This post was written by Ann V. Kramer.
Last week, the Sixth Circuit ruled largely in favor of Stryker Corporation in its effort to secure insurance coverage from XL Insurance America. Since 2001, Stryker has been battling XL for reimbursement of its defense and indemnity costs arising from sales of expired Uni-Knees, an artificial knee medical device. Stryker had accidentally permitted sales of the expired products from its warehouse until it discovered the error. Uni-Knees were developed by Howmedica, a Pfizer subsidiary that Stryker bought in 1998.
Although a five-year expiration date applicable to the Uni-Knee among others was put in place in the mid-1990’s and Stryker was aware of it, the Pfizer-designed program to prevent sales of expired implants failed to include the Uni-Knee. Styker did not realize that it was the source of such sales until mid-2000. XL, which sold Stryker a first-layer policy which pays defense costs in addition to the policy’s $15 million limit, contended that it owed no coverage because Stryker knew about problems with expired knees before XL’s coverage began in January 2000.
The Sixth Circuit rejected XL’s argument as had the lower court, saying it went too far:
Under XL’s theory, if an insured knows that there is some future scenario under which a product would become defective via expiration, even if it is completely out of the insured’s hands, then there is no coverage.
* * *
It would also mean that any medical product with an expiration date, such as most pharmaceuticals, would be uninsurable …, since there is always the chance that the expiration date would not be heeded.
Slip op at p.8. In addition, the appeals court sustained Stryker’s right to 12% pre-judgment interest under Michigan law, though not for as long as Stryker had hoped.
Worse for Stryker, the appeals court held that XL was within its rights to settle Pfizer’s later-in-time claims against Stryker (seeking indemnity under the acquisition agreement), thereby reducing the limits available to Stryker for its own claims and XL’s defense obligations as well. Yet, even there, the appeals court pushed back against XL, finding that Pfizer’s defense costs in defending claims from Uni-Knee implant claimants were defense costs to be paid in addition to limits. This part of the ruling is unlikely to be of much use to policyholders since the wording of the policy’s Insured Contract coverage was unique and probably no longer available.