APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY, D.C. Civil No. 83-3480
Before: WEIS and HIGGINBOTHAM, Circuit Judges, and RE*fn* , Chief Judge
In this case a pharmaceutical manufacturer's claim for indemnity against its excess products liability insurer rests on the theory that a hospital is also insured under the same policy. Once that fact is established, the manufacturer contends it is entitled to a credit against its self-insured retention for the amount the hospital contributed to the multi-party settlement of a patient's injury. Differing with the district court, we conclude that the hospital comes within the scope of a vendor's endorsement to the policy. That leads to a second question, whether the hazard insured against includes responsibility for an excessive dosage to the patient. The answer depends on whether the hospital itself was negligent or whether it was only secondarily liable as the seller of a defective product. We will remand to the district court for findings on those factual issues as well as those on the manufacturer's claim for costs of defense.
The district court entered summary judgment for the defendant insurance company on two of three claims in the complaint, certifying the two under Fed. R. Civ. P. 54(b), and leaving the other for resolution at a later stage.
The dispute grows out of the settlement of a personal injury suit. While a patient in the St. Francis Hospital in Wilmington, Delaware, an eleven month-old infant, Thomas M. Keys, received an overdose of a pharmaceutical manufactured by Cooper Laboratories, Inc., plaintiff in this case. The child suffered permanent injuries, and his parents brought suit in the Delaware state court in 1979. Ultimately, the list of defendants included the hospital, Doctors McReynolds and Lynam (the attending physicians), and Cooper Laboratories.
The physicians were alleged to have negligently prescribed dosages which were excessive for an infant. The hospital was said to be vicariously at fault for the conduct of its nurses in failing properly to monitor the child's condition. In addition, the hospital pharmacist was charged with negligence in filling the prescriptions without recognizing that the dosages were inappropriate for the patient. Cooper Laboratories was cited for using a misleading label that failed to alert users to the difference in potency between two similarly named pharmaceuticals, elixophyllin pediatric suspension and elixophyllin elixir. Finally, Cooper was charged with having failed to provide sufficient warnings through inserts, advertisements, or notifications.
The case was settled during trial for the sum of $1,900,000, contributions being made by the parties as follows:
Cooper Laboratories $950,000.00
St. Francis Hospital 300,000.00
Dr. McReynolds 200,000.00
International Surplus Lines Insurance Company (ISLIC), defendant here, had issued to Cooper Laboratories a products liability policy which was excess to a one million dollar retention by the insured. Included was a vendor's endorsement, extending protection to those who distributed or sold a Cooper product in the course of their business. The policy also contained a clause stating that the carrier had "the right and duty to defend" suits against the insured.
ISLIC received its first notice of the child's claim and suit in March 1982, one month after Cooper's attorneys had received a settlement demand of $3,500,000. They kept the insurance company informed throughout the negotiations, which continued until settlement during trial on February 10, 1983. On January 28, 1983, Cooper advised ISLIC that it would be held responsible for the cost of defense and that the doctors and hospital were additional insureds who were covered by the vendor's endorsement.
When ISLIC refused to pay any part of the settlement or defense costs, Cooper filed this suit in the federal district court in New Jersey, the state in which the company's principal place of business was located. The complaint charges that the carrier unjustifiably refused to defend the personal injury suit or contribute to its settlement and that ISLIC badgered Cooper into compromising the case. Plaintiff alleges that the insurance company violated the New Jersey Consumer Fraud Act, N.J. Stat. Ann. §§ 56:8-1, et seq., and engaged in unfair and deceptive insurance practices contrary to N.J. Stat. Ann. §§ 17:29B-1, et seq.
Cooper's position is that because the doctors and hospital were additional insureds under the policy, their contributions amounting to $950,000 should be credited toward the one million dollar retention. According to this theory, Cooper would owe $50,000, thus satisfying the remainder of the retention and leaving ISLIC the obligation to reimburse Cooper for the final $900,000 paid toward the settlement amount of $1,900,000. In addition, Cooper demands that its attorney's fees be paid by ISLIC.
Deciding in favor of ISLIC on summary judgment, the district court concluded that neither the hospital nor the doctors were covered under the vendor's endorsement. That the hospital both furnished the drug and charged for it would not, according to the court, "constitute a sale of drugs in the course of the hospital's business in the plain, ordinary and commonly understood meaning of the endorsement." Applying the same standard of ordinary meaning, the court similarly concluded that the hospital had not distributed the drug. Likewise, since the physicians had not actually sold the product, the court declined to consider them sellers or distributors as that term is understood in general commercial usage.
The court also denied Cooper's claim for the cost of its defense. Reasoning that ISLIC's duty arose only after Cooper exhausted its one million dollar retention, the court observed that this condition precedent had not occurred. Therefore, no payment of damages, "to which this insurance applies" as the policy read, had taken place. The court drew an analogy between Cooper and a "primary insurer", which customarily pays the cost of defense.
ISLIC's conduct is allegedly coercing Cooper into settling the personal injury case was found to raise factual issues precluding granting summary judgment.
On appeal, Cooper contends that the policy must be interpreted either in accordance with the reasonable expectation of the average insured or according to the purpose defined in the language. Viewed in that light, the argument continues, there was an actual sale of the drug by the hospital. In addition, both it and the physicians were distributors of prescription drugs. With respect to the reimbursement of attorney's fees, Cooper asserts that ISLIC was obligated to defend when the personal injury plaintiff submitted a demand that fell within the carrier's excess limits.
ISLIC argues that since the physicians provide only a service, they are not conduits for the distribution of a commercial product. Moreover, the complaint in the personal injury case charged both the hospital and physicians with malpractice, not with the vicarious liability of retailers of a defective product. With respect to the duty to defend, ISLIC observes that Cooper had retained its own attorneys who actively conducted its defense for two years before notifying the carrier of the claim. Finally, ...