Opinion
No. X08 CV 02 0191697 S
November 29, 2005
MEMORANDUM OF DECISION RE MOTION FOR SUMMARY JUDGMENT (401.00)
The court has previously denied four motions for partial summary judgment filed by the parties to this insurance coverage litigation. In September 2004 the court held that the plaintiff, Steadfast Insurance Company's (Steadfast) $2 million product liability indemnity policy was not exhausted by a payment of that amount to its insured, the defendant Purdue Frederick Company (Purdue) as reimbursement for the indemnification Purdue owed Abbott Laboratories for legal expenses incurred by Abbott in defending numerous lawsuits against Purdue and Abbott arising out of Purdue's manufacture and sale and Abbott's promotion of Purdue's pharmaceutical product OxyContin (OxyContin cases).
Also in September 2004 the court denied Steadfast's motion for declaratory relief that it had no obligation to pay the fees and expenses of two law firms hired by Purdue as "co-national coordinating counsel" in the OxyContin cases.
On January 13, 2005 the court denied motions for partial summary judgment filed by Purdue seeking (1) a declaration that Steadfast has a duty to pay Purdue's continuing defense costs in the OxyContin cases and (2) a declaration that Steadfast's proffered payment of $2 million, purportedly exhausting its indemnity limits, was a waiver of all defenses it had asserted to insurance coverage.
Purdue has now moved for an order directing Steadfast to reimburse Purdue for defense costs incurred in the OxyContin cases. In its earlier decision on Purdue's motion for a declaration that Steadfast had a duty to pay Purdue's defense costs this court declined to grant summary judgment largely on juridical grounds. While noting the existence of legal issues affecting the burden of proof and some fact questions, the court was primarily concerned with rendering a decision with a potentially significant monetary impact but possibly only the most abbreviated of effective life spans, because a finding after trial that Purdue had breached a material provision of the insurance contract would likely supersede a summary judgment holding that Steadfast had a duty to pay defense costs.
Since that decision, however, the trial date has been postponed, through no fault of the parties. The court is also aware that significant defense fees are being incurred each day and the fact that the amount is now over $300 million emphasizes a need for some disposition. Furthermore, the court has had the opportunity to read additional briefs and cases submitted on the issue and to consider additional arguments. As a result the court considers the matter ripe for disposition by summary judgment.
In order to avoid repetition, reference is made to the memorandum of decision issued on January 13, 2005 containing the court's analysis of the issues raised by Purdue's motion. The court will restrict itself here to summarizing portions thereof. In that decision the court noted Connecticut law to the effect that:
[if] an allegation of the complaint falls even possibly within the coverage then the insurance company must defend the insured.
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the duty to defend is triggered whenever a complaint alleges facts that potentially could fall within the scope of coverage.
DaCruz v. State Farm Fire Casualty Co., 268 Conn. 675, 688 (2004) (emphasis in original). This court finds there is no dispute that many of the OxyContin cases allege claims that are within the insurance coverage provided by Steadfast.
Steadfast has contended that the duty to defend is terminated by the breach of the insurance contract by the insured, and in this case, Purdue breached its contract in numerous ways, among them by choosing its own national coordinating counsel, failing to allow Steadfast to control the defense of the case and failing generally to cooperate with Steadfast. There is substantial case law to support the argument that the alleged breaches, if proven, could terminate any duty to defend.
The dispositive issue is when and by what means is the insurer's duty to defend abrogated by the insured's breach of material provisions of the insurance contract. Steadfast relies heavily on the case of Arton v. Liberty Mutual Ins. Co., 163 Conn. 127 (1972), holding that an insurer's duty to defend is "dependent on the insured's compliance with the cooperation requirements of the policy." Id. 136. In its January 2005 memorandum of decision this court held that Arton and other cases relied on by Steadfast should not be interpreted to require an insured to prove compliance with all conditions of the policy before receiving the benefits of the insurer's duty to defend. This conclusion was based on several factors. First, as noted the court's earlier memorandum, Arton and other cases cited by Steadfast involved circumstances where the insured's breach of the insurance contract and failure to cooperate with the insurance company were clear and undisputed. The court continues to believe those facts serve to distinguish those cases from the case at hand where one of the major unresolved issues is precisely whether there has been a breach. Cases more recently cited by Steadfast do not alter the conclusion. Guerin v. Indemnity Insurance Co., 107 Conn. 649 (1928), involved a claim against an insurer under the direct action statute, and the Connecticut Supreme Court held that the insured did not breach his insurance contract. The case sheds no light on the issue of when such a breach terminates the duty to defend. In Brown v. Employer's Reinsurance Corp., 206 Conn. 668 (1988), the Connecticut Supreme Court found, much the same as in Arton, that there was "no question that [the insured's] abandonment of the defense of the suit prior to trial was a material breach of its obligation under the insurance policy." Id. 674.
Second, while the court found Connecticut cases not to be directly on point, there was persuasive authority in other jurisdictions, noted in the January memorandum, to the effect that an insurer's duty to defend continued in effect even though the very validity of the insurance contract was being attacked. The more recent briefing and the court's research have added weight to this authority. In Federal Insurance Co. v. Tyco Int'l Ltd., New York State, Sup.Ct., N.Y.Cty., Index No. 600507/03, (March 5, 2004, Freedman, H., J.) 2 Misc.3d 1006(A), the insurance company sought to rescind, indeed claimed to have unilaterally rescinded, an insurance policy providing coverages to Tyco's chief executive officer, Kozlowski, based on material misrepresentations and omissions which the insurer had relied on in issuing the policy. Kozlowski moved for a declaration that the insurer owed him a duty to defend and a duty to pay defense costs. The court held that the insurer's "unproven rescission claim does not affect its present obligation to defend Kozlowski or pay his defense costs under the Policies." A similar conclusion was reached in In Re World Com, Inc. Securities Litigation, 354 F.Sup.2d 455 (S.D.N.Y 2005) (applying New York law).
Third, as the court stated in its January 2005 memorandum, to interpret Arton and Interface Flooring Systems, Inc. v. Aetna Casualty Surety Co., 261 Conn. 601 (2002), as imposing a requirement on the insured to prove compliance with all policy conditions, or disprove noncompliance, before the duty to defend is imposed undercuts and makes meaningless the triggering of the duty to defend mechanism enunciated so clearly in DaCruz.
This court determines that the appropriate judicial posture where a duty to defend has been triggered and lack of compliance with contract conditions issues raised which if non-compliance is established would implicate coverage is to continue to enforce the duty to defend until compliance or non-compliance is finally established. This is the thrust of the cases noted above and in this court's earlier memorandum. As one court has put it, echoing the emphasized language of DaCruz,
In other words a possibility of coverage exists until such time as the notice issue is resolved, even though the notice is a condition precedent to coverage.
Vermont Gas Systems v. United States Fidelity Guaranty Co., 805 F.Sup. 227, 232-33 (D.Vt. 1992) (applying Vermont law).
As an additional factor in determining not to grant summary judgment earlier, this court cited difficulties in assessing the case law on allocation of the burden of proof. On further reflection the court concludes that Purdue has the burden of proof to establish Steadfast's duty to defend and once Steadfast has asserted a lack of cooperation defense it is also Purdue's burden to prove substantial compliance with the cooperation clause. O'Leary v. Lumbermen's Mutual Casualty Co., 178 Conn. 32, 38 (1979). In this case Purdue has met its burden, through conceded facts, to establish a duty to defend on behalf of Steadfast, and while the factual issues or the issue of cooperation are unresolved they are not material to the issue of the duty to defend.
Based on the foregoing, the court concludes that Purdue is entitled to summary judgment directing Steadfast to recompense Purdue for the reasonable costs of Purdue's defense of the OxyContin cases.
The issue of what is the reasonable cost of defense is sharply contested between Steadfast and Purdue. The record reflects strong disagreements about the need for two national coordinating counsel and the propriety of the firms that were selected to play that role. Steadfast has contended that there exist a myriad of disputes as to the reasonableness of Purdue's defense costs, and the court agrees that, at the present moment, it appears that the reasonableness of some portion of the costs will be an issue that will have to be tried. Nevertheless, even Steadfast grudgingly concedes that some "portions of Purdue's gargantuan expenses" may not be disputed as unreasonable. See Steadfast Memorandum, July 11, 2005, 34. In this court's view, such portions may be considerably larger than Steadfast contends. For instance, the record reflects there may not be any real contest over the fee structures of many of the local counsel used to defend Purdue in the OxyContin cases. The same may be said of regular and usual litigation costs such as those expended for transcripts, copying, and normal travel. The record shows that Purdue claims to have expended over $337 million in defense of the OxyContin cases and argues that more than $137 million of this should be undisputed. Steadfast does dispute this figure, but surely cannot contend that the reasonable costs of defending hundreds of cases for a period of five years are zero.
Therefore, the court directs each party to submit a breakdown of the costs of defense which it believes in good faith, there is no material fact in issue as to their reasonableness, and the reasons for asserting there is no factual dispute as well as the basis for asserting there is a material fact in issue regarding the remaining costs. Furthermore, the parties are to set forth their proposals for the most efficient means (either at trial or through pretrial procedures) to resolve what they perceive as the remaining fact issues.
These submissions are to be in writing and should be served and filed with the court, with such affidavits as are necessary, on or before December 15, 2005.
So Ordered.