Opinion
03 Civ. 3850 (VM) (JCF).
April 13, 2005
REDACTED REPORT AND RECOMMENDATION
This case concerns claims under an insurance policy covering the transport of pharmaceutical products. The plaintiff, American Home Assurance Company ("American Home"), and the defendant, Merck Co., Inc. ("Merck"), have each moved pursuant to Rule 56 of the Federal Rules of Civil Procedure, seeking partial summary judgment with respect to interpretation of the valuation clause of the policy at issue. On its face, however, the valuation clause is ambiguous, as each party's construction, while plausible, is not the only reasonable reading of the policy. There is extrinsic evidence that supports both competing positions, and each party has engaged in a course of conduct that, at least in part, supports its adversary's interpretation. Accordingly, I recommend that both motions be denied and that American Home be awarded the discovery that it seeks in connection with valuation.
Background
In the year 2000, Merck, a drug manufacturer and distributor, obtained a transit insurance policy (the "Transit Policy") from American Home. Thereafter, American Home denied a number of Merck claims, and it commenced the instant action seeking a declaratory judgment that it is entitled to decline payment of the disputed claims. Merck then asserted breach of contract and related counterclaims. Because of the large number of disparate claims involved, ten were selected to serve as prototypes in the expectation that, once these claims had been resolved, the remaining ones could be settled or litigated more efficiently. (Order dated Nov. 13, 2003).
During discovery, a dispute arose relating to the appropriate method for valuing Prototype Claims Nos. 2, 4, and 5 under the Transit Policy. The clause at issue reads in full as follows:
1. Valuation
Property which has been sold on the basis of a Commercial Invoice
Valued, premium included, at amount of invoice, including all charges in the invoice, and including prepaid and/or advanced and/or guaranteed freight, if any, plus 10%.
It is nevertheless agreed that the Company shall insure on a basis other than the foregoing provided instructions to do so are received by the Assured prior to any known or reported loss, but in no event to be less than the foregoing.
Property which has not been sold on the basis of a Commercial Invoice on Finished Goods
Property shipped to or for the account of the Assured, or property which has not been sold by the Assured and has been shipped to or for the account of the Assured shall be valued at the Assured's selling price plus freight, as verified through Merck's published price list in effect at the time of the shipment.Unfinished Goods
Valued as agreed at the time and place of loss as substantiated through records of the insuring entity, which may be verified by the Company or their designated representative through records of the Assured, which are available upon written request to the Director of Insurance and Risk Management, Merck Co., Inc.
It is understood that used machinery will be valued at Actual Cash Value.
In the event the Assured receives written instructions for shipments to be valued on a basis difference from the above, the shipments involved are to be valued in accordance with such instructions, provided same are received by the Assured prior to arrival and prior to any known or reported loss or accident.
(Affidavit of Joseph Francis Fields dated Dec. 17, 2004 ("Fields Aff."), Exh. 1 at 4-5) (the "Valuation Clause").
The first of the claims at issue, Prototype Claim No. 2, involves a shipment of an active pharmaceutical ingredient, sodium alendronate, from Ireland to Puerto Rico in March 2002. (Affidavit of John A.V. Nicoletti dated Dec. 15, 2004 ("Nicoletti Aff."), Exhs. 16, 17). This product was shipped by air from Merck Sharp Dohme (Ireland) Ltd. ("Merck Ireland") to Merck Sharpe Dohme Quimica de Puerto Rico, Inc. ("Merck Quimica"), a separately incorporated Merck subsidiary. (Nicoletti Aff., Exh. 17). On March 20, 2002, Merck submitted a claim in the amount of $2 million based on the fact that two drums of the product had been punctured in transit. (Nicoletti Aff., Exh. 16). Shortly thereafter, Merck amended its claim to the amount of $3,390,165.50, based on the loss of 50 kilograms of product at a price of $67,803.31 per kilogram. (Nicoletti Aff., Exh. 17).
In its pleadings, American Home alleges that Merck's claim was for $6,800,000, or roughly twice the amount that appears in the relevant documents. (Second Amended Complaint, ¶¶ 81-82). Although this discrepancy has not been explained, it is not pertinent to resolution of the instant motions.
Prototype Claim No. 4 concerns another active pharmaceutical ingredient, rofecoxib, which was shipped by air on December 3, 2002 from Merck Sharpe Dohme (Singapore) Ltd. ("Merck Singapore") to Merck Quimica as agent for MSD Somerset Ltd. ("Merck Somerset"). (Nicoletti Aff., Exh. 32). One drum of this product was damaged, and Merck submitted a claim for $1,112,898.00. (Nicoletti Aff., Exh. 32).
Prototype Claim No. 5 also relates to a shipment of rofecoxib from Merck Singapore and received by Merck Quimica on behalf of Merck Somerset. That shipment took place by air on April 18, 2002, and one drum of the product was punctured. As a result, Merck filed a claim for $1,100,436.19. (Nicoletti Aff., Exh. 34). Additional facts will be summarized below to the extent they are relevant to the legal analysis.
Merck contends that under the first section of the valuation clause, it is entitled to payment of the full invoice price of the damaged goods plus ten percent. Merck argues that this section applies because the products in question, sodium alendronate and rofecoxib, were "property;" in each instance, the products were "sold" from one Merck subsidiary to another; and each sale was reflected in a "commercial invoice." Furthermore, Merck maintains that even if the second or third sections of the valuation clause arguably apply, they are trumped by the clause in the first section that mandates that a claim shall be valued "in no event less than [invoice price plus ten percent]."
By contrast, American Home argues that, because sodium alendronate and rofecoxib are precursor ingredients rather than marketable pharmaceuticals, the Unfinished Goods section of the valuation clause controls. Accordingly, it maintains that the claims must be "valued as agreed at time and place of loss," and that it is entitled to information concerning Merck's manufacturing costs and profits in order to help establish such a value.
During discovery, American Home sought disclosure of Merck documents relating to the cost of manufacturing rofecoxib and its profitability. Merck objected, arguing that such information was irrelevant since the value of any claim involving rofecoxib was to be determined only on the basis of the invoice price. On Merck's application, I granted a stay of the requested discovery pending determination of the instant motions for partial summary judgment. (Order dated Nov. 12, 2004). Discussion
A. Summary Judgment Standard
Pursuant to Rule 56 of the Federal Rules of Civil Procedure, summary judgment is appropriate where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); accord Marvel Characters, Inc. v. Simon, 310 F.3d 280, 285-86 (2d Cir. 2002); Andy Warhol Foundation for the Visual Arts, Inc. v. Federal Insurance Co., 189 F.3d 208, 214 (2d Cir. 1999). The moving party bears the initial burden of demonstrating "the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Where the moving party meets that burden, the opposing party must come forward with "specific facts showing that there is a genuine issue for trial," Fed.R.Civ.P. 56(e), by "a showing sufficient to establish the existence of [every] element essential to that party's case, and on which that party will bear the burden of proof at trial."Celotex, 477 U.S. at 322.
In assessing the record to determine whether there is a genuine issue of material fact, the court must resolve all ambiguities and draw all factual inferences in favor of the nonmoving party.Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986);Vann v. City of New York, 72 F.3d 1040, 1048-49 (2d Cir. 1995). But the court must inquire whether "there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party," Anderson, 477 U.S. at 249 (citation omitted), and grant summary judgment where the nonmovant's evidence is conclusory, speculative, or not significantly probative. Id. at 249-50. "The litigant opposing summary judgment may not rest upon mere conclusory allegations or denials, but must bring forward some affirmative indication that his version of relevant events is not fanciful." Podell v. Citicorp Diners Club, Inc., 112 F.3d 98, 101 (2d Cir. 1997) (internal quotations and citations omitted); accord Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (a nonmoving party "must do more than simply show that there is some metaphysical doubt as to the material facts");Goenaga v. March of Dimes Birth Defects Foundation, 51 F.3d 14, 18 (2d Cir. 1995) (nonmovant "may not rely simply on conclusory statements or on contentions that the affidavits supporting the motion are not credible"). In sum, if the court determines that "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no `genuine issue for trial.'" Matsushita, 475 U.S. at 587 (quoting First National Bank of Arizona v. Cities Service Co., 391 U.S. 253, 288 (1968)).
B. Principles of Contract Interpretation
Pennsylvania law governs the contract claims in this diversity action. American Home Assurance Co. v. Merck Co., 329 F. Supp. 2d 436, 445 (S.D.N.Y. 2004). Under Pennsylvania law, the role of the court in construing a contract is to give effect to the intent of the parties. Ferrer v. Trustees of the University of Pennsylvania, 573 Pa. 310, 338, 825 A.2d 591, 608 (2002);Mace v. Atlantic Refining Marketing Corp., 567 Pa. 71, 80, 785 A.2d 491, 496 (2001). Therefore, a court "must ascertain the intent of the parties as manifested by the language of the written agreement." Riccio v. American Republic Insurance Co., 550 Pa. 254, 263, 705 A.2d 422, 426 (1997). In interpreting an insurance policy, "[w]here the language of the policy is clear and unambiguous, a court is required to give effect to that language." Progressive Northern Insurance Co. v. Schneck, 572 Pa. 216, 221, 813 A.2d 828, 831 (2002); see also Riccio, 550 Pa. at 263-64, 705 A.2d at 426.
On the other hand, when a contract is ambiguous, "irrespective of whether the ambiguity is created by the language of the instrument or by extrinsic or collateral circumstances," parol evidence is admissible to clarify or resolve the ambiguity.Yocca v. Pittsburgh Steelers Sports, Inc., 578 Pa. 479, 498, 854 A.2d 425, 437 (2004); see also Kripp v. Kripp, 578 Pa. 82, 90-91, 849 A.2d 1159, 1163 (2004). "`The parties to an agreement know best what they mean, and their action under it is often the strongest evidence of their meaning.'" Atlantic Richfield Co. v. Razumic, 480 Pa. 366, 376 n. 6, 390 A.2d 376, 741 n. 6 (1978) (quoting Restatement (Second) of Contracts § 288 Cmt. g (Tentative Draft No. 5 1970)). Therefore, "under Pennsylvania law, even where the contract is unambiguous, course of conduct evidence is always relevant in interpreting a writing." McCormack Terminal Co. v. F.A. Potts Co., No. 84-5091, 1986 WL 663, at *4 (E.D. Pa. Jan. 8, 1986); see also Prusky v. Phoenix Life Insurance Co., No. Civ.A. 20-6010, 2003 WL 1256225, at *5 (E.D. Pa. March 4, 2003). Nevertheless, evidence of a course of conduct "must still be weighed in the light of the terms of the agreement itself."Giampolo v. Somerset Hospital Center for Health, Inc., No. Civ.A. 95-133J, 1998 WL 608243, at *12 (W.D. Pa. May 29, 1998),aff'd, 189 F.3d 464 (3d Cir. 1999) (table).
The parties' respective motions may now be analyzed in light of these principles.
C. American Home's Motion for Summary Judgment
1. Contractual Language
American Home contends that the language of the Valuation Clause is unambiguous and that it dictates that the prototype claims at issue be valued under the third clause, that pertaining to unfinished goods. (Memorandum of Law in Support of American Home Company's Motion for Partial Summary Judgment on the Issue of the Valuation Clause ("Am. Home Memo.") at 1). Interestingly, although American Home argues that the contract is clear and unambiguous, it appears to offer two different readings to achieve the desired result. Neither withstands scrutiny.
First, American Home seems to maintain that while the third clause governs all unfinished goods and the second clause, by its terms, relates to finished goods not sold per commercial invoice, the first clause governs only finished goods sold by means of a commercial invoice. (American Home Assurance Company's Memorandum of Law in Reply to Merck Co., Inc.'s Opposition to Motion for Partial Summary Judgment ("Am. Home Reply") at 3-5). While this might be a rational structure, it is not mandated by the contractual language. The first clause covers "property which has been sold on the basis of a commercial invoice," not "finished goods which have been sold on the basis of a commercial invoice."
Second, American Home contends that even if the first clause is not limited to finished goods but pertains to all property sold on the basis of a commercial invoice, the term "commercial invoice" is unambiguous and does not include the inter-plant invoices generated in connection with transfers of goods among different Merck subsidiaries. (Am. Home Memo. at 14-17; Am. Home Reply at 5-12). In effect, American Home argues that a commercial invoice can only arise from an arm's-length negotiation, which was not the basis for the transfers at issue. American Home relies in part on a treatise on marine insurance that defines an invoice as the written terms and conditions reflecting the negotiation between a seller and a buyer. William D. Winter,Marine insurance: Its Principles and Practices 51 (McGraw-Hill Book Co., 3d ed. 1952). But, as Merck points out, other authorities espouse a broader definition of commercial invoice that might well encompass the documents issued in connection with the transfers underlying the prototype claims. For example, a commercial invoice has been defined as a "statement of the merchandise to be shipped," Lary Lawrence, Anderson on the Uniform Commercial Code 5-114:13 (2003) (attached as Exh. 15 to Fields Aff.), or as "the accounting document by which the seller charges the goods to the buyer." Guide to Documentary Credit Operations Including Uniform Customs and Practice for Documentary Credits (Fields Aff., Exh. 16).
Thus, neither interpretation proffered by American Home is based on unambiguous contractual language, and it is necessary to refer to extrinsic evidence including the course of performance of the parties to determine whether summary judgment is appropriate.
2. Extrinsic Evidence
American Home contends that its construction of the valuation clause is supported by reference to the insurance agreement that preceded the Transit Policy. (Am. Home Memo. at 22-23). From at least 1995, Merck was insured by CIGNA. At that time, the valuation clause of the CIGNA policy contained a section providing that "inter-plant shipments" would be valued at "the amount of invoice including all charges plus 10% or at other amounts per the normal practice of the entity insuring the shipment." (Nicoletti Aff., Exh. 7 at ACEUSA 001300). In 1996, the CIGNA underwriter amended this section by redesignating it as the "Unfinished Goods" clause and altering the language so that it was virtually identical to that contained in the Transit Policy now at issue. (Nicoletti Aff., Exh. 8 at ACEUSA 001334, Exh. 39 at 71, 91). According to American Home, "[c]ommon sense dictates that you do not eliminate a clause valuing Merck's Inter-Plant Shipments at invoice price and substitute `value as agreed' if you are only going to continue to use the Inter-Plant Invoice price as the measure of insured valuation." (Am. Home Memo. at 23).
This argument might have more force if the only change in the valuation clause had been the amendment of the inter-plant shipment section. But, in fact, each of the three sections of the clause was extensively altered. The first section, which previously related to "Exports," now referred to "Property which has been sold on the basis of a Commercial Invoice," while the second section, which had been entitled "Imports," now concerns "Property which has not been sold on the basis of a Commercial Invoice on Finished Goods." (Nicoletti Aff., Exh. 6 at 4th page of policy, Exh. 7 at 001300). Both sections were substantively amended, as well. Thus, it is hardly clear that the amendment to the third section specifically precludes valuation of inter-plant shipments on the basis of internal invoices. Certainly, American Home has profferred no testimony to that effect from the drafters.
3. Course of Conduct
Finally, American Home relies on the statements of Merck's own employees to support its position. For example, both Timothy A. McLees, Merck's Director for Insurance and Risk Management, and his predecessor, Phillip P. Adams, testified that unfinished goods would be valued under the third section of the valuation clause, that is, at an agreed upon price. (Nicoletti Aff., Exh. 42 at 19, 163-64, Exh. 40 at 8, 71). Representatives of AON, Merck's insurance broker, gave similar testimony. (Nicoletti Aff., Exh. 43 at 4, 514-16, Exh. 44 at 4, 151).
Yet, in responses to Merck's contention interrogatories, American Home itself took the position in connection with Prototype Claim 6, that a claim involving sodium alendronate — which qualifies as "unfinished goods" — must be valued under the first section of the Valuation Clause at the invoice amount plus ten percent because it was sold on the basis of a commercial invoice. (Fields Aff., Exh. 14 at 9-10). Likewise, the New York Regional Manager for AI Marine Adjusters, Inc., the claims adjuster chosen by American Home, testified that the first rather than the third section of the Valuation Clause would apply to unfinished goods sold through a commercial invoice. (Fields Aff., Exh. 11 at 183).
Finally, American Home argues that Merck consistently drew a distinction between commercial invoices and the transfer price invoices that serve as the documentation for the transactions at issue in Prototype Claims 2, 4, and 5. (Am. Home Memo. at 14-17). For example, Mr. McLees stated in reference to one of the claims at issue that "[m]ost likely there will not be a "Commercial Invoice" since this was a shipment between two Merck sites." (Nicoletti Aff., Exh. 13 at ARSNY 0405). Similarly, when asked for circumstances in which Merck would ship goods without a commercial invoice, Mr. Adams replied, "There would be numerous examples. One of them it is going from one facility to another, one Merck facility to another." (Nicoletti Aff., Exh. 40 at 427). Indeed, with respect to Prototype Claims 4 and 5, Merck's logistics coordinator in Puerto Rico testified that Merck does not use commercial invoices for rofecoxib. (Deposition of Maria Ramos, attached as Exh. 41 to Nicoletti Aff., at 6, 119).
Merck, however, has pointed to evidence that undermines the force of American Home's course of conduct argument. For example, it has demonstrated that the transaction to which Mr. McLees was referring involved the transfer of finished goods with no invoice whatsoever, not a transfer of unfinished goods that would arguably be governed by the third section of the Valuation Clause. (Fields Aff., Exhs. 40, 41). And, as will be discussed below, American Home's own course of performance can be viewed as more consistent with Merck's interpretation of the Transit Policy.
American Home, then, is not entitled to summary judgment. Its construction of the language of the Valuation Clause is not definitive, and the extrinsic facts on which it relies are subject to dispute.
D. Merck's Motion for Summary Judgment
1. Contractual Language
Like American Home, Merck offers alternative interpretations of the meaning of the Valuation Clause, yet argues that that meaning is unambiguous. First, it contends that there are sharp distinctions between the three sections of the clause: the first governs any property sold on the basis of a commercial invoice, the second, any finished goods not sold with a commercial invoice, and the third, any unfinished goods not sold with a commercial invoice. (Merck Co., Inc.'s Reply Memorandum of Law in Support of Partial Summary Judgment Regarding the Proper Valuation of Prototype Claims 2, 4, and 5 ("Merck Reply"), at 6-7). But such an interpretation requires the addition of a phrase that does not appear in the policy: as written, the third section relates to "unfinished goods," not to "unfinished goods not sold on the basis of a commercial invoice."
As a fallback, Merck maintains that even if both the first and third sections of the Valuation Clause apply to the prototype claims at issue, nothing in the third section requires that the goods be valued at less than the invoice price plus ten percent, as long as they were sold pursuant to a commercial invoice. (Merck Reply at 7). However, as discussed in the preceding sections and again below, disputed issues of fact preclude a summary determination that the documents underlying these transactions qualified as commercial invoices within the terms of the policy.
Merck also argues that American Home's interpretation of the Valuation Clause is flawed to the extent that it construes the third section as requiring that valuation of unfinished goods be based on an agreement between American Home and Merck following any loss rather than on a prior agreement between the entities that shipped and received the goods. (Merck Co., Inc.'s Memorandum of Law in Opposition to American Home Assurance Company's Motion for Partial Summary Judgment on the Issue of the Valuation Clause ("Merck Opp. Memo."), at 27-30. But American Home's construction is not irrational. It takes into account those circumstances where goods as to which no price has been assigned are damaged in transit, as, for example, during shipment between facilities belonging to the same Merck entity. Under those circumstances, it would be reasonable to base valuation on an after-the-fact agreement of the parties, informing the negotiations with documentation available from Merck.
Finally, Merck contends that any doubt concerning the proper construction of the Valuation Clause should be resolved in its favor. (Merck Opp. Memo. at 4; Merck Reply at 8). It relies on the principle under Pennsylvania law that if an insurance policy is subject to more than one interpretation, it should be construed against the insurer and in favor of the policyholder. See Cohen v. Erie Indemnity Co., 288 Pa. Super. 445, 448, 432 A.2d 596, 597 (1981). But, "`the principle that ambiguities in policies should be strictly construed against the insurer does not control the situation where large corporations, advised by counsel and having equal bargaining power, are the parties to a negotiated policy.'" First State Underwriters Agency of New England Reinsurance Corp. v. Travelers Insurance Co., 803 F.2d 1308, 1311-12 (3d Cir. 1986) (quoting Eastern Associated Coal Corp. v. Aetna Casualty Surety Co., 632 F.2d 1068, 1075 (3d Cir. 1980)). Here, Merck has presented no evidence that there was an imbalance in bargaining power. Indeed, there is even a factual dispute as to which party was primarily responsible for drafting the Transit Policy. On one hand, American Home has presented evidence that Merck's broker, AON, approached American International Marine Agency of New York, Inc. ("AIMA"), a managing general agent for marine insurance that provided services to American Home, concerning the underwriting of Merck's insurance program. (Affidavit of William E. Lang dated July 12, 2004 ("Lang Aff."), attached as Exh. 5 to Nicoletti Aff., ¶¶ 5, 6). AON presented AIMA with a draft policy, and AIMA ultimately agreed to bind Merck's policy on the AON policy form with certain amendments. (Lang Aff., ¶ 7). On the other hand, Merck has proffered testimony from American Home's own designated corporate witness that AIMA, acting on behalf of American Home, "orchestrated all the wording in the policy." (Deposition of John Cella, attached as Exh. 9 to Affidavit of Joseph Francis Fields dated Jan. 26, 2005 ("Fields Reply Aff."), at 124).
The Valuation Clause, then, is ambiguous, and reliance on the general rule that a contract should be construed against the drafter is of little help. It is therefore necessary to resort again to evidence outside the contract, including the parties' course of dealing.
2. Extrinsic Evidence
Merck first argues that documents underlying Prototype Claims 2, 4, and 5 qualify as commercial invoices because they reflect bona fide transfers of title. (Merck Co., Inc.'s Memorandum of Law in Support of Partial Summary Judgment Regarding the Proper Valuation of Prototype Claims 2, 4, and 5 ("Merck Memo.") at 11-12). It has presented evidence that each of the transactions involved transfers of goods between separately incorporated entities in return for consideration. (Affidavit of James Frankenfield dated Dec. 15, 2004, attached as Exh. 8 to Fields Aff.; Affidavit of Wesley Toavs dated Dec. 15, 2004, attached as Exh. 9 to Fields Aff.). However, one of the witnesses it relies on was never disclosed as having relevant information, and the other testified during deposition that he had no familiarity with the invoicing process or with the particular invoice that is the subject of his affidavit. (Affidavit of John A.V. Nicoletti dated Jan. 7, 2005 ("Nicoletti Answering Aff."), Exhs. 46, 47, 48; Deposition of James Frankenfield, attached as Exh. 49 to Nicoletti Answering Aff., at 55-56). And, as discussed above, American Home has presented evidence that Merck employees distinguished between transactions with non-Merck entities, which generated commercial invoices, and inter-plant transfers, which did not.
Merck also argues that the conduct of American Home's own agents demonstrates that they understood that Prototype Claims 2, 4, and 5 gave rise to commercial invoices. For example, in his deposition, a claims adjuster who worked for an American Home subsidiary identified the documentation for Prototype Claim 2 as a "commercial invoice." (Deposition of James Zrebiec ("Zrebiec Dep."), attached as Exh. 12 to Fields Aff., at 388-89). With respect to Prototype Claim 5, the adjuster repeatedly sought to obtain the "commercial invoice." (Zrebiec Dep. at 484; Fields Aff., Exhs. 21, 22, 23, 27). So, too, did American Home's surveyor. (Fields Aff., Exh. 20 at M002197). When the adjuster received the documentation requested, he acknowledged having been sent the "commercial invoice." (Fields Aff., Exh. 30). According to Merck, this shows that American Home understood that inter-plant transactions generated commercial invoices.
This evidence, however, is too weak to support Merck's conclusion. As to Prototype Claim 5, there is no reason to believe that the adjuster was making fine distinctions between different types of invoices; he can equally well be viewed as simply demanding any available documentation for a claim in excess of one million dollars. (Nicoletti Aff., Exhs. 34, 37). Second, the document he did receive was in fact entitled "Tax Invoice." (Nicoletti Aff., Exh. 37 at A1034). Third, it was Merck's broker who initially identified that document as a "commercial invoice." (Nicoletti Aff., Exh. 37 at A1028). And, finally, when asked in his deposition about the invoice, American Home's adjuster testified that he could not confirm that it was a "commercial invoice," in part because it involved an inter-plant shipment. (Zrebiec Dep. at 488).
3. Course of Conduct
Merck maintains that American Home's own handling of claims reflects its understanding that shipments such as Prototype Claims 2, 4, and 5 are to be valued at the invoice price plus ten percent. For example, the New York Regional Manager for American Home's claims adjuster opined that under the policy, "valuation is selling price." (Fields Aff., Exh. 33). Moreover, Merck cites to several instances in which American Home seemingly paid claims for the transfer of unfinished goods from one subsidiary to another on the basis of the invoice. For example, American Home honored a claim involving a shipment of sodium alendronate in July 2001 from Merck Ireland to a Merck subsidiary in Italy. The invoice value of the shipment was $6,410,404, one of eight containers was rejected, and American Home paid $881,420, which is equal to approximately one-eighth of the invoice value plus ten percent. (Affidavit of Timothy McLees dated July 16, 2004 ("McLees Aff."), attached as Exh. 35 to Fields Aff., ¶¶ 7-9 Exhs. 1, 2, 3). Similarly, in January 2001, one of five containers of a shipment of sodium alendronate was damaged while on route from Merck Ireland to the Italian subsidiary. On this claim, American Home paid $881,461.90, or one-fifth of the invoice price of $4,006,250 plus ten percent. (McLees Aff., ¶¶ 10-11 Exhs. 4, 5). Finally, Prototype Claim 8 involved a shipment of Ivomec from a Merck entity in the Netherlands to Merck Quimica, and American Home calculated the value of the loss based on the invoice price. (McLees Aff., ¶ 12 Exhs. 8, 9).
American Home responds, first, that insurers are not bound by prior claim payments, relying on the court's decision inKeystone Filler Manufacturing Co. v. American Mining Insurance Co., 179 F. Supp. 2d 432 (M.D. Pa. 2002), aff'd, 55 Fed. Appx. 600 (3d Cir. 2002). It would be a curious result, however, if insurers alone were immune from course of performance evidence. And, indeed, the Keystone decision does not support such a rule. First, that case related to coverage, which cannot be created by estoppel, and the opinion does not address construction of any other aspect of an insurance contract. See id. at 444. Second, the public policy considerations cited by the court are not relevant here. The court reasoned that it would be anomalous to require an insurer to devote substantial resources to challenging coverage rather than settling a trivial claim for fear of being precluded from declining more significant claims in the future. See id. at 443-44. But that rationale has little force here, where two of the three claims which American Home allegedly paid at the invoice price exceeded $800,000.
Nevertheless, disputed factual issues undermine Merck's reliance on American Home's course of conduct. First, the claims manager's opinion that "valuation is selling price" was followed by a second communication in which the same officer explained that "valuation is Merck's selling price, as established by commercial invoice." (Nicoletti Answering Aff., Exh. 45). Similarly, American Home has presented evidence that Prototype Claim 8 was valued on the basis of the invoice price only because a small portion of the total claim — approximately twenty percent — was actually paid, and, contrary to Merck's theory, no ten percent premium was added. (Affidavit of James Michael Zrebiec dated Jan. 5, 2005, attached as Exh. 56 to Nicoletti Answering Aff.). With respect to the remaining claims cited by Merck, American Home has presented evidence that they were mistakenly valued by American Home employees who did not have access to the text of the Transit Policy at the time the relevant decisions were made or were valued by reference to invoices merely because those documents provided some basis for reaching an agreed upon valuation. (Declaration of Ralph Ridderhof dated Jan. 4, 2005, attached as Exh. 57 to Nicoletti Answering Aff.; Affidavit of Tina Aaron Ferrara dated Jan. 5, 2005, attached as Exh. 58 to Nicoletti Answering Aff.).
In sum, Merck fares no better than American Home in attempting to establish its construction of the Valuation Clause. The policy is ambiguous, and each side has presented evidence that, if credited, would undermine its adversary's interpretation. Summary judgment is therefore inappropriate.
E. Discovery
Pending determination of the motions for partial summary judgment, I had deferred decision on American Home's demand for discovery of Merck's production costs and profit information for rofecoxib. Since American Home may ultimately prevail on its interpretation of the Valuation Clause, such that the value of the shipments may not be dictated solely by the invoices, the discovery request is appropriate.
Indeed, Merck could not shield this information from discovery even if it had prevailed on its construction of the Valuation Clause. While, in that circumstance, the invoice price might be the presumptive basis for valuation, it is doubtful that it would be determinative if it bore no relationship to the actual value of the goods. American Home has submitted evidence that the cost of production of a drum of sodium alendronate was [REDACTED], but that Merck assigned an inter-plant transfer price of $1.7 million. (Nicoletti Aff., Exhs. 30, 31, 17). American Home would be entitled to explore such a discrepancy even under Merck's construction of the Valuation Clause, and this same principle applies to other unfinished goods such as rofecoxib. Accordingly, Merck shall produce the requested cost and profit information.
Conclusion
For the reasons set forth above, the partial summary judgment motions of both American Home and Merck should be denied. Merck shall produce the requested cost and profit information related to sodium alendronate and rofecoxib. Pursuant to 28 U.S.C. § 636(b)(1) and Rules 72, 6(a), and 6(e) of the Federal Rules of Civil Procedure, the parties shall have ten (10) days from this date to file written objections to this Report and Recommendation. Such objections shall be filed with the Clerk of the Court, with extra copies delivered to the chambers of the Honorable Victor Marrero, Room 414, 40 Foley Square, and to the chambers of the undersigned, Room 1960, 500 Pearl Street, New York, New York 10007. Failure to file timely objections will preclude appellate review.