Artificial Knee Joint Settlements: No Written Consent, No Excess Coverage

The U.S. Court of Appeals for the Sixth Circuit, reversing a decision by a federal district court in Michigan, has ruled that a company that settled product liability suits without the written consent of its excess liability insurance company was not entitled to recover the amount of the settlements from its excess carrier.

The Case

Stryker Corporation, a medical technologies company, purchased a subsidiary of Pfizer that made orthopedic products. One of the products was an artificial knee joint that turned out to be defective.  In the early 2000s, Stryker was named in over 70 product liability actions and was potentially obligated to cover Pfizer’s losses as well.

Stryker submitted a claim to its umbrella and excess insurers. XL issued an umbrella policy with limits of $15 million subject to a $2 million self-insured retention.  TIG issued a $25 million excess liability policy above the XL policy.  Both insurers denied coverage.

Stryker sued each insurer in federal court in Michigan. During the course of the coverage litigation, Stryker unilaterally settled the product liability claims against it for $7.6 million.  It was separately adjudicated liable for $17.7 million of Pfizer’s losses as well.

In 2012, the court found that XL owed coverage to Stryker. XL paid the limits of its policy.  Stryker then pursued TIG for the $7.6 million it paid to settle the direct product liability claims against it.  TIG argued that the product liability settlement did not constitute “ultimate net loss” because Stryker failed to obtain written consent at the time it entered into the settlements.   The TIG policy defined “ultimate net loss” as “the amount of the principal sum, award or verdict actually paid or payable in cash in the settlement or satisfaction of claims for which the insured is liable, either by adjudication or compromise with the written consent of [TIG], after making proper deduction for all recoveries and salvages.”

Stryker argued that the excess policy did not actually require the insurer’s consent when settlements were made below the excess layer, and at best, the policy was ambiguous when applied to the situation here. Because XL satisfied the Pfizer judgment first, and exhausted its policy, Stryker claimed it was forced to present its direct settlements to TIG years after they were made. The district court agreed with Stryker that the policy was ambiguous.  TIG appealed to the Sixth Circuit.

The Sixth Circuit’s Decision

The Sixth Circuit reversed, finding no ambiguity in the policy.

In its decision, the circuit court ruled that the policy “clearly” required the excess insurer’s “written consent” for any and all settlements, adding that “[n]othing within the four corners of the contract” suggested an “otherwise hidden meaning.” The court also rejected Stryker’s argument that the term “claim” meant liability for settlements made without consent if the compromise originally occurred within the underlying limits.

Because the company had not satisfied the written consent requirement, its direct settlements could not constitute ultimate net loss.

The Sixth Circuit also rejected Stryker’s argument that its notice of the settlements should apply retroactively. The court reasoned that Stryker’s reading of the contract defeated the very purpose of the consent-to-settle requirement – to prospectively “give the insurer the opportunity to contest liability, to participate in settlement negotiations and to have input as to the value of the claim.”

Hence, the Sixth Circuit concluded that Stryker was not entitled to coverage for the $7.6 million settlement under the excess policy.

The case is Stryker Corp. v. National Union Fire Ins. Co. of Pittsburgh, PA, Nos. 15-1657/15-1664 (6th Cir. Nov. 18, 2016).