Failure to Obtain Prior Consent For Settlements Lets Excess Insurer Off Hook

“Consent-to-Settle” Provision Applies to Settlement Made Before Primary Exhausted

The Sixth Circuit, applying Michigan law, reversed the district court and held that excess insurer TIG Insurance Company (“TIG”) had no coverage obligation to Stryker Corporation (“Stryker”) for certain settlements because Stryker had not received TIG’s written consent for the settlements as unambiguously required under the TIG policy.  The appellate court was not persuaded by Stryker’s argument that the policy contained a latent ambiguity because the settlements to which consent was required were entered into prior to the TIG policy was triggered.  While the outcome reminds policyholders to be cognizant of the consent requirements of its policies, the case has unique facts and policy language that shaped the result.

In the late 1990s, Stryker purchased a subsidiary of Pfizer, Inc. (“Pfizer”) that made and sold orthopedic products.  One of those products, an artificial knee, turned out to be defective.   In the early 2000s, Stryker began receiving product liability claims regarding the defective artificial knees.  Stryker had commercial liability umbrella insurance through XL Insurance Co., Inc. (“XL”) and excess insurance through TIG.  Stryker tendered the claims for the defective artificial knees to its insurers.  XL denied coverage.  Stryker sued the insurers for defense and indemnification for the claims in the Western District of Michigan.  In the meantime, Stryker unilaterally settled the claims regarding the defective artificial knees and paid over $7.6 million from its own resources.  Stryker was separately adjudicated liable in the Southern District of New York for $17.7 million of Pfizer’s losses relating to the artificial knees.  In 2012, the 6th Circuit held that XL was obligated to provide coverage for the claims made against Stryker in connection with the defective artificial knees.  However, before paying the previously settled claims, XL settled with Pfizer for over $17 million, which exhausted its policy limits, and left Stryker’s individual product liability claims unpaid.   In 2013, Stryker filed a supplemental complaint against TIG, seeking to recover the remaining $7.6 million paid to settle its product liability claims.  TIG disputed its coverage obligation by arguing that the settlements did not constitute “ultimate net loss” because Stryker failed to obtain TIG’s written consent at the time the settlement was made as required under the policy.  The district court found that the TIG policy contained a latent ambiguity because the policy language did not explicitly require consent to settlements entered below the TIG layer.  Due to the alleged ambiguity, the district court construed the policy against TIG and held that Stryker’s claims were covered under the policy in the amount of $8.6 million in damages and interest.   TIG appealed to the 6th Circuit.

According to the appellate court, “[t]rue linguistic ambiguities are rather ‘rare in contract cases.’”  The TIG policy covers Stryker’s “ultimate net loss,” defined in relevant part, as the amount paid “in the settlement or satisfaction of claims” for which the insured’s liability is established by “adjudication” or “compromise with the written consent of [TIG].”   The court found that a “reasonable person, with an ordinary understanding of the English language” would understand that the policy required TIG’s consent to a settlement before TIG would have any coverage obligation.  The court could not find anything in the policy to suggest some other hidden meaning.

Stryker argued that due to the unusual facts of the case the policy contained a latent ambiguity.   Under Michigan law, “[a] written instrument that is clear on its face may, upon consideration of extrinsic evidence or some collateral matter, be rendered latently ambiguous when applied in the real world.”  Stryker contended that there is an ambiguity in the meaning of “claims” and argued that “claims” actually means “liability of settlements made without consent, so long as the compromise originally occurred below TIG’s coverage layer.”   Stryker presented evidence consisting of the opinion testimony of TIG’s former claims adjusters and underwriters to support its position.  Under Michigan law, a latent ambiguity must be demonstrated by objective means, not merely subjective testimony, like as provided by Stryker.   The appellate court noted that, even if subjective means were enough to prove a latent ambiguity, it was not persuaded by the evidence presented by Stryker which, if anything, showed that consent to a settlement was in fact required before TIG would have a coverage obligation.  The appellate court found no latent ambiguity and held that the plain language of the policy controlled.   Thus, TIG had no coverage obligation to Stryker for any settlements it entered into without TIG’s written consent, even though those settlements were entered into before the TIG policy was triggered.

Stryker also argued before the appellate court that TIG violated the implied covenant of good faith and fair dealing.   There was never a dispute that the settlements were unreasonable.  However, the court was not persuaded by Stryker’s argument because Stryker did not seek TIG’s consent until over a decade after the fact.  “Stryker did not seek excess coverage until long after entering into its settlements, so it cannot be said that TIG wrongly denied liability or refused to provide a defense at that time.”  Stryker Corp. v. National Union Fire Ins. Co., No 15-1664 (6th Cir.  Dec. 2, 2016).

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