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MCNEILAB, INC. v. NORTH RIVER INS. CO.

September 17, 1986

McNEILAB, INC., Plaintiff
v.
NORTH RIVER INSURANCE CO., et al., Defendants



The opinion of the court was delivered by: BARRY

 Plaintiff in this action, McNeilab, Inc., is and has been since 1959 a wholly-owned subsidiary of Johnson & Johnson, *fn1" a multi-national, multi-billion dollar corporation involved primarily in the health care business. Since 1955, plaintiff has been engaged in the manufacture and sale of acetaminophen, an internal analgesic for temporary relief of pain and fever, which it has marketed under the trade name "Tylenol".

 The nation was stunned when, between September 29 and October 1, 1982, seven persons in the Chicago area died after ingesting Extra Strength Tylenol capsules laced with cyanide. Acting swiftly and efficiently to protect the public, to dissipate fear, and to clear the shelves of Tylenol so that it could quickly remarket a product in which the public would have confidence, Johnson & Johnson, between September 30 and October 7, 1982 and without consultation at any time with its insurers, undertook and funded a host of actions. Tylenol capsules and certain other McNeilab products were withdrawn from the market in the United States and seven foreign countries; the withdrawn Tylenol capsules were tested; the source of the tampering was investigated; non-tamper resistant packaged products were destroyed; tamper resistant packaging was developed; consumer studies and surveys were performed; an enormous number of reassurance messages were placed in print and on television and teleconferences were conducted; and a consumer research and exchange campaign as well as a campaign which enabled consumers to redeem coupons for tablet products issued during the crisis were launched. These actions were so successful that Tylenol not only regained but in short order exceeded its former share of the market. Without exception, those who have studied what took place during this period of time have concluded that, whatever the motive, no further deaths occurred *fn2" and Johnson & Johnson with its brilliant marketing strategy scored a major business coup.

 The first count of the complaint, the count before me now, seeks a determination that Johnson & Johnson's excess and umbrella liability insurers - defendants North River Insurance Company, Transit Casualty Company, Employers Insurance of Wausau, Aetna Casualty and Surety Company, American Centennial Insurance Company, Granite State Insurance Company, First State Insurance Company, and Northbrook Excess & Surplus Insurance Company (hereinafter "defendants") - are required to reimburse plaintiff for those recall-related costs to the extent of their respective layers of excess insurance coverage. *fn3" Defendants North River, Transit Casualty, Employers of Wausau and First State, denying coverage, have moved for summary judgment, in which motion the remaining defendants have joined.

 Plaintiff, arguing that coverage exists, has cross- moved for summary judgment as to liability *fn4" relying essentially on two theories. First, it argues that the language of the excess liability insurance policy at issue here, as construed by the courts, clearly and unambiguously covers recall and recall-related expenses even though neither recall nor anything akin to it is mentioned in the coverage provision of the policy. Second, it argues that if there be ambiguity in the policy, it must be resolved in favor of the insured without resort to extrinsic evidence.

 This aversion to extrinsic evidence may perhaps be explained by the fact that at no time until counsel became involved following the recall was there any thought, belief, or intent on the part of Johnson & Johnson or of any party that recall and expenses related thereto, which were neither sought nor paid for, were covered. Rather, in the years preceding the recall, Johnson & Johnson's Corporate Insurance Department, in Annual Reports to the Board of Directors, unequivocally stated that it maintained no recall coverage whatsoever. Johnson & Johnson, which at one time carried recall coverage, knew such coverage could be purchased, elected not to purchase it because the cost was prohibitive, and now claims that it enjoys recall coverage anyway. These and all other material facts are undisputed and it is similarly undisputed that the issue as to whether recall and recall-related expenses are within the scope of the policy is ripe for summary resolution on the cross motions of the parties.

 I. THE INSURANCE CONTRACT

 In 1977, Johnson & Johnson signed on behalf of itself and its subsidiaries an excess insurance policy with representatives of defendant North River Insurance Company, policy number JU 1081. The terms of the policy with North River are identical to those of the other defendant excess and umbrella insurers, each of which subscribed to an additional layer of coverage. The policies were renewed annually, and the North River policy applicable here was executed on May 13, 1982. *fn5"

 The parties contend that the policy language clearly supports their respective positions. The relevant policy language provides as follows:

 
COVERAGE OR CONDITIONS UMBRELLA LIABILITY
 
* * * *
 
1. COVERAGE
 
The Company [North River] hereby agrees, subject to the limitations, terms and conditions hereinafter mentioned, to indemnify the insured [Johnson & Johnson and its subsidiaries] for all Sums which the insured shall be obliged to pay by reason of the liability
 
(a) imposed upon the insured by law, or
 
(b) assumed under contract or agreement by the Named Insured and/or any officer, director, stockholder, partner or employee of the Named Insured, while acting in his capacity as such. for damages on account of -
 
(i) Personal Injuries
 
(ii) Property Damage
 
(iii) Advertising Liability
 
caused by or arising out of each occurrence happening anywhere in the world.
 
* * * *
 
THIS POLICY IS SUBJECT TO THE FOLLOWING DEFINITIONS:
 
* * * *
 
5. OCCURRENCE
 
The term "Occurrence" where ever used herein shall mean an accident or happening or event or a continuous or repeated exposure to conditions which unexpectedly and unintentionally results in personal injury, property damage or advertising liability during the policy period. All such exposure to substantially the same general conditions existing at or emanating from one premises location shall be deemed one occurrence.
 
* * * *
 
THIS POLICY IS SUBJECT TO THE FOLLOWING EXCLUSIONS:
 
This Policy shall not apply: -
 
* * * *
 
* * * *
 
(iv) for the withdrawal, inspection, repair, replacement, or loss of use of the Insured's products or work completed by or for the Insured or of any property of which such products or work form a part, if such products, work or property are withdrawn from the market or from use because of any known or suspected defect or deficiency therein.

 A. THE COVERAGE PROVISION

 1. The Impact of Precedent

 Plaintiff states that the coverage provision of the policy clearly covers first-party recall expenses or "first-party mitigation expenses", as plaintiff prefers to call them, presumably because that is the description used in the cases on which it relies. Defendants contend that the coverage provision only contemplates certain third party claims against the insured. Clearly the coverage provision by its terms does not include recall and recall-related expenses whether those expenses are denominated as "recall", "withdrawal", or "mitigation". Indeed, Exclusion (c)(iv) (the so-called "sistership" provision, discussed below), which specifically excludes coverage for third-party "withdrawal claims", is the only point in the policy at which any such language is used explicitly.

 Plaintiff relies primarily upon Leebov for its construction of the coverage clause. The policy in Leebov read, "[The defendant insurance company agrees] to pay on behalf of the Insured all sums which the Insured shall become obligated to pay by reason of the liability imposed upon him by the loss of use thereof, caused by accident and arising out of the hazards hereinafter defined." 401 Pa. at 478-79 (brackets in original, italics added for emphasis). The court in Leebov distinguished the policy it was construing from that discussed in Desrochers v. New York Cas. Co., 99 N.H. 129, 106 A.2d 196 (1954), which stated that the insurer undertook, "to pay on behalf of the insured all sums which the insured shall become obligated legally to pay as damages. . . because of injury to or destruction of property, including the loss of use thereof." 106 A.2d at 198 (ellipsis in original, underlining added for emphasis). *fn7"

 Leebov states, without revealing its reasoning or relying on any authority, that the phrase, "as damages", is a limited one, while the statement "by reason of liability" is not limited, eliminating insurer responsibility for mitigation expenses under the former phraseology and including such expenses under the latter phraseology. 165 A.2d at 84. The court thereafter justifies its decision on grounds entirely indifferent to any distinction between "limited" and "not limited" coverage clauses - that the insurer would have been liable for further actual damage barring mitigation, that there was evidence that the insured had asked for "complete coverage", and that there was evidence that the insurer had previously paid a similar claim to the insured. Thus, it would appear that the difference between "as damages" and "by reason of liability for damages" was not essential or even important to the Leebov court's holding. Indeed, it appears that if, indeed, there is a distinction, the distinction was a mere makeweight to other circumstances which enabled the court to find coverage.

 Leebov, "the leading case," certainly has not been frequently relied upon. Since it appeared twenty-six years ago, only thirteen published cases have cited it and only one slip opinion citing Leebov was available in the computer-aided legal research databases. Of these fourteen cases, none was decided by a New Jersey court, and only two discuss the distinction made in Leebov between "by reason of liability for damages" and "as damages". Slay Warehousing Co. v. Reliance Ins. Co., 471 F.2d 1364 (8th Cir. 1973); Aronson Associates, Inc. v. Pennsylvania National Mut. Cas. Ins. Co., 14 Pa. D & C.3d 1 (Com. Pl. 1977), aff'd mem. 272 Pa. Super. 606, 422 A.2d 689 (1979).

 In fact, it appears that the plurality of subsequent citations to Leebov stand for the proposition that extrinsic evidence is admissible to aid in ascertaining the parties' intent in the interpretation of a contract generally or an insurance policy in particular, *fn10" a determination which plaintiff seeks to avoid. Several cases cite Leebov generally for the proposition that, in certain circumstances, mitigation expenses may be recoverable against an insurer, but do not refer to specific coverage language. *fn11" Other cases distinguish Leebov's mitigation expenses holding on various grounds. *fn12" Yet other cases cite Leebov for various propositions having nothing to do with the coverage provision. *fn13"

 Slay Warehousing Co. v. Reliance Ins. Co., 471 F.2d 1364, relied upon Leebov in its discussion of a different mitigation reimbursement situation. The policy in question in Slay Warehousing contained "by reason of liability" language. In reference to this language, the Slay Warehousing court, at 1366, stated, "The Supreme Court of Pennsylvania has construed similar language within a liability insurance policy to require reimbursement of [mitigation] expenses . . .," and went on to quote verbatim the articulation of the distinction in Leebov without further discussion of the merits of that distinction. It is obvious, however, that the court in Slay Warehousing did not rest on the use of "by reason of liability" language in finding mitigation expenses reimbursable by the insurer.

 The Slay Warehousing court pointed to another court which had found the insurer liable for mitigation expenses based upon an exclusion, not a coverage, clause ( Harper v. Pelican Trucking Co., 176 So.2d 767 (La. App. 1965)) and went on to state: "Obviously, each case must be examined in light of the specific agreement and the law of the particular jurisdiction." 471 F.2d at 1367. Further discussion in Slay Warehousing reveals that the decision requiring reimbursement of mitigation expenses was based not at all upon the use of the phrase "by reason of liability" in the coverage clause, but upon the court's reading of the cooperation clause involved in that case. There is no such cooperation clause here.

 Slay Warehousing has been cited even less frequently than Leebov and not one of those citations discusses any distinction between the phraseology "as damages" and "by reason of liability." *fn14" On the other hand, Aronson Associates, Inc. v. Pennsylvania National Mut. Cas. Ins. Co., 14 Pa. D. & C. 3d.1, discussed the distinction and, deciding that it was unimportant, found Leebov controlling and awarded mitigation reimbursement expenses against the insurer where there was an "as damages" coverage clause. The Aronson court stated, 14 Pa. D. & C. 3d at 6-7, "Justice Musmanno appeared to distinguish a New Hampshire case, which went in favor of the insurer, where the policy language was similar to the within policy. However, a full reading of the decision in Leebov, 401 Pa. 477, 165 A.2d 82, reveals that what the court held was that preventive measures can be recovered where they are required to protect against a third person being harmed." (emphasis added) The court thereafter made clear that the logic behind Leebov would apply irrespective of the language employed. It would thus appear that Aronson, an opinion by a lower court in the state in which Leebov was decided and, ...


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