Allianz Insurance v. Guidant Corp.

Citations: 839 N.E.2d 113; 355 Ill. App. 3d 721; 298 Ill. Dec. 126; 2005 Ill. App. LEXIS 66Docket: 2-04-1038

Court: Appellate Court of Illinois; January 28, 2005; Illinois; State Appellate Court

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Guidant Corporation appeals a Du Page County circuit court order that denied its request for a partial stay in an insurance coverage lawsuit involving the Ancure Endograft System, a medical device developed to treat abdominal aortic aneurysms. The Ancure Device, approved by the FDA in September 1999, was designed to be inserted via a leg incision, replacing more invasive traditional surgical methods. Following its market introduction, Guidant's subsidiary, Endovascular Technologies, Inc. (EVT), identified malfunctions in the device's delivery system, which sometimes became lodged in patients, necessitating traditional surgical removal. Sales representatives informed doctors of an unapproved "Handle-Breaking Technique" to address these issues. The court ultimately affirmed the denial of Guidant's motion for a stay, indicating the continuation of the insurance litigation.

A company must file a medical device report (MDR) with the FDA when a device malfunctions and may have caused or could cause death or serious injury (21 U.S.C. 360i(a)(1), 2000). The Ancure Device required an MDR filing when its placement necessitated additional surgeries. EVT suspended sales and recalled the Ancure Device on March 16, 2001, after identifying regulatory deficiencies, having sold over 7,600 units. EVT pleaded guilty on June 12, 2003, to 10 felonies, including misbranding and false statements, admitting to misleading the FDA about the frequency of delivery system malfunctions. Between September 30, 1999, and March 16, 2001, EVT filed 172 MDRs but later disclosed approximately 2,628 additional MDRs, including reports of 12 deaths and 57 conversions to traditional surgery, which had not been timely reported. EVT's plea agreement included a payment of $92.4 million to the federal government, comprising a $10.9 million forfeiture, a $32.5 million criminal fine, and a $49 million civil settlement. Following FDA review, the Ancure Device returned to market, yet Guidant and its subsidiaries faced numerous lawsuits related to injuries from the device. Allianz Insurance Company issued coverage to Guidant starting in 1997, providing a policy for the periods September 1, 2000, to September 1, 2001, and September 1, 2001, to September 1, 2002, with EVT and GSC as named insureds. Six additional insurers provided excess product liability coverage during these periods.

In July 2000, Guidant provided Allianz with essential business information and loss details for the renewal of its insurance policy starting September 1, 2000, and completed an insurance application with underwriting questions. In June 2001, Guidant submitted further information for the renewal beginning September 1, 2001. Notably, Guidant answered "NO" to questions regarding significant claims or defects that could lead to liabilities exceeding $2 million. Between August 2001 and September 2003, Guidant notified Allianz about claims related to the Ancure Device. On October 20, 2003, Allianz disclaimed liability for these claims and subsequently filed a four-count complaint against Guidant on November 6, 2003. Count I alleged common-law fraud, asserting that Guidant knowingly made false representations regarding Ancure product defects during the insurance application processes to obtain coverage. Count IV sought a declaration excluding coverage for claims associated with the Ancure Device, specifically contesting the $49 million civil settlement with the federal government, arguing that it fell outside the policy period, was a voluntary settlement without prior approval, stemmed from Guidant's intentional misconduct, did not qualify as an insurable occurrence, and constituted a known loss.

Part two addresses issues surrounding civil settlement and individual bodily injury claims related to Allianz policies, arguing that these policies lack coverage due to several factors: 1) many claims occurred post-policy expiration; 2) claims stem from willful acts regarding FDA reporting and distribution of the Ancure Device despite known failure rates; and 3) the claims were known losses. Following Allianz's lawsuit against Guidant in Illinois, Guidant and its subsidiaries initiated a separate suit in Marion County, Indiana, asserting that Allianz must defend against the underlying claims and that excess insurers must indemnify Guidant. The Indiana court stayed its proceedings pending the resolution of Allianz's fraud claim against Guidant in Illinois. Subsequently, Zurich, Gerling, and Liberty intervened in the Illinois litigation, filing a complaint against Guidant and naming additional insurers as third-party defendants, who also sought a declaration of non-coverage.

Guidant filed a motion on March 17, 2004, for a partial stay of the coverage litigation, seeking to limit proceedings to Allianz's duty to defend, citing significant overlap in factual and legal issues that could prejudice its position in the underlying claims. However, on September 16, 2004, the trial court denied this motion, asserting that the issues in the coverage litigation and underlying claims were severable and distinct, focusing on the awareness of liability at the time of insurance application rather than the merits of the underlying claims. Guidant subsequently filed a notice of interlocutory appeal. 

The analysis section begins with determining jurisdiction for the appeal, with Guidant citing Supreme Court Rule 307(a)(1) regarding interlocutory appeals from certain orders. The insurers challenge jurisdiction, arguing that the trial court's order resembles a discovery ruling rather than one warranting an interlocutory appeal, given Guidant's request was limited to a specific aspect of the litigation concerning the duty to defend.

An order's appealability as an injunction under Rule 307(a)(1) is determined by the substance of the action rather than the order's form. Illinois courts have broadly interpreted "injunction" within this context, equating "stay orders" with injunctions and holding that the denial of a motion to stay can be viewed as a denial of a preliminary injunction request. Specifically, a motion to stay proceedings pending the resolution of a related case is appealable under Rule 307(a)(1). Case law confirms that denials of motions to stay are appealable as of right under this rule, although purely discovery matters are not appealable as injunctions. The trial court's order denying Guidant's motion for a partial stay is deemed appealable under Rule 307(a)(1) because it affects both discovery and the adjudication of underlying factual and legal issues. Guidant's request for a stay was not merely procedural; it sought to regulate substantive issues that could prejudice its position in related product liability claims. Although the stay was partial, the Insurers did not present authority to challenge the court's jurisdiction based on this aspect. The court noted that requests for injunctive relief often address only parts of litigation, yet remain appealable, leading to the conclusion that it has the jurisdiction to consider Guidant's interlocutory appeal.

Guidant contends that the trial court's denial of its motion for a partial stay neglects established legal principles that mandate enjoining aspects of the litigation overlapping with underlying claims. Guidant argues that a stay would not prejudice the Insurers, while the trial court's ruling would force Guidant to simultaneously defend against both the Underlying Lawsuits and its Insurers, potentially subjecting it to collateral estoppel based on findings in the coverage litigation. The Insurers counter that the claims are distinct, asserting that the trial court's decision was based on its factual determination of separability. The appellate standard of review for a trial court's decision to grant or deny a stay is whether there was an abuse of discretion, which occurs when the court acts arbitrarily or exceeds reasonable bounds after considering the circumstances. The appellate court finds no abuse of discretion in the trial court's denial of the stay. It is noted that while insurers can seek declaratory judgment actions to clarify their obligations, such actions regarding indemnification should generally await the resolution of the underlying claims unless the issues are clearly separable. The Illinois Supreme Court has acknowledged exceptions for declaratory actions on coverage when issues are separable, citing relevant case law supporting this principle.

The parties agree on the applicable law but dispute its application to the case facts. Guidant argues that the legal and factual issues in the insurance coverage litigation and the underlying claims are inseparable, citing overlapping fraud claims based on the same causes of action and facts. Guidant contends that both the Insurers and the plaintiffs assert fraud and misrepresentation related to the same events surrounding the Ancure Device. Conversely, the Insurers maintain that their fraud claims arise from different actions attributed to Guidant. Although both share the label of fraud, the court finds no overlap in the ultimate facts. The Insurers' claims specifically allege that Guidant made false representations during the insurance application process, knowing of defects in the Ancure Device, whereas the underlying claims focus on Guidant's fraudulent concealment of safety risks from patients and regulatory bodies. Therefore, the court concludes the fraud claims in the coverage litigation are distinct from those in the underlying claims, upholding the trial court's decision against Guidant's position.

Guidant disputes the Insurers' claim that the underlying allegations lack coverage due to the absence of an "occurrence" under the insurance policies, arguing that the Insurers' assertion relies on the characterization of the conduct as "willful, deliberate, or intentional." The Insurers' position is based on allegations from Allianz's complaint, which assert that Guidant's actions regarding the Ancure Device were intentional violations of FDA reporting requirements and that Guidant continued to distribute the device despite knowledge of its high failure rates.

Guidant maintains that these allegations represent a typical scenario where a declaratory judgment action should be paused; however, the situation is complicated by the fact that EVT, Guidant's subsidiary, admitted in a 2003 plea agreement to intentionally misleading the FDA and failing to report numerous malfunction reports. This admission effectively negates any factual disputes regarding Guidant’s conduct. Previous case law supports that a guilty plea can eliminate factual questions about the insured's behavior. Consequently, the court sees no prejudice to Guidant from proceeding with the Insurers' declaratory judgment actions.

Guidant also argues that the definition of "occurrence" in the policies—which describes an event causing personal injury or property damage that is neither expected nor intended—supports its case. Guidant claims that addressing the "occurrence" issue would require it to demonstrate the plaintiffs' injuries in the coverage litigation. However, the court clarifies that the critical aspect of Allianz's complaint is not the personal injury itself but rather whether Guidant's conduct was intentional, as acknowledged in the plea agreement.

Insurers argue that there is no coverage for claims against Guidant due to a "known loss," asserting that Guidant must have been aware of issues with the Ancure Device at the time of purchasing the insurance policies. Guidant contends that Insurers must demonstrate specific knowledge within the company regarding potential claims and liability for coverage to be denied. However, the legal standard established by prior case law indicates that if an insured knows or has reason to know of a substantial probability of loss when acquiring a policy, it constitutes an uninsurable "known loss." Insurers only need to show that Guidant had knowledge of existing or impending claims regarding the Ancure Device, not whether the device was unsafe.

The underlying claims against Guidant involve various allegations, including product liability and negligence, focusing on Guidant's legal responsibility for injuries linked to the Ancure Device. The trial court is not required to evaluate the safety of the device for the Insurers to succeed in proving a known loss. Guidant argues it would face significant prejudice if the trial court's ruling remains, particularly due to potential overlaps in factual issues affecting its defenses in the underlying claims. However, the court finds that the issues in the coverage litigation are distinct from those in the underlying claims, mitigating the risk of prejudice. A protective order may be crafted to address any overlapping discovery concerns. Guidant's claims of collateral estoppel are rejected, as the relevant issues are either distinct from those raised in the underlying claims or related to conduct already acknowledged by Guidant. Consequently, the trial court's denial of Guidant's motion for a partial stay is affirmed.