". Nor do I think the use of the word "excess" carries with it any preconceived or immutable answers to the question.
The St Paul covers contained separate indemnity clauses for what may be called third party liabilities and defence costs. The first, read with Condition 4, provided an indemnity in respect of sums Wyeth became "obligated to pay by reason of " legal liability for damages excess over and above the total amount of the GRE coverage. I see no difficulty in applying those words in the context of the GRE buy-out clause so that in the (now unlikely) event that Wyeth ever becomes obliged to meet liabilities to third parties, the St Paul covers are effective above the buy-out limit.
The indemnity clause for defence costs in the St Paul covers, read with Condition 4, requires St Paul to pay for the costs (or defend any suit) brought against Wyeth on account of loss "coming within the purview" of the policy excess over and above the total amount of the GRE coverage. Again I see no difficulty in applying those words in the context of the GRE buy-out clause so that St Paul became liable to pay for the costs excess over the amount of £750,000 in the event paid by GRE.
There is nothing in the language of either the insuring clauses or condition 4 which makes the obligation of St Paul conditional upon actual payment of claims by third parties as Mr Slater submitted. Nor do I see any difference in the wording of the Aetna covers. The insuring clause is in different terms in that the St Paul covers contained an option to pay or defend claims and the Aetna covers provided only for the reimbursement of costs. That, however, in my judgment does not produce a different result and it would be surprising if it did. Although it was a major part of Mr Slater's submissions, and Mr Wollan's evidence, that in New York law there is a substantive distinction between "a duty to defend" and a bare obligation to pay defence costs that, even if correct, cannot affect what I think to be the clear words of the provisions presently under consideration.
In effect, I think, if Cigna is to avoid liability it has to rely on the Maintenance clause to achieve that result.
I am also satisfied that this conclusion accords with New York law, albeit I think it follows from the actual words used in any event.
The Ninth Edition of the Handbook on Insurance Coverage Disputes (Ostrager & Newman) in discussing the "Excess Insurer's Duty to defend" at pages 267-8 states:
The traditional view is that an excess insurer is not required to contribute to the defence of the insured so long as the primary insurer is required to defend .... However, several courts have held that regardless of the extent of the primary insurer's duty to defend, an excess insurer must provide defence coverage in cases in which the primary indemnity limits have been exhausted and the primary insurer has refused to continue the defence .... The guiding principle is that the insured, having purchased both primary and excess coverage cannot be abandoned by his insurers.
This passage is addressing decisions in which the primary insurance did not contain a buy-out. It suggests therefore that in America excess insurers are if anything exposed even where the primary insurers remained liable. The effect of the buy-out and its exercise was that the primary insurer was no longer "required to defend". Moreover Cigna was, or at least had the means of being aware of the existence and terms of the buy-out clause and indeed in the period in which the Afia Local policies were in force the clause was in the primary policy provided by a member of its group. If one was required to look further into the intention of the parties that in my judgment would add considerable support to what in any event I think to be the effect of the words used.
Mr Kendrick also referred me to the decision of Judge Leval in Allstate Insurance Co v St Paul Marine 1984 WL 1969 (SDNY). The case involved a dispute between primary and excess liability insurers. A claim against the insured succeeded for a sum which went through both primary and excess layers. The primary insurers paid all the defence costs and sought a prorated recovery from excess insurers. They failed. Each cover had the same wording obliging the insurer to "pay in full" the costs of contesting liability.
In the course of his judgment, Judge Leval said:
Stated in generalised terms, the point is that the defendant's policy is an excess policy. Its coverage begins where the responsibility of the primary policy ends. If the primary policy had provided a cap on its responsibility for legal fees (as it did on its responsibility for the insured's liability) it is clear that the excess insurer would have been liable for legal expenses incurred in excess of the cap. The primary insurers, however, undertook responsibility for legal expenses in full without limit.
Those words do in my judgment apply just as well to a "cap" resulting from the buy-out clause as to a cap resulting from a specified figure. The GRE insurers did not undertake responsibility for legal expenses in full without limit but only responsibility for such expenses subject to the buy-out.
The second question which arises is whether or not the Maintenance clause was broken by Wyeth.
Perhaps to state the obvious, the Maintenance clause provides for a reduced rate of premium, calculated by reference to sales, for the worldwide excess policy when it is to have effect as an excess policy because a local primary insurance is "maintained" in a given country and that primary insurance provides for at least the stated levels of cover. Those levels of cover are in fact considerably less than the level of cover provided by the GRE policies. They also make no reference at all to any obligation to defend or to pay legal costs required to be provided by the local primary insurance. Although Mr Wollan was inclined to say that such an obligation should be implied or would go without saying, I do not see why that should be the case. Indeed I would expect any such obligation to be spelt out if it was a requirement. It is obvious from this case that such obligations may take a number of different forms, which it is at least contended may have significantly different legal consequences, and that they may involve very significant exposures. The GRE policies did, of course, contain a costs provision, but if Cigna were to rely upon that it would equally have to acknowledge that the provision was subject to the buy-out.
The stated consideration for the reduced premium in a particular country is not only that the local primary insurance "is maintained" but that it is warranted by Wyeth that the policy or a renewal or replacement of it not more restricted "shall be maintained in force, except for any reduction of the aggregate limits contained herein solely by payment of claims".
Mr Slater's submissions were, in part, attractively straightforward. The GRE policies were not maintained in force because they ceased to be so when the buy-out was exercised and did so in circumstances in which they had not paid any claims at all. The "aggregate limits" were not reduced "solely by payment of claims", which meant payment to dispose of an actual claim. Faced with Mr Kendrick's challenge to say when the breach of the clause occurred, however, Mr Slater was inclined to abandon any case that it was when the GRE insurances were agreed and to submit it was when the buy-out was exercised in 1991 or at least exercised without the policy being renewed or replaced. Mr Wollan thought the breach was a combination of obtaining a policy with a buy-out clause, the exercise of it, and the failure to replace it with equivalent cover.
Mr Kendrick's submissions were not quite so straightforward. One of his submissions was that "payment of claims" in context meant (or reasonably could mean) payment of claims by Wyeth for payment from the GRE insurers under the local primary insurance. I cannot accept that. The word "claims" is used throughout the wording, as one would expect, to refer to what I have been calling third party claims, that is claims by the plaintiffs in the Benzodiazepine litigation.
He submitted, more compellingly, that the GRE policies were "maintained in force". They had responded to the Benzodiazepine litigation years after the periods of cover, which ended in 1977, and had done so in full according to their terms. The words "renewal or replacement" were singularly inapposite if the whole clause was intended to bite in such circumstances. There could be no sensible prospect in any normal sense of the words of either renewing or replacing the GRE policies at the time the buy-out was exercised, hence perhaps Cigna's reluctance to abandon the case that the very fact of agreeing the buy-out clause was a breach of the Maintenance clause. The word renewal would normally apply only to a continuation of the policy on its expiry (in fact in this case the primary and excess insurances ran for different 12 month periods) and the word replacement was appropriate for a case where Wyeth wished to change insurer in a given year. Neither word was appropriate to a new cover bought years after the one it had "replaced" had expired let alone in circumstances in which claims were known to fall within it and the buy-out had been exercised (a decision of GRE not Wyeth). The ultimate absurdity, as Mr Kendrick submitted, would be that a replacement on terms "not more restricted" would itself include a buy out clause with, if Cigna was right, the consequence of perpetual replacements until there could be nothing left for the Afia Worldwide policies ever to cover.
In that context Mr Kendrick further submitted that the words "except for any reduction in the aggregate limits contained herein solely by payment of claims" were not addressing complete exhaustion of the cover but a partial reduction and simply making clear that the original aggregate limits did not have to be reinstated on each occasion a small claim was paid. He also submitted that the words should be read to include payments made in respect of, or on account of, or to use the words of the GRE buy-out clause itself "in connection with" claims (in the sense of third party claims) and not in any more limited sense such as payment to claimants or payments by way of actual indemnity to claimants or in settlement of such claims. Mr Slater said that involved illegitimately reading words into the clause, particularly so if proper emphasis was placed on the word "solely".
I should add that the final sentence ("It is further agreed, however, that if applicable limits of insurance in this policy are in excess of the limits provided by such other insurance, this insurance shall provide excess insurance") in my judgment add nothing to the arguments under either this or the preceding question. The words are to the same effect as condition 4 of the St Paul covers and beg the same question excess of what.
I find these submissions on the meaning of the words used nicely balanced. The reality, I think, is that the clause was not intended to address a buy-out clause at all. Mr Slater's submission does less violence to some of the actual words used, whilst in my judgment Mr Kendrick's submissions accord much better with what I think and he submitted to be the meaning of the clause read as a whole namely that the local primary insurance should provide a limited amount of cover for small liability claims which might be expected to become manifest during the actual period of cover. I think the clause does contemplate that Wyeth will and will have the opportunity to avoid a breach by keeping the cover in force during the currency of the relevant excess policy or policies. I also think that the words "solely by payment of claims" expressed as an exception are intended only to ensure that the stipulated aggregate limits may be reduced (or exhausted) by payment, and I do not think that the words require payment of one or more specific claims let alone payment to one or more specific claimant.
If I had to decide between these submissions as a matter of construction of the words used alone, I would on balance reach the conclusion that Mr Kendrick's submissions were to be preferred. If, as I am entitled to do by New York law in cases of ambiguity, I am to look to evidence of the intention of the parties that serves to fortify me in that conclusion. It cannot (sensibly) have been Wyeth's intention that if the GRE buy-out was operated the Company would in effect lose its excess cover. Cigna thought of the cover as DIC/excess and had at least the means of knowing of the existence and terms of the buy-out. The purpose of the provision entitling excess insurers to a copy of the underlying policies must have been to enable Cigna to satisfy itself that the terms were acceptable to it and that they justified the reduction in premium. The cover was renewed each year. Further, when the Afia local insurances were in place the buy-out clause was expressly adopted by Home and in 1977/8 the Maintenance clause was also in place. Mr Wollan was plainly troubled by the notion that, if his opinion was right, had Home exercised the buy-out Aetna would have been relieved of liability under the excess policy. His attempts to meet the point by reference to general equitable principles by which a court would not allow Cigna to get away with such "self-dealing" were perhaps a little short on legal analysis. The obvious analysis to my mind is that the courts would find that such an outcome could not reflect the intention of the parties and the Maintenance clause was not to be construed so as to reach that result.
Both expert witnesses referred to a number of authorities, in the case of Mr Wollan to support a proposition that an excess policy could in principle only be triggered by the actual payment of claims by the primary policy. I can deal with them shortly because I do not think they provide any real assistance on this issue. In particular this is not a case in which a primary insurer has failed due to insolvency to honour his policy or where an agreement has been made to reduce the level of cover below that agreed to be maintained. The American courts have in such cases considered issues such as whether the excess insurers can then be required to "drop down" to meet the primary liability and whether it is still bound at the excess level despite non-payment by the primary insurer. The results (unsurprisingly) have turned on the particular wordings, albeit the cases cited in fact lend some support to Judge Milonas' opinion that American courts construe policies so as to provide coverage.
It was also Wyeth's submission, supported by Judge Milonas, that in any event the Maintenance clause was not in the strict sense a condition precedent or warranty breach of which would be sufficient to entitle Cigna to avoid liability but which would result in no more than an obligation on Wyeth to repay the premium saving it had obtained on the basis of the maintenance of the local primary cover.
Whilst acknowledging the respect to which the opinion of Judge Milonas is entitled, I found this submission a surprising one. The business of insurance is to take risks for a premium. Both are agreed when the policy is agreed. The fact that an insurer would prospectively charge a premium of X when his cover is excess cover and X + Y if it is primary cover does not mean that if the insured is subsequently in breach of contract in failing to provide the primary cover the insurer's loss is only Y; the loss is the increased risk and starkly so when the risk has in fact occurred.
Section 3106(a) of New York Insurance Law defines a warranty as:
... any provision of an insurance contract which has the effect of requiring, as a condition precedent of the taking effect of such contract or as a condition precedent of the insurer's liability thereunder, the existence of a fact which tends to diminish, or the non-existence of a fact which tends to increase, the risk of the occurrence of any loss, damage, or injury within the coverage.
Section 3106(b) states:
... a breach of warranty shall not avoid an insurance contract or defeat recovery thereunder unless such breach materially increases the risk of loss, damage, or injury within the coverage of the contract.
The Maintenance clause uses the word "warranty" and, properly construed, in my judgment a breach would satisfy these Sections: Great American Ins Co v J. Aron & Co 1995 WL 495492 (S.D.N.Y.). The difficulty, I think, arises because of the construction issues and so the dispute as to what would constitute a breach of the clause. If local primary insurance was not maintained during the period of cover provided for by St Paul or Aetna there would be no relevant limits of underlying cover and the "excess" cover would operate as primary cover. In such a case the risk of loss to Cigna would be materially increased.
The fact that the actual situation in this case at least arguably might not satisfy the strict test for a warranty is some further if small support for the conclusions already expressed on the proper construction of the Maintenance clause. I have already held that the Maintenance clause itself imposed no obligation on Wyeth to obtain local primary insurance which provided any cover against litigation costs, and thus a failure to do so would not have been a breach of the warranty. Further the GRE insurers have in fact paid £1m in connection with the claims in the Benzodiazepine litigation (as well as £750,000 for costs) which suggests that Cigna got its money's worth.
My answers to the first preliminary issue are:
(a) No. There was no breach by Wyeth of the Maintenance clause in the Afia Worldwide policies.
(B) Yes. Wyeth was entitled to coverage for defence costs under the Afia Worldwide policies when the GRE insurers ceased to be liable.
It is on this Issue on which the evidence of New York law has been of most assistance. Moreover there is a substantial measure of agreement about the applicable principles. Again, I think it helpful to approach the Issue by way of two questions: first by asking what claims are covered by the costs obligations in the Afia Worldwide insurances: is it claims which might be or which are (if made good) within the cover; and second by asking what if any allocation of costs is to be made to the insured if claims occur in or continue over periods when there was no insurance to meet them.
To what claims does the costs cover apply?
The material wording is to be found in Indemnifying Agreement 11 of the St Paul covers and the coverage clause in the Aetna covers.
The salient points from these wordings are:
(1) The indemnity against legal liability is expressed as a separate obligation from the obligation to defend or pay costs. That is particularly clear in the St Paul covers, but it is equally true of the Aetna covers. The limits of the cover in each case applied only to the indemnity.
(2) The St Paul covers contained an option "to pay for the costs incurred or defend". The Aetna covers amended a printed form which required Aetna to defend to an agreement which only obliged Aetna "to reimburse the insured for costs to defend".
(3) Both covers expressly provided that the relevant obligations applied even if the claims in question were "groundless, false or fraudulent". Bad, even very bad, claims have to be defended as well as good or supportable ones. Cover is triggered by the allegations made not the truth of them.
(4) The St Paul covers referred to claims for loss "coming within the purview of" the policy and "as respects insurance afforded by this policy". The Aetna covers referred to a suit against the insured seeking damages "on account of such bodily injury" being "bodily injury to which this insurance applies".
I would add the following. For the purpose of the preliminary issues it is being assumed that the claims, when originally made, might have come within a period of cover. I have already referred to the fact that neither party suggests that the St Paul and Aetna wordings produce different results. Whilst the Aetna wording is different I am quite satisfied that both the change from St Paul to Aetna and the change in the Aetna wording itself were not intended to alter the substantive scope of cover in any way but to continue it as before. Something much more specific would have been required if there had been a contrary intention. In fact, Cigna's view in 1989, as recorded, was that they owed "a duty to defend" and a "defense obligation ... separate to the question of indemnity." No distinction appears to have been drawn between a duty "to defend" and a duty "to pay" at that time.
It is the provisions of the covers which I have set out at (4) above which are of primary relevance to the present question. The question is how are they to be applied to a claim which is for relevant bodily injury but which is so expressed that whilst it may have occurred wholly or in part within a policy year and so if good be within the indemnity but it is not clear from its terms whether or not that is the case.
Judge Milonas and Mr Wollan agree that New York law requires an insurer which is under a duty to defend a claim, so expressed, to do so for so long as the claim might give rise to a liability covered by the relevant policy because the duty is separate from and not contingent upon the liability indemnity: See Mendes & Mount v American Home 97 A.D. 2d. 384, 467 N.Y.S. 2d. 596. They disagree as to whether or not the same principle is to be applied to what may be termed a duty to pay (or reimburse) costs as distinct from a duty to defend. It is this disagreement which underlies all their divergent opinions, and it is its resolution which I think substantially resolves the issues before the court.
Before turning to some of the authorities, I would comment that as a matter of what I consider to be a basic rule of construction where (as here in the St Paul covers) the duty to defend and the duty to pay appear in the same clause which uses identical language as to the scope of each duty it would be a remarkable conclusion that the words were to be construed so as to produce any let alone a radically different result in the one case from the other. Thus, whilst Mr Slater points out that the wording does not talk of "within the possible purview" of the policy nor "as respects insurance which may be afforded by this policy" there is no dispute that the duty to defend bites in just such cases.
Despite the agreement as to the effects of a duty to defend I think the rationale for and breadth of the principle should be stated. It can be found in the opinion of District Judge Sofaer in American Home v Liberty Mutual Insurance 565 F Supp 1485 (S.D.N.Y 1983). The relevant passages begin at page 88. The relevant cover was "with respect to such insurance as is afforded by this policy for personal injury liability" to "defend any suit against the insured alleging such injury ...."
In the course of his Opinion the Judge said :
Liberty concedes the principle that the duty to defend is broader than the duty to indemnify, in that it must defend meritless suits, so long as they could conceivably result in a liability covered by the policy. But Liberty relies upon the equally valid principle that it has no duty to defend claims which may have merit but for which liability coverage does not exist because injury occurred outside the policy period .... New York's Court of Appeals has established that 'if we can determine that no basis for recovery within the coverage of the policy is stated in the complaint, we may sustain defendant's refusal to defend .... Furthermore, even if a complaint states a basis for possible recovery, once an insurer is able to 'confine the claim' - exclude the possibility of a recovery for which it has provided insurance - the insurer has no duty to defend .... As Liberty itself argued in another suit in this District, an insured is entitled to a defense if the underlying complaint 'permits proof' of facts establishing coverage, or, as in this case, if the complaint does not exclude the possibility that injury, sickness or disease in fact occurred during the policy period .... So long as the allegations in a case could conceivably result in liability covered by a policy at issue, Liberty must defend.
It is precisely this which Wyeth says applies in this case, namely that only from when it became clear that a claim was outside the period of cover did Cigna cease to be liable for the costs. Thus, whilst the distinction Mr Wollan draws between a claim which is bad on the facts but which, if made out, is within the coverage and a claim which, even if made out, would not be within the coverage is readily intelligible, the New York courts have clearly determined that at least the duty to defend in the strict sense applies so long as the claim might be within the coverage and that, by definition, falls to be judged from the terms of the claim made and not when (if it is) it is concluded.
The basic rationale for the principle is that the duty to defend is wider than the duty to indemnify, not dependant upon it, and effective before it can be determined whether or not any indemnity will arise. That principle seems to me to apply equally to a duty or obligation to pay or reimburse costs. It is not right to submit, as Mr Slater did, that "the costs will be covered only if the claim is covered"; the submission ignores both the fact that the St Paul covers contained the option to defend and the very principle in fact conceded in the American Home case.
Further and despite Mr Slater's submissions to the contrary, whether the obligation is to pay the costs or to reimburse them, in my judgment it is a continuing obligation arising either as and when the costs are incurred or, at latest, to "reimburse" them as and when they are paid by Wyeth. The natural meaning of the word "reimburse" is to pay what has been paid. It is commonplace to pay costs during the progress of a claim. Mr Slater submitted "reimburse" meant there was no obligation to pay unless and until it was established that a claim was within the cover (in contrast to a duty to defend). In my judgment, if it had been intended to provide such a limit on the time when the obligation to pay or reimburse arose then I think it should have been expressly stated and different words would have been used. A defence has to be undertaken immediately (as Mr Slater submitted) but so also do the costs of defending arise immediately, and each may occur at a time when it is uncertain whether the claim is covered by the policy.
Cigna nonetheless submits, supported by the opinion of Mr Wollan, that "the balance of New York authority" is in favour of requiring payment of defence costs (where that is the only obligation) only at the conclusion of the relevant suit. But I do not think on analysis the two authorities primarily relied upon for this submission justify it. Both relate to liability insurance of directors and officers. In the first, In Re Ambassador Group Inc 738 F Supp 57 (E.D.N.Y.(1990)) the question was whether the insured was entitled to have its costs paid out of the limit of liability in priority to third party claimants. It was held that the answer was no. But the wording of the policy was clear. There was no separate "costs clause" and the insurers liability for costs was not only expressed to be part of the overall indemnity but there was an express provision to the effect that the costs were payable only "if a payment not in excess of the Limit of Liability has to be made to dispose of a claim." It is not surprising therefore that the court held that no costs were payable until the extent of the liability for the claim had been established.
The second authority on which Cigna relied is Kenai Corp v National Union Fire Ins Co 136 B.R. 59 (S.D.N.Y. 1992). The decision is to the same effect as In Re Ambassador and for the same reasons. Where the costs obligation is only part of and subject to the limit applied to the liability indemnity itself the one will depend upon the other. The principle is apparent from part of the opinion of District Judge Wood at page 84:
The D&O policy at issue here covers 'losses' which are defined in the policy as 'any amounts which the Insureds are legally obligated to pay for a claim made against them for Wrongful Acts, and shall include judgments, settlements, costs, charges and expenses ... incurred in the defence of actions ....' Unlike duty to defend policies, which require the insurer to defend claims even if they are only arguably entitled to coverage, policies requiring the insurer to reimburse damages and defence costs related to wrongful acts entitle the insurer to costs only when the underlying claims are covered by the policy .... D&O policy language defining losses in terms of wrongful acts suggests that the reimbursement should occur only after the losses have been determined to be covered by the contract.
Cigna's submission was that "duty to defend policies" were only those expressed as such and the same principles did not apply to a duty to pay costs. I cannot accept that. The St Paul covers, as I have said, use the same language for both obligations. The key distinction is whether the obligation is expressed to be only part of and conditional upon the liability indemnity itself. It was not in this case.
In my judgment therefore Cigna's obligation to pay or reimburse costs incurred by Wyeth was one which arose independently of the liability indemnity itself and was effective during the course of the Benzodiazepine litigation.
That, however, does not dispose finally of Cigna's submissions that the obligation applies only to claims which do come within the cover rather than those which might do so. Applied to the facts which Wyeth itself asserts in this case, Wyeth seeks to recover all the costs in the Benzodiazepine litigation until it became clear in March 1994 that 40% of the claims fell outside any period of the Cigna covers. Cigna submits that now that is known it would be "blindfold injustice" to hold it liable for any costs incurred in those cases on the basis that until March 1994 the claims might have fallen within the covers. That submission however ignores the fact, as I have held it to be, that New York law would require just that result in the case of a duty to defend in what Cigna calls the strict sense. The question, as it seems to me, is one of what is agreed and I see no injustice in the clear rulings of the New York courts. Moreover in this case, on any construction of the relevant wording, Cigna has agreed to bear the costs of fraudulent and groundless claims in respect of which it could by definition have no liability exposure.
In this context there are two further authorities on which Mr Wollan and Cigna particularly relied. The first is a decision of the United States Court of Appeals for the Ninth Circuit (not New York) Okada v MGIC Indemnity Corp 823 F, 2d 276. It should first be noted that the case itself was trenchantly criticised in both the Re Ambassador and Kanai Corp cases (which are New York decisions). Okada was another case involving a Directors and Officers policy. Ironically, the outcome was a decision under the policy there in issue that the insurer was under a duty to pay defence costs as they came due. The wording included an indemnity against "loss" and loss was defined to include both liability and costs. However there was an exclusion for loss brought about or contributed to by the dishonesty of the directors which expressly entitled the directors to cover for claims which alleged dishonesty unless a judgment established material "active and deliberate" dishonesty. In addition there was an express provision for insurers to "advance" costs "prior to disposition of such claims" with a proviso for repayment if it was established that "the insurer has no liability hereunder".
I confess that despite Mr Wollan's evidence and Mr Slater's submissions about the Okada decision I derive no real assistance from it. First the court approached the case on the basis that because the costs were included in the definition of loss insurers had to pay them when the directors were obliged to do so. That is contrary to the New York authority and hardly helpful to Cigna's case about the timing of the obligation to pay costs that it arises only when liability is established. Secondly the court said that coverage may be determined by the nature of the underlying complaint. That is not in issue. If a complaint as made is outside coverage then there is no cover. Beyond that, and taking account of the clear words of the cover, I do not think the decision supports Cigna's case and it is not, as I read it, any authority for the proposition that if insurers pay and it turns out the claim is not within cover they are always entitled to reimbursement. Rather it illustrates the unsurprising conclusion that where the policy expressly provides for repayment it will be given effect accordingly. It is noteworthy that there was no such provision in any of the covers in issue in this case.
The second decision which was at the foundation of Cigna's case on this Issue is Stonewall Ins. Company v Asbestos Claims Management Corp 73 F. 3d. 1178 (2d. Cir 1995). That decision related to a number of appeals in cases involving asbestos related bodily injury claims. One of the appealed decisions was a decision of District Judge Martin reported under the name Stonewall Insurance Company v National Gypsum Company 1992 WL 296435 (S.D.N.Y.).
The issue was to determine the defence obligations of a number of policies including excess policies. The EDIP (Excess Defence Indemnification Policies) policies, it was agreed, did not impose a duty to defend but "the more limited obligation to indemnify or reimburse National Gypsum for any ultimate net loss", which was defined to include costs "which are paid as a consequence of any occurrence covered hereunder".
Judge Martin said:
National Gypsum urges that the duty to indemnify for defence costs attaches whenever a claim and allegations in the underlying complaint provide a possibility of coverage. The insurers argue, however, that this contention is contradicted by the language of the policies, which provide that the EDIP insurers' obligation is limited to indemnifying for 'Ultimate Net Loss' (including defence costs) which are 'paid as a consequence of any occurrence covered hereunder'.
The insurers' obligation to reimburse for defence costs is co-extensive with their indemnification obligation .... When coverage has been established, either through litigation or settlement, the obligation to pay defence costs, as part of indemnification obligations, kicks in.
This decision also turned on the particular wording. Indeed the assumption seems to have been that but for that wording National Gypsum's submission would be right. Again, the key was that the payment of costs was expressly part of and subject to the duty to indemnify against liability.
The appellate court addressed the same issues in a short passage at page 1219 of the report. They upheld Judge Martin's ruling, for the reasons which he gave. Reference was made to Okada (on which the insured, not insurers, was relying to argue that costs should be advanced before liability was established) but the court pointed out that "even Okada" had decided that costs must be repaid if the facts ultimately showed that the claim was not covered. Here it was said:
The policies do not contemplate unconditional payment of defense costs for potentially covered claims, but only payment of costs if indemnification is required.
In this case, the wording plainly does contemplate payment of costs even if indemnification is not required (for example for fraudulent claims) and there is nothing to exclude what I am satisfied is the general principle of New York law that provided a given claim might be within the cover then an insurers' separate obligation to defend or to pay the costs of defending it arises and continues until, if it does, it becomes clear that the claim is not covered. Of course, that can be excluded or modified by the clear words of the policy as in my judgment was the case in the authorities on which Cigna and Mr Wollan rely.
I think the decisions I have arrived at under Question 1 of this Issue also go some way to determine the question of apportionment. Once it is appreciated that insurers are liable to pay the costs of claims which might, if made out, come within the cover then they must do so. Further there is (rightly) no issue that if other insurers may be exposed to the same liability, because, for example, their covers apply in earlier or later years and the claims equally might come within them, then it is a matter between insurers how they apportion the exposure: see Continental Casualty v Rapid-American Corporation 80 NY 2d 640 and Squibb v Accident and Casualty Insurance 860 F. Supp 124. The legal analysis in New York, should the matter be contentious, appears to be that either by way of contribution between parties liable for the same loss or by way of the paying insurer being subrogated to the rights of the insured against the non-paying insurer, an apportionment can be achieved: See Fidelity General Insurance Co v Aetna Insurance Co 27 A.D. 2d 932, 278 N.Y.S. 2d 787.
It has also been decided that just as one insurer cannot decline to pay the costs of the defence because there may be other insurers which have duties to defend, an insurer cannot decline to provide a defence on the ground that the insured may be "self-insured" for some periods of damage. In Continental Casualty v Rapid-American the New York Court of Appeals found (page 656) that "the allegation that (the insured) was self-insured for a period of time predating (the insurer's) coverage cannot operate to deny (the insured) the complete defence to which it is entitled under the policies in the event of overlapping periods", but left open the question whether the insured would be liable to contribute to the costs if it was later determined that the underlying lawsuit involved occurrences during self-insured periods.
There remains, therefore, one further possibility which has to be addressed. It is agreed that even in a case of the sort which is represented by the Benzodiazepine litigation a New York court will seek to find a single point in time when it can be shown that a claimant has suffered an injury or each injury if more than one is alleged. In the terms used in the American courts, New York rejects the exposure theory and the manifestation theory and looks if possible for the date (or dates) when injury in fact occurred. On the other hand where an injury is of a continuous nature or several injuries in fact are found then successive policy years may be exposed. Happily it is agreed that it is not for me to determine on this Issue whether the claims in the Benzodiazepine litigation are properly to be characterised as ones where a date (or dates) of injury occurred or ones of a continuous nature. But what remains to be decided in principle is if they (or some of them) are of a continuous nature and/or overlap years where Cigna's covers were in force and years when Wyeth had no relevant cover at all, does Wyeth have to make a contribution or is it also exposed to an allocation of the costs to reflect that exposure once the litigation has been resolved.
It is not in dispute that any allocation or proration will be by reference to time on risk as compared to the time over which the injuries have been suffered.
The authorities on which Mr Wollan relied for his opinion that the insured is also liable to contribute to defence costs for uninsured periods in fact concerned cases involving only claims between insurers. In Stonewall (on appeal) the court decided as regards the liability indemnity that (pages 1202-3) "in the context of multiple policies triggered for continuous injuries, proration-to-the-insured is a sensible way to interpret insurance policies that do not squarely resolve the allocation issue". But that does not determine whether the same applies to a costs cover, although Cigna submits, supported by Mr Wollan, that it should. Wyeth, supported by Judge Milonas, submits that it does not.
The authority which comes nearest to addressing this issue is a New Jersey District Court decision applying New York law, NL Industries Inc v Commercial Union Insurance 935 F Supp 513 (1996). In that case Judge Walls referred to Stonewall, recognised that on costs issues it was "only analogous" as it concerned contribution for indemnity rather than defence costs and continued:
... the duty of the insurer to defend is far broader than its duty to indemnify. Consequently (the insured's) contention that proration-to-the-insured is inconsistent with the insurer's duty to the insured is more engaging in the defense cost context.
Nonetheless the proration-to-the-insured rule which this court predicts that the New York Courts of Appeal would embrace does not significantly undercut the broad duty to defend imposed upon insurers by New York law. The insurer still must provide a complete defense up front. It may, however, be entitled to contribution from the insured later, if the existence of occurrences within this period of self-insurance can be demonstrated.
The basis of Cigna's submission is that "the principle is that costs follow the position with regard to indemnity ... because of the essentially parasitic nature of the costs coverage". But that is in my judgment the exact opposite of the principle established by the authorities to which I have already referred, in the absence of (unlike Stonewall) express wording to the contrary. The question is clearly one which is open to decision either way and there is an irony in this court having to address it rather than a court in New York. Nonetheless, in principle I think Judge Milonas' opinion is to be preferred. Once it is accepted that the duty to defend and/or to pay costs in this case itself arises and continues for so long as a claim as made might be within the cover I think it follows in logic that insurers have agreed to make payment even if the claim might not be within the cover because it might be outside any period of cover or both in and outside a period of cover. If the agreement by insurers is to pay costs for such claims and the wording contains no right to reimbursement or other relevant qualification on the obligation then that is the agreement and it should be honoured. I would add that in the event an insurer were to seek to recover an allocation from his insured in the circumstances postulated I find it difficult (unlike the case of co-insurers) to see on what legal principle of New York law such a claim could be founded. Neither subrogation nor contribution is appropriate. Mr Wollan resorted to "equity" but could not suggest any more analytical approach.
My answers to the second preliminary issue are:
(a) Yes to co-insurers but No to the Insured.
Mr Slater submits that the claims in the Benzodiazepine litigation were within the Efficacy Exclusion and so excluded from cover because
"although they alleged causation of bodily injury by both ingestion of and withdrawal from the Benzodiazepine drugs, that injury was caused by the failure of the drug to serve its purpose - viz the alleviation of symptoms and not increasing either in severity or number such symptoms and certainly not causing dependency - by reason of a deficiency in the printed instructions.
However it is presented, this submission in reality amounts to giving to the Efficacy Exclusion the effect of excluding from cover any injury on the basis that the drug has failed to serve its purpose if it should not have caused that injury and instruction could have been given to prevent it doing so. That would be to give to the clause an exclusionary effect which would emasculate much of the cover. Indeed, when pressed, Mr Slater was unable to think of many examples where cover would not be excluded if the clause had such a sweeping effect. Just as an exception to an exclusion should not be interpreted so broadly as to swallow up the exclusion, as Mr Wollan said, so also I think on ordinary principles of construction an exclusion should not be interpreted so broadly as to emasculate the cover. It should be remembered that the Efficacy clause appears in both the St Paul covers and the Afia local insurances, the former being subject to New York law and the latter to English law. Although the way this Issue is phrased only the St Paul covers are addressed, I agree with Mr Slater that it would be surprising if the construction was to differ and I see no reason why it should.
In my judgment, the purpose of the Efficacy Exclusion as a whole is not hard to divine. It is to exclude from cover claims which, as Mr Kendrick put it, were for failing to make the Claimant better or failing to prevent some condition arising (eg contraception or vaccines). True it is, as Mr Slater submitted, that claims in tort (as distinct from contract) against Wyeth on the former basis would at least in this jurisdiction face some difficulties both in principle and causation. But that is not of itself a reason why it should not be made clear that they are not covered. Indeed the clause itself seems to recognise that they may give rise to liability and in a worldwide policy that is not surprising. In contrast claims which arise from injury caused by the positive effects of a product are intended to be covered.
The clause has three parts to it:
(1) The exclusion is only in respect of bodily injury resulting from a failure of the drug to perform the function or serve the purpose intended;
(2) that failure must itself be due to a mistake or deficiency in design, formula, advertising material or printed instructions; and
(3) even if (1) and (2) are satisfied the exclusion is not to apply to injury resulting from the "active malfunctioning" of the drug.
As to the first of these requirements, it is artificial to describe the function or purpose of a drug as "not to cause injury" or "not to make an existing condition worse" which is the submission of Mr Slater. That is to assume the answer in your favour. It is that artificiality which, if it were correct, would result in the exclusion having greater effect than the indemnity itself. The second requirement, by limiting the causes of the failure of the drug to perform or serve its purpose to failures due only to stated causes, not only appears to acknowledge that other such failures are not excluded from cover, but in referring to a mistake or deficiency in printed instructions cannot I think have been intended to extend to failures to warn of unintended injuries which a drug might cause. The mistake or deficiency in the printed instructions must be a cause of the failure of the drug to perform its function or serve its purpose not of it causing some added injury. An example would be instructions which by mistake understated the dosage required to be effective. On the other hand, instructions which dangerously over-stated the dosage either would not be a cause of the failure of the drug to perform its function or even if they were they would also be a cause of any injury resulting from the danger and so in my judgment to that extent not excluded from cover.
The final requirement by definition only applies where the first two requirements are met. Thus even if the drug has failed to perform its function due to one of the stated causes injury resulting from active malfunctioning of the drug is not excluded. Whilst, as the clause covers many products as well as "work completed by or for" the insured, to some of which it might be possible to ascribe particular relevance to this requirement, in the context of a drug I think it serves to stress that it is only failures to work and not causing positive harm that is excluded. Equally, if I was wrong on my analysis of the first two requirements this requirement would itself I think lead to the same result.
I have already sought to summarise the nature of the claims made in the Benzodiazepine litigation. They are not claims for injury because the drugs failed to perform their function or serve their purpose. They are claims for injuries because the drugs caused dependency and injury which either did not pre-exist or did not do so to the same degree.
In my judgment the Efficacy Exclusion has no application to such claims and they were not excluded from the cover.
I should add that although Mr Slater submitted that Judge Milonas had agreed in cross-examination with the construction of the Efficacy Exclusion on which he relied I do not think Judge Milonas did so, or at least, if as a matter of what appears on the transcript he did so, I am quite sure that he did not (perhaps understandably) follow the question and that was not what he meant to convey. His reports clearly rejected such a construction and he confirmed their contents in his evidence. In any event I am not bound by opinions on the construction of the words.
My answer to the third preliminary issue is : "No".
Note: the expressions “GRE policies”, “AFIA local policies” and “the Benzodiazopine litigation” have the meaning ascribed to them in the Points of Claim.
a. Applying New York law, did
i. The effecting by Wyeth of the GRE policies in terms which gave the GRE Insurers such option: and/or
ii. The exercise of such option by the GRE insurers; and/or
iii. A failure to renew or replace the GRE insurance
constitute a breach by the Claimants of the Maintenance Clause in the AFIA worldwide policies, and, if so, what is the effect of any such breach?
b. Were the Claimants entitled to coverage for defence costs under the AFIA worldwide policies when the GRE Insurers ceased to be liable following the tender of the Limit of Indemnity?
a. Should costs be apportioned where injury to a particular claimant was alleged to extend over more than one policy year
b. Was the effect of the payment by the GRE insurers that the AFIA Worldwide Insurers became liable thereafter for 100% of the costs for all claims which could arguably come within the policy period of the AFIA Worldwide Insurance, unless and until the AFIA Worldwide Insurers proved that the claims fell outside their policy period?