American Capital and Scientific Protein Laboratories (“SPL”), two companies involved in the manufacture and distribution of the prescription blood-thinning medication heparin, found themselves on the receiving end of more than 1,000 product liability lawsuits. Seeking a defense in the lawsuits, they turned to their insurers, The Charter Oak Fire Insurance Co. and Travelers Property Casualty Co. of America. The insurers refused coverage on two independent grounds.
First, the insurers argued they owed no coverage to SPL because the policies in question covered only American Capital. Second, they claimed that coverage was defeated by the policies’ “joint venture” clause, under which suits related to the conduct of a non-insured joint venture were not covered. The insurers argued that the contaminated heparin sodium at the core of the product liability suits was sourced through a Chinese business with which SPL had entered into a joint venture agreement.
In the coverage lawsuit, the federal trial court ruled against the insurers and required them to defend the lawsuits. The court rejected their argument that no duty was owed to SPL, because the policies were ambiguous on whether SPL and other companies in which American Capital held an interest were covered as insureds.
The Court also rejected the joint venture agreement argument, observing that some of the contaminated heparin sodium potentially came from a source other than the Chinese business (meaning that the “joint venture” clause was not necessarily implicated). Applying the “potentiality rule,” the dictates of which require an insurer to defend if there is a potentiality that the claim could be covered,” the court ruled in favor of coverage.
The insurance companies appealed. The United States Court of Appeals for the Fourt Circuit affirmed, requiring the insurance companies to provide a defense. The Fourth Circuit adopted the reasoning of the trial court, the most important of which is the “potentiality rule.”
This is another reminder to policyholders that potentially covered claims, even if they later turn out not to be covered or to be groundless, even fraudulent, still need to be defended by insurance companies.
The Charter Oak Fire Ins. Co. v. American Capital, Ltd. (4th Cir. Feb. 6, 2019)
Evan S. Schwartz
Founder of Schwartz, Conroy & Hack
833-824-5350
[email protected]
