Allianz Insurance Co. v. Guidant Corp.

Citation: Not availableDocket: 2-04-1038 Rel

Court: Appellate Court of Illinois; January 27, 2005; Illinois; State Appellate Court

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In the case Allianz Insurance Company v. Guidant Corporation, Guidant Corporation appeals a circuit court decision that denied its request for a partial stay in an insurance coverage lawsuit related to its Ancure Endograft System. The Ancure Device, designed to treat abdominal aortic aneurysms, was developed by Guidant's subsidiary, Endovascular Technologies, Inc., and received FDA approval in September 1999. Following its introduction, malfunctions occurred with the delivery system, leading to complications that sometimes required traditional surgery for removal. Guidant sales representatives advised doctors on a non-FDA-approved "Handle-Breaking Technique" to address these issues. Federal law mandates reporting serious malfunctions to the FDA, and Guidant failed to report numerous malfunctions, resulting in a March 2001 suspension and recall of the device. Subsequently, EVT pleaded guilty to ten felonies, including misbranding and making false statements, acknowledging misleading the FDA about the device's malfunction frequency and revealing previously unreported medical device reports (MDRs), which included records of 12 deaths and 57 cases requiring surgery.

EVT entered a plea agreement with the federal government, committing to pay a total of $92.4 million, which comprises a forfeiture of $10.9 million, a criminal fine of $32.5 million, and a civil settlement of $49 million. Following an FDA review, the Ancure Device was reintroduced to the market; however, Guidant and its subsidiaries, including EVT and GSC, faced multiple lawsuits from individuals alleging injuries related to the device's implantation.

Allianz Insurance Company provided insurance coverage to Guidant starting in 1997, with policy number ULA 4100422 effective from September 1, 2000, to September 1, 2002, naming EVT and GSC as insureds. Additionally, six other insurers offered excess product liability coverage during the same periods. In July 2000, for the policy renewal, Guidant supplied Allianz with relevant business information and completed an insurance application addressing underwriting risks. In June 2001, Guidant updated Allianz with further information for the subsequent policy renewal.

In the applications for both 2000 and 2001, Guidant answered questions regarding potential liability claims. Notably, for one question, it indicated awareness of integrated occurrences that could exceed $2 million, while for others, it answered affirmatively regarding the potential for liability losses due to defects or hazards associated with their products. The emphasis in the original document has been preserved in the summary.

Between August 2001 and September 2003, Guidant informed Allianz of claims related to the Ancure Device. Allianz disclaimed liability in a letter dated October 20, 2003, and subsequently filed a four-count complaint against Guidant on November 6, 2003. Count I alleged common-law fraud, claiming Guidant made false representations and concealed information about the Ancure product's defects during its application for Allianz Policy Number ULA 4100422, intending to secure insurance. Count IV sought a declaration of no coverage under the policies for claims associated with the Ancure Device, divided into two parts: 

1. Part one argued that the $49 million civil settlement from a criminal plea was not covered due to reasons such as being outside the policy period, lack of prior approval for the settlement, arising from Guidant's intentional misconduct regarding FDA reporting, not constituting an occurrence under the policies, and being a known loss.
   
2. Part two contended that many claims occurred after the policy expiration, stemmed from Guidant's deliberate misconduct, and were known losses.

Following Allianz's lawsuit in Illinois, Guidant filed a suit in Indiana against Allianz and six excess insurers, seeking a declaration for defense against the claims. The Indiana court stayed the action pending resolution of Allianz's fraud claim in Illinois. On June 18, 2004, several insurers were allowed to intervene in the Illinois litigation and filed their own complaints against Guidant, asserting that their policies did not cover the claims.

Guidant requested a partial stay of the coverage litigation on March 17, 2004, wanting to limit proceedings to Allianz's duty to defend, citing significant overlap between the underlying claims and the coverage action that could prejudice Guidant's case.

On September 16, 2004, the trial court denied Guidant's motion for a partial stay, emphasizing that the issues in the underlying claims and coverage litigation were severable. The court clarified that the focus was on the knowledge at the time of the insurance applications regarding potential liability, rather than on allegations of negligence or device quality. Following this ruling, Guidant filed a notice of interlocutory appeal on October 15, 2004. 

The appellate court's first task was to establish jurisdiction for the appeal, which Guidant argued was based on Supreme Court Rule 307(a)(1), allowing interlocutory appeals from orders related to injunctions. The Insurers contended that the trial court's order resembled a discovery ruling and was non-appealable under this rule. The court noted that whether an order is appealable as an injunction depends on the substance of the action rather than its form. Illinois courts have broadly interpreted "injunction" to include stay orders, treating denials of motions to stay as denials of preliminary injunction requests. Consequently, the appellate court concluded that the trial court's denial of Guidant's motion for a partial stay was indeed appealable under Rule 307(a)(1), distinguishing it from purely administrative or discovery matters that are not subject to interlocutory appeal.

Guidant's motion for a partial stay sought to limit the case to issues regarding Allianz's duty to defend against product liability claims, arguing that proceeding with other aspects could prejudice its defense in those claims due to overlapping factual and legal issues. Guidant requested a stay on all discovery and adjudication related to these overlapping issues. The trial court's order, while a partial stay, affected both discovery and the adjudication of key issues, which Guidant contended was significant. Guidant argued that denying the stay would force it to manage simultaneous litigation against both its adversaries and its Insurers, potentially leading to collateral estoppel from findings in the coverage litigation. The Insurers countered that the two cases did not overlap and that the trial court's decision was based on factual determinations of separable issues. The appellate court noted that a trial court's decision on a stay is reviewed for abuse of discretion and found no such abuse in the denial of Guidant's motion, concluding that the trial court acted within reasonable bounds and adhered to legal principles.

Insurers can initiate a declaratory judgment action to clarify their obligations and rights regarding coverage for their insured, as established in case law (United States Fidelity & Guaranty Co. v. Jiffy Cab Co., 1994). Generally, such actions concerning an insurer's duty to indemnify should not occur before the underlying action is resolved, especially when the issues in both actions are substantially similar, as premature determinations could prejudice parties through collateral estoppel (Murphy v. Urso, 1981; Burnett v. Safeco Insurance Co. of Illinois, 1992; Brotherhood Mutual Insurance Co. v. Roseth, 1988). However, an exception exists where the issues are separable from those in the underlying action (Murphy, 1981). 

In the present case, the parties agree on the applicable law but dispute its application to the facts. Guidant argues that the fraud claims in the insurance coverage litigation and the underlying claims overlap, as they involve the same legal causes of action and facts concerning the Ancure Device and Guidant's knowledge of its defects. Conversely, the Insurers contend that the fraud claims are based on different actions by Guidant. While both claim fraud, the ultimate facts are distinct, allowing the court to address the declaratory judgment action separately from the underlying litigation (Continental Casualty Co. v. Coastal Savings Bank, 1992). Specifically, Allianz's fraud claim alleges that Guidant made false representations regarding the Ancure product defects during the insurance application process, a claim similarly made by other Insurers.

Insurers allege that Guidant committed fraud during its insurance application by failing to disclose knowledge of claims related to the Ancure Device. The key issue is whether Guidant was aware of potential claims at the time of application, not whether it was aware of defects. The underlying claims involve Guidant allegedly misleading the public and regulatory bodies about the safety of the Ancure Device, which differs from the fraud claims concerning the insurance application process. The court finds these fraud claims to be distinct and rejects Guidant's request to overturn the trial court's decision based on this distinction.

Guidant also challenges the Insurers' argument that the underlying claims lack coverage due to being "willful, deliberate, or intentional." The Insurers assert that Guidant's actions, including failing to report malfunctions to the FDA while continuing to distribute the device, fall under this category. Guidant's position is weakened by its subsidiary EVT’s admission in a plea agreement that it intentionally misled the FDA and failed to disclose significant information regarding the Ancure Device. This admission negates any factual disputes about Guidant's conduct, as established by precedent. Consequently, the court sees no reason for prejudice against Guidant in allowing the Insurers' declaratory judgment actions to proceed.

The trial court must determine if Guidant's admission qualifies as an "occurrence" under the insurance policies and if a duty to indemnify exists. Guidant argues that the definition of "occurrence" supports reversing the trial court's denial of its motion for a partial stay, referencing Allianz's complaint which defines "occurrence" as an event leading to unintended personal injury or property damage. Guidant contends that proving an "occurrence" would require demonstrating that the plaintiffs were indeed injured by its actions, misinterpreting the true nature of Allianz's claim, which focuses on whether Guidant's conduct was intentional. Notably, Guidant acknowledged its intentional conduct in a plea agreement. 

Guidant's defense against the Insurers' claim of "known loss" hinges on the assertion that the Insurers must prove Guidant was aware of the alleged issues with the Ancure Device at the time of purchasing the insurance policies. Guidant argues that this requirement overlaps with the underlying claims. However, the court clarified that insurance covers contingent risks; if an insured is aware of a substantial probability of loss at the time of policy purchase, it becomes an uninsurable known loss. To establish the known loss theory, the Insurers need only show that Guidant knew or had reason to know about potential claims related to the Ancure Device and the expected extent of exposure. Additionally, the underlying claims involve various legal theories of liability, focusing on Guidant's responsibility for injuries related to the Ancure Device, rather than whether the device was unsafe or Guidant's awareness of its safety. The Insurers need only demonstrate some exposure related to the Ancure Device to prevail on their known loss claims.

Guidant argues that it will face significant prejudice if the trial court's ruling is upheld, referencing Old Republic Insurance Co. v. Chuhak Tecson, P.C., which suggests that overlapping factual issues in coverage litigation could compromise the insured's defenses in underlying claims. However, the court finds that the issues in the coverage litigation and the underlying claims are distinct, diminishing the relevance of Guidant's prejudice claim. The court proposes that a well-structured protective order could address any potential overlap in discovery, noting that the parties have been working toward this solution and that the trial court has already directed them to prepare a protective order. Additionally, Guidant's claim of collateral estoppel is rejected, as the court agrees with the Insurers that the findings of the trial court do not apply, given the separable nature of the issues and Guidant's admissions regarding intentional conduct. The conclusion is that the trial court did not abuse its discretion in denying Guidant's motion for a partial stay, and the order of the circuit court of Du Page County is affirmed.