Settlement Covered Despite Lack Of Insurer Consent:  Michigan Federal Court Finds Coverage For Policyholder’s Unilateral Settlement Of Claims Without Insurer Consent.

A Michigan U.S. district court, applying Michigan law, held an excess insurer liable to Stryker Corporation (“Stryker”) for settlements of claims related to defective artificial knees, notwithstanding the fact that Stryker did not receive the insurer’s consent prior to settlement, as required under the policy. The court also rejected the insurer’s late notice claim.

In 1998, Stryker purchased the stock and assets of Howmedica, Inc. from Pfizer, Inc. (“Pfizer”).   In 2000, Stryker began receiving product liability claims regarding defective artificial knees manufactured by Howmedica. Stryker had commercial liability insurance through XL Insurance Co., Inc. (“XL”) and excess insurance through TIG Insurance Company (“TIG”).  Stryker tendered the claims for the defective artificial knees to XL. XL declined to defend or indemnity Stryker and Stryker sued XL for defense and indemnification. In the meantime, Stryker settled the artificial knee claims and paid over $7.6 million from its own resources to settle the claims. The reasonableness of the settlements was not in dispute. The court determined that XL was liable to Stryker for the settlements. Then, a New York court ruled that Stryker was liable to Pfizer for indemnification for all losses relating to the artificial knees sold after 1998. Stryker filed suit against XL and TIG. Before paying for previously settled claims, XL settled with Pfizer for over $17 million, which exhausted its policy limits.

The issue before the court was whether TIG was liable to Stryker for payments made by Stryker to settle the claims.  The parties disputed whether Stryker’s settlements fell within the TIG policy’s definition of “Ultimate Net Loss” which required TIG’s written consent for settlements. Stryker argued that the settlements did not require consent because, at the time they were settled, the settlements were not within TIG’s policy layer.

The court found the consent requirement under the unique facts of the case to be ambiguous and that the extrinsic evidence suggested that the consent requirement should be construed in a way that does not bar coverage. The court stated that it was better to place the risk on TIG rather than on Stryker because well established law states that “ambiguous language should be construed against the insurer.” TIG had no interest in involving itself in the settlements that were within XL’s layer which was obvious by their previous lack of involvement. Therefore, the court concluded that TIG was not entitled to avoid liability based on the consent provision.

TIG also attempted to avoid liability by claiming that Stryker failed to promptly notify TIG of the Pfizer indemnification claim. The court found that TIG was not entitled to a late notice defense because it had very little relevance to the issue in the case and TIG had not shown prejudice from any late notice. According to the court: “TIG did very little to protect its own interests.”  Stryker Corp. v. XL Ins. Co. Inc., No. 1:05-CV-51 (W.D. Mich. Oct. 30, 2014).