Products Liability Law Daily Excess insurer must contribute $15M toward settlement of defective vitamin suit
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Monday, December 5, 2016

Excess insurer must contribute $15M toward settlement of defective vitamin suit

By Susan Engstrom

The excess liability insurer for a pharmacy chain was obligated to pay $15 million toward the settlement of a class action suit brought on behalf of infants who had died or sustained injuries after receiving an intravenous vitamin E supplement known as E-Ferol, a federal court in Texas ruled. The class plaintiffs established as a matter of law that the excess liability policy covered the insured’s negligent conduct in connection with the manufacturing and marketing of the supplement. However, the plaintiffs were not entitled to recover attorney fees from the insurer (Klein v. Federal Insurance Co., December 2, 2016, Fitzwater, S.).

Over one thousand premature babies were administered E-Ferol and were affected to some degree by "E-Ferol Syndrome" which resulted in injuries that included severe brain injury, blindness, and death. The class plaintiffs had sued Revco D.S., Inc. (predecessor to CVS Caremark Corp.) and its wholly owned subsidiary, Carter-Glogau Laboratories, Inc. (now known as Retrac, Inc.) in 2003, alleging claims for negligence, strict liability, and negligent misrepresentation in connection with the manufacture and distribution of E-Ferol Aqueous Solution (E-Ferol).

At the relevant time, Revco was covered under an excess liability policy issued by Federal Insurance Co. The policy also covered Retrac, but the corporations were considered separate insureds under the policy’s "severability of interest" clause.

In 2009, the class entered into a settlement agreement with Retrac resolving the underlying claims. However, Federal did not participate in funding the settlement, asserting that it had no duty to indemnify its insureds. After the class settlement was approved, Revco and Retrac executed an assignment that purported to assign to the class plaintiffs all of their rights to seek indemnity coverage against Federal and other non-settling insurers.

Establishment of coverage. In this case, the question before the court was whether the insurance policy provided coverage based on Revco’s negligent supervision of Retrac in the manufacturing and marketing of E-Ferol.

The class plaintiffs asserted that Revco was unaware of the development, manufacture, and distribution of E-Ferol until the day before the product was recalled, and that Revco’s negligent failure to use ordinary care to supervise its subsidiary proximately caused the plaintiffs’ injuries. The plaintiffs maintained that as a result of the policy’s "severability of interest" provision, they were entitled to coverage based on Revco’s negligence alone, and that any intentional conduct on the part of its subsidiary did not impede Federal’s obligation to cover Revco’s liability.

Federal argued that because Revco was dismissed and released from the class action by the settlement agreement, the insurer was not obligated to pay any portion of the settlement. However, the court determined that under the express terms of the settlement agreement, Revco had assigned to the class plaintiffs its right to seek indemnity from Federal as a condition of its being dismissed from the class action.

In the court’s view, the class plaintiffs established that under the "severability of interest" clause, the allegedly intentional conduct of Revco’s subsidiary could not be imputed to Revco; that Revco must be treated as being separately insured from its subsidiary; and that Revco’s conduct in connection with the manufacturing and marketing of E-Ferol was negligent and proximately resulted in the injuries claimed by the class. As such, the class plaintiffs established as a matter of law that the policy covered Revco’s negligent conduct.

Affirmative defenses. The court rejected Federal’s affirmative defenses, including one asserting that it had no duty to pay medical monitoring costs for the underlying claims. According to Federal, those expenses were incurred in connection with a possible diagnosis of a potential future injury and, thus, did not fall within the policy’s coverage for "personal injury," which was defined to include "bodily injury."

However, the class plaintiffs produced evidence, which Federal did not dispute, that "every single dose of E-Ferol caused the death of liver and kidney cells, such that each recipient of E-Ferol was damaged at the cellular level." According to the court, the cellular damage that each E-Ferol recipient experienced constituted "bodily injury" within the meaning of the policy. Because Federal failed to offer any evidence that the class members did not experience damage at the cellular level, the court granted the plaintiffs’ motion for summary judgment on this affirmative defense.

Federal also argued that the class plaintiffs’ claims were barred to the extent they sought coverage for products failing to meet warranties or representations. However, there were no allegations that Revco had made any warranty or representation regarding E-Ferol, and any allegations that Revco’s subsidiary made warranties or representations that resulted in injury were immaterial.

Accordingly, the class plaintiffs were entitled to recover $15 million from Federal, plus any accrued interest.

Attorney fees. The plaintiffs were not entitled to recover attorney fees from the insurance company, however. Their claim was governed by Ohio law, which does not allow for the recovery of attorney fees for breach of contract, including claims under an insurance contract. The court noted, though, that the plaintiffs could apply for an award of attorney fees from the common fund within 28 days of the date of this opinion.

The case is No. 7:03-CV-102-D.

Attorneys: Arthur John Brender (The Brender Law Firm) for Victoria Klein. Barry Alan Chasnoff (Akin Gump Strauss Hauer & Feld) and Jeffrey M. Goldfarb (Goldfarb PLLC) for O'Neal Inc. f/k/a O'Neal Jones & Feldman Pharmaceuticals., CVS Pharmacy Inc. f/k/a CVS Revco DS Inc. f/k/a Revco DS Inc. and Carter-Glogau Laboratories Retrac Inc.

Companies: O'Neal Inc. f/k/a O'Neal Jones & Feldman Pharmaceuticals.; CVS Pharmacy Inc. f/k/a CVS Revco DS Inc. f/k/a Revco DS Inc.; Carter-Glogau Laboratories Retrac Inc.

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