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Insurer must cover claims arising from implants of expired artificial knees: Appeals court

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Insurer must cover claims arising from implants of expired artificial knees: Appeals court

CINCINNATI—A U.S. appeals court panel ruled Thursday that XL Insurance America Inc. must cover medical device manufacturer Stryker Corp. for claims arising from the implanting of expired artificial knees.

The case centers on artificial knee joints known as “Uni-Knees” developed by Howmedica Inc., an Irish subsidiary of Pfizer Inc. Kalamazoo, Mich.-based Stryker acquired Howmedica from Pfizer at the end of 1998 and, under the terms of the deal, agreed to indemnify Pfizer for costs associated with claims brought against Pfizer related to Howmedica products such as Uni-Knees.

In the mid-1990s, according to court documents, it was discovered that the procedure used to sterilize medical devices after manufacture caused material in key Uni-Knee components to deteriorate, potentially leading to the devices' failure. To ensure that expired products did not ship to customers, Pfizer developed a database to monitor products potentially at risk. Uni-Knees, however, were accidentally not entered into the database, court documents said.

In 1999, Stryker became aware an expired knee had been implanted in a patient. After investigating, Stryker believed the problem was caused by hospitals using expired inventory from their shelves, according to court documents, though in 2000 it was determined the error involved expired Uni-Knees sold from Stryker warehouses. Beginning in 2000, Stryker became the subject of lawsuits from patients who'd received expired Uni-Knees. Ultimately, 77 such suits were brought against Stryker, many also naming Pfizer.

Stryker bought a commercial general liability umbrella policy for the 2000 policy year from Winterthur International America Insurance Co., which was purchased by XL Capital Ltd. in 2001. That policy provided for $15 million in coverage per occurrence and $15 million aggregate over a $2 million retention.

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The policy also required the insurer to defend suits that would be covered under the policy, and that any defense costs would be in addition to policy limits. It also required coverage for entities Stryker was contractually obligated to indemnify, as well as an endorsement that grouped all medical products with the same defect into a single batch or occurrence for coverage purposes and that provided batch coverage shouldn't apply to any loss arising from defects known or suspected prior to the start of 2000.

Stryker notified XL of claims in August 2000, and in October 2001 the insurer notified the policyholder that it was denying coverage, arguing that the claims arose from a defect known or suspected prior to Jan. 1, 2000 and consequently not covered under the medical product endorsement. Stryker sued XL in U.S. District Court for the Western District of Michigan seeking defense and indemnification. In separate orders, the district court held that the XL policy did cover direct claims against Stryker as well as Stryker's obligations to Pfizer.

In 2009 XL entered into a $26 million settlement to settle Stryker's liability to Pfizer and subsequently sought summary judgment arguing that, as the Pfizer settlement exhausted the limits of the Stryker policy, it no longer was liable for sums outlined by the court in a 2008 damages opinion. The district court denied the summary judgment motion, however, ruling that XL's breach of the duty to defend Stryker voided the policy's limits of liability, and entered a final judgment, which XL appealed.

In its ruling, the 6th U.S. Circuit Court of Appeals in Cincinnati noted that the lower court had held that with regard to the policy's medical product endorsement, the endorsement did not bar coverage because it wasn't until April 2000 that Stryker began to suspect that the expired Uni-Knee problem stemmed from its own operations. The appeals court panel affirmed that finding.

The appeals court sent several items back to the lower court for consideration. It reversed the district court's judgment that the XL policy's aggregate limit doesn't apply to the earlier Stryker judgments and directed the district court to determine what portion of the total liability beyond the $15 million represents consequential damages under Michigan law.

The appeals court also directed the lower court to consider what portion of the Pfizer settlement applies to the XL policy limits, indicating that costs stemming from indemnification actions against Stryker could apply to the $15 million limit, while costs stemming from defending Uni-Knee suits may not exhaust the policy and that XL is liable for those costs regardless of the policy limits.