The opinion of the court was delivered by: Bassler, Senior District Judge
This case breaks no new legal ground, but rather involves the application of well settled principles of insurance law. Its genesis arises out of the manufacture and sale by Pfizer Inc. of the Shiley heart valves. Faced with numerous law suits*fn1 alleging malfunction or fear of malfunction of the heart valves, Pfizer settled a large class action in 1992. Pfizer agreed to pay hundreds of millions of dollars on account of claims by valve recipients, whose valves had not failed, but who claimed to suffer anxiety about the prospect that they would fail. Pfizer did not actively pursue coverage from Integrity until early 1999.
Transit Casualty Company had issued umbrella liability policies. The settlement included claims by people with working valves for fear of anxiety that the Shiley heart valve might sometime fail in the future. Above Transit was Integrity Insurance Company, a high level excess carrier, which paid the limits of its policy and in turn looked to the defendant General Accident Insurance Company as its reinsurer for payment under the reinsurance doctrine of "follow the fortunes" or more precisely, "follow the settlements." In other words, Integrity allowed anxiety claims that did not arise during the policy period based on when the Shiley valve was implanted, which was during the policy period.
General Accident refused payment, contending that Integrity did not act reasonably or in good faith in allowing coverage for claims of anxiety under policies issued in 1982 and 1983 on the basis of a date of implant trigger. If a valve was working then no injury occurred when it was implanted. General Accident also argued that the law of reinsurance exempts a reinsurer from the doctrine of "follow the settlements" when a reinsurer, as here, did not take all proper and businesslike steps in allowing the claim.
To determine whether General Accident's denial of coverage was proper, presents the Court with an inherent tension between two legal principles: to preserve the doctrine of "follow the settlements," this Court cannot conduct a de novo review of the settlement between Pfizer and Integrity; on the other hand, to protect the contractual intent of the parties, the Court is required to re-examine the settlement to determine whether the claim represents a risk that was reasonably within the scope of the original policies. See North River Ins. Co. v. Cigna Reinsurance Co., 52 F.3d 1194 (3d Cir. 1995).
This matter was tried without a jury from May 17 to July 5, 2005.*fn2 The Court has jurisdiction pursuant to 28 U.S.C. § 1332, and venue is proper under 28 U.S.C. § 1391.
I. Introduction and Procedural History
Karen L. Suter, the Commissioner of Banking and Insurance for the State of New Jersey, instituted this action in her capacity as Liquidator of the Estate of Integrity Insurance Company ("Integrity"), to recover more than three million dollars under the facultative reinsurance certificates issued by Defendant General Accident Insurance Company of America ("General Accident"). A summary of the relevant filings follows.
Originating in the Superior Court of Bergen County, New Jersey, the case was removed to this Court by Defendant in June 2001. In September 2004, this Court denied both parties' motions for summary judgment and also denied without prejudice the motions of both parties' to preclude expert testimony. See Suter v. General Accident Ins. Co. of Am., No. 01-2686, slip op. (D.N.J. Sept. 30, 2004). The bench trial commenced May 17, 2005. After the conclusion of the trial testimony, but before closing arguments on June 2, 2006, the Court issued a Memorandum Opinion in response to previously renewed in limine motions of the parties, denying the Plaintiff's and denying in part and granting in part the Defendant's. See Suter v. General Accident Ins. Co. of Am., No. 01-2686, 2006 WL 842365 (D.N.J. Mar. 30, 2006).
These findings of fact constitute the Court's final determination of contested factual issues, and they therefore supersede any prior recitation of facts in opinions or comments from the Bench. The Court makes these findings of fact pursuant to Fed. R. Civ. P. 52. To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as legal conclusions. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as factual determinations.*fn3
After the close of testimony, the Court invited each party to submit its own proposed findings of fact. The Court has now carefully reviewed those submissions, the documentary evidence, the testimony presented at trial, and the logical inferences that may be reasonably drawn therefrom. Having considered all of the information before it, the Court sets forth its findings of fact based on its independent review of the evidence.*fn4
Where the Court has made a factual finding, it has been made by a preponderance of the credible evidence. Many of the historical facts, of course, are not disputed.
Prior to the institution of delinquency proceedings in December 1986, Integrity Insurance Company ("Integrity") was a stock insurance company organized under the laws of the State of New Jersey and authorized to do business in all fifty states and the District of Columbia. (Joint Final Pretrial Order Stip. ("JFPO") at ¶ 1.) On December 30, 1986, the Honorable William C. Meehan, J.S.C. (the "Liquidation Court") issued an Order (the "Rehabilitation Order") placing Integrity into rehabilitation pursuant to N.J.S.A. § 17:30C-1, et seq. (the "Liquidation Act"). (Id. at ¶ 2.)
On March 24, 1987, Judge Meehan issued an Order (the "Liquidation Order") declaring Integrity insolvent, placing it in liquidation pursuant to the Liquidation Act, and appointing the New Jersey Commissioner of Insurance and successors in office as Liquidator of Integrity. (6/7/05 Trial Transcript ("T. Tr.") at 77:08-77:20.) Pursuant to the March 24, 1987 Liquidation Order and the July 8, 1987 Order of the Liquidation Court, the Liquidator's allowance of a claim, if not objected to within 60 days, becomes the final judgment of the Superior Court of New Jersey. (Pl. Exhs. 21, 22.)
General Accident*fn5 is an insurance company authorized to write insurance in New Jersey. It is organized under the laws of the State of Pennsylvania, and its principal place of business is in Boston, Massachusetts. (JFPO at ¶ 3.)
B. Integrity's Insurance Policies and General Accident's Reinsurance Agreements
Pfizer, Inc. is a major corporation primarily engaged in the pharmaceutical business. Its corporate office is located in New York City. (Id. at ¶ 4.) Pfizer purchased liability insurance as part of a layered program with total occurrence and aggregate limits exceeding $100 million in each policy year, from October 1, 1978 through October 1, 1985. (Id. at ¶ 5.) In each of those policy years, Integrity was an excess carrier*fn6 of Pfizer. (Id. at ¶ 6.) The lowest attachment point of any Integrity excess policy was $55 million in excess of a $10 million self-insured retention ("SIR") and $65 million of underlying policy limits. (5/18/05 T. Tr. at 32:15-23.)
Integrity Policy No. XL 206632, which was effective October 1, 1982 through October 1, 1983 (the "1982 Integrity Policy," or the "1982 Policy"), was just such a policy, attaching $65 million in excess of a $10 million SIR and $65 million of underlying insurance policy limits. (JFPO at ¶ 7.) The 1982 Policy further provided $3 million in occurrence and aggregate limits as part of a $40 million layer shared with several other insurers. (Id.; see also Joint Exh. 1.)
Integrity Policy No. XL 207895 (the "1983 Integrity Policy," or the "1983 Policy"), which was effective October 1, 1983 through October 1, 1984, attached excess of a $10 million SIR and $65 million of underlying policy limits. (JFPO at ¶ 8.) Like the 1982 Policy, the 1983 Policy provided $3 million in occurrence and aggregate limits as part of a $40 million layer shared with other insurers. (Id.; see also Joint Exh. 4.)
Transit Casualty Company ("Transit"), a property/liability insurer, was placed into liquidation by Order of the Missouri Superior Court on December 3, 1985. (Joint Exh. 58.) Previously, between October 1, 1979 and October 1, 1985, Transit had issued a total of twenty-four policies to Pfizer. (Id.) Some of those policies attached below the Integrity policies, while others attached above. (Id.)
Both the 1982 and 1983 Integrity Policies "follow form" to Transit's umbrella liability policies. (5/17/05 T. Tr. at 11:07-20.) Transit's two umbrella policies, in turn, followed form to two policies issued by the Insurance Company of North America ("INA"), the insurance company from which Pfizer had purchased primary insurance in each policy year. (See Joint Exhs. 2, 5.) The INA policies contained a deductible equal to the policy limit liability of $10 million. (See Joint Exh. 3.) This arrangement resulted in Pfizer's first layer of insurance consisting entirely of self-insurance. (See Joint Exhs. 2, 5; see also 5/18/05 T. Tr. at 32:22-25.)
The Transit umbrella policies define "personal injury" as: "bodily injury(including death at any time resulting therefrom), mental injury, mental anguish, shock, sickness, disease, disability, false arrest, false imprisonment, wrongful eviction, detention, malicious prosecution, discrimination, humiliation," as well as "libel, slander or defamation of character or invasion of rights of privacy, except that which arises out of any advertising activities and which results in an Occurrence during the policy period." (Joint Exh. 2.)
The Transit policies define "Occurrence," in pertinent part, as: an accident, event or happening including continuous or repeated exposure to conditions which results, during the policy period, in Personal Injury, Property Damage or Advertising Liability neither expected or intended from the standpoint of the Insured . . . All such Personal Injury, Property Damage or Advertising Injury caused by one event or by continuous or repeated exposure to substantially the same conditions shall be deemed to result from one Occurrence. (Id.)
Under the Transit policies and the Integrity follow-form policies, coverage is not triggered unless personal injury or property damage, caused by an Occurrence, takes place during the policy period.*fn7 (JFPO at ¶ 12; Joint Exhs. 2, 5; 5/19/05 T. Tr. at 157:14-25, 158:14-17.) General Accident facultatively reinsured*fn8 the 1982 and 1983 Policies on a pro rata basis, after specifically deciding to accept the risk. (Joint Exh. 7.) The stated reinsurance limit for each policy is a $2 million part of the $3 million limit of both Integrity Policies. (Id.) Under the Facultative Certificate, "the liability of the Reinsurer . . . shall follow that of [Integrity] and except as otherwise specifically provided herein, shall be subject in all respects to all the terms and conditions of [Integrity's] policy." (Id.)
Furthermore, the Facultative Certificate provides that: [a]ll claims involving this reinsurance, when settled by [Integrity], shall be binding on the Reinsurer, who shall be bound to pay its proportion of such settlements, and in addition thereto, in the ratio that the Reinsurer's loss payment bears to the [Integrity's] gross loss payment, its proportion of the expenses . . . incurred by the Company in the investigation and settlement of claims or suits . . . . (Id.)
C. The Heart Valve Claims Against Pfizer and Shiley
In the mid-1970s, Shiley Incorporated ("Shiley"), which became a subsidiary of Pfizer in 1979,*fn9 developed a mechanical heart valve, known as the Bjork-Shiley 60° Convexo-Concave Heart Valve (the "Shiley valve"). The Shiley valve was designed to replace a patient's natural heart valve, in cases where the natural valve had become diseased or deformed.
The Shiley valve consisted of a convexo-concave disc, which sat inside a metal ring and was covered by a sewing ring that a surgeon would suture to the patient's heart in order to hold the valve in place. The disc sat between two wire holders, called inflow and outflow "struts," and opened to a 60° angle to allow normal blood flow into and out of the heart.*fn10 A fracture in one of the struts would cause the disc to "escape from the ring, causing uncontrolled blood flow through the heart." (Id. at 2.)
A patient receiving a Shiley valve implant would be required to have her chest cut open and her heart stopped. The heart's pumping function would then be taken over by a heart/lung machine, so that the heart could be cut open and the diseased valve removed. The surgeon would then anchor the prosthetic Shiley valve and sew it onto the heart tissue. (5/25/2005 T. Tr. at 45:13-21, 47:12-24.)
The Shiley valve was sold from 1978 until October 1986. (Pl. Exh. 11 at 2.) During that time, the Shiley valve was implanted in approximately 86,000 patients worldwide, including about 40,000 in the United States. (Id.)
It was reported that production of the Shiley valve had been marred by various manufacturing problems, including unmonitored welding practices and an overall lack of quality control and testing. (Pl. Exh. 11, The 1990 Congressional Report, at 8-10.) Between 1980 and 1983, the Shiley valve had been recalled three times "for fractures and changes to the manufacturing or testing procedures." (Id. at 2.) Specifically, a 1983 investigation of Shiley's manufacturing processes found four major weaknesses in the manufacturing and production of the valve: (1) poor controls over the measurement, welding and documentation of critical changes in the valve; (2) little or no commitment to quality concerns; (3) poor process controls in the manufacturing of the valves; and (4) a further design flaw in the 29mm valve, causing it to be under-designed for the pressure to which it would be subjected. (Id. at 8.) A 1984 memo written by a member of the investigative team*fn11 concluded that (1) the welding practice was "out of control [and] not monitored;" (2) "[t]here [was] non uniformity of the [weld] pattern;" and (3) ". . . valves were shipped misaligned because [Pfizer] never inspected for that situation." (Id. at 8-9.)
The 1990 Congressional Report also discussed a 1985 report issued by Shiley, itself, which identified "outlet strut interference and bimodal closure as factors contributing to strut fracture." (Id. at 11.) The Congressional Report went on, however, to cite evidence that Shiley was aware of the problem of interference and closure as early as 1981. The cited evidence included a deposition statement made by a Shiley Engineering Product Manager that "it was generally agreed that the convexo-concave valve was more difficult to weld than the radial-spherical valve and the stresses in bimodal closure were so great that it was practically a sure thing that the valves would break." (Id. at 12.)
Nevertheless, there is no evidence that any heart valve claim against Shiley-Pfizer was ever settled or resolved on the basis that the claimant suffered bodily injury at the time of the implantation of the heart valve.*fn12 See, e.g., Walus v. Pfizer, Inc., 812 F. Supp. 41, 44 (D.N.J. 1993)("Plaintiffs' claims are not the result of a physical injury or some medically identifiable effect linked to a failure of the valve."); Khan v. Shiley Inc., 217 Cal. App. 3d 848, 857, 266 Cal. Rptr. 106, 111 (Cal. Ct. App. 1990)("So long as the valve continues to function, no cause of action exists under any products liability theory."). A retrospective of cases brought against Shiley-Pfizer rejected claims brought under theories of products liability, fraud, negligent failure to warn or strict liability based on failure to warn. Without evidence of product defect, the Shiley heart valve's allowed propensity for failure would not support recovery for emotional injuries.*fn13 There is no reported case and no evidence in this record that any plaintiff with a functioning Shiley heart valve has ever prevailed against Shiley-Pfizer on the basis that the valve had a propensity to fail.
In 1986, the Shiley valve was permanently removed from the market. (See Pl. Exh. 11 at 2.)
The Bowling Class Action Settlement
As the problems associated with the Shiley valves got attention, many valve recipients filed lawsuits against Pfizer, asserting bodily injury and mental distress. One suit, Bowling v. Pfizer Corp., filed in 1991 in the United States District Court for the Southern District of Ohio, included the claims of nine individual plaintiffs who had been implanted with the valve, five of whom were implanted during the period of Integrity's policy. (See Class Action Complaint and Jury Demand, Bowling v. Shiley, Inc., (S.D. Ohio, filed Apr. 19, 1991) ("Bowling Complaint," or "Joint Exh. 9."))
The Bowling Complaint alleged that there were defects inherent in the Shiley valve, causing a propensity for strut fracture. (Id. at ¶ 27.) Almost four hundred instances of such fracture resulted in the deaths of more than 250 people. (Id. at ¶ 23.) Pfizer-Shiley denied any design or manufacturing defects and claimed that its heart valves are not any more likely to fracture than other heart valves available on the market. See Bowling v. Pfizer, Inc., 143 F.R.D. 141, 147 (S.D. Ohio 1992).
The Bowling plaintiffs sought class certification for all persons in the United States who had been implanted with the Shiley valve. (Id. at ¶ 12.) The District Court certified the class for settlement purposes. In evaluating the fairness of the settlement, the Court observed that with respect to the claims for emotional distress about possible product failure the plaintiff class would have "little chance of success if this case were tried on its merits." Id. at 165. The court also found that at least twenty-seven courts had granted summary judgment to Pfizer on the ground that a plaintiff cannot recover for fear or anxiety that a heart valve may fracture. Id. at 147. These observations of the Court assume importance in the case before the Court when it comes to evaluating whether Integrity acted in a businesslike manner in allowing Pfizer's claims for anxiety. Nonetheless, Pfizer entered into a settlement with the Bowling class, agreeing to pay hundreds of millions of dollars on account of claims by valve recipients whose valves had not yet failed, but who claimed to have suffered anxiety due to the prospect that they would fail. (See "Working Heart Valves With Implant Dates," Joint Exh. 13. at P00208-224.)
The Bowling settlement agreement established a fund consisting of two parts. (See Joint Exh. 13; see also 5/18/05 T. Tr. at 46:01-49:08.) The first, the Patient Benefit Fund, provides compensation for research and development of diagnostic techniques to identify implantees who may have a significant risk of strut fracture, as well as research concerning the risks of valve replacement surgery. (Id.) The second part is the Medical and Psychological Consultation Fund, which provides claimants with funds to obtain medical and psychological consultation with respect to their heart valves. (Id.)
As of March 4, 1999, Pfizer had spent $562 million in settling claims by valve recipients, and had further expended $165 million in defense expenses. (5/17/05 T. Tr. at 107:21-108:14, 108:24-109:12.)
At the trial, the plaintiff offered the testimony of Dr. Ian C. Gilchrist*fn14 in support of its theory that the anxiety claims triggered the Integrity policies when the heart valves were implanted. Dr. Gilchrist testified that the valve, once implanted, became organically and functionally part of the patient's body. Defendant denied this proposition and claims that the Shiley valve is a prosthetic device that never becomes part of the patient's heart or body. (6/1/05 T. Tr. at 48:01- 12.)*fn15
It was Dr. Gilchrist's opinion that the valve failed because of problems with under-engineering, manufacturing and welding, and its shape. (5/25/05 T. Tr. at 80:12-81:16.) Interestingly, Dr. Gilchrest made no mention of information presumably given to Transit by Pfizer in support of its implant theory that ". . . the evidence indicates that this gradual breakdown causes blood clotting in and around the disc valve, in turn causing the valve to work less efficiently and eventually fail or cause a blood clot to dislodge which often results in death to the heart valve recipient." (Joint Exh. 50 at PO1183.)
The opinion that the valve becomes part of the body was offered in support of the argument that a defective valve is similar to a diseased valve and so as the valve deteriorates the disease progresses; therefore, it is reasonable to use the date of implant to trigger the Integrity policies. The difficulty with the opinion is that while it explains what happens when one strut or both break down, it assumes that every Shiley heart valve was defective on implantation. While there is evidence that some valves failed -- even Shiley admitted that (see Kahn, 266 Cal. Rptr. 106) - there is no evidence that all or even a substantial number of the valves were defective. The Court credits the testimony of the defendant's expert witness, Dr. Jacob Haft, that the Bjork-Shiley valve "is still an excellent valve" and "between 1984 and 1986, there were no problems with the strut breaking any more." (6/1/05 T. Tr. at 35:06-14.) As Dr. Haft explained, "at the time it was the best valve that was available. It had its warts . . . We knew the incidents were really quite low and it was worth the risk. . . [A]t the time it was recalled we are talking about 80,000 valves out there. And the number of cases at the time, 1986, was like two or three hundred, which was such a small percentage. . . ." (Id. at 21-24, 37:01-06.) This testimony is actually consistent with Pfizer's litigation stance. See Burnett v. Pfizer, 864 F. Supp. 25 (E.D. Ky. 1994)(slight risk of fracture).
Dr. Gilchrist opined that causing a valve that has a tendency to fracture to become a part of a patient's heart/body is, itself, inflicting an injury upon the patient. (5/25/05 T. Tr. at 82:02-15.)*fn16 If a valve after implantation is identified as defective, there is a logic to that testimony. But if it is intended to mean that the insertion of a valve that is not defective constitutes an injury, just because some small percentage of valves may fracture in the future, then it makes no sense. The surgical insult to the human body occasioned by the implantation of a normal Shiley heart valve into the patient does not constitute bodily injury. (Id. at 119:18-120:03, 122:21-123:12; 6/2/05 T. Tr. at 34:06-12) ("asymptomatic but defective heart valve.")
The Court credits Dr. Haft's testimony that most valves would not fail, that the incidence of rupture decreased with age and that unless the valve fails, which is a very low occurrence, a Shiley valve recipient has not been injured. (6/1/05 T. Tr. at 68:01-24.) The court does not accept Dr. Haft's opinion to the extent that a recipient experiencing a one strut failure or a valve identified as defective has not been injured. The valve with one strut works, but the valve is defective in that it was designed to operate with two struts. That being said, however, doesn't mean that the language of the insurance policy, read objectively, was intended to cover valves that worked but that could be defective in some way. The policy didn't insure against an imperfect product.
In discussing the way in which the valve's engineering problems led to the possibility of fracture, Dr. Gilchrist said that the Shiley valve "didn't benefit from some of the engineering we know about today . . . and that, it was probably under-engineered for the stress it was going to run into in the human body." (5/25/05 T. Tr. at 79:16-22)(emphasis added.) He further explained that, over time, as a result of repeated tapping of the valve disc onto the welds, the valve was subjected to more force than it was engineered to tolerate. (Id. at 65:03-07.) This repeated tapping and pressure on the welds led to the formation of micro cracks, which were undetectable by x-ray or otherwise. (Id. at 60:11-14, 65:11-20.) If the condition continued, the micro fractures would coalesce into a strut fracture. (Id. at 60:11-14.)
The Court accepts Dr. Gilchrist's testimony in so far as it explains why the Shiley heart valve fractured when it did.
When the defective Shiley valve fractured, it is reasonable to theorize that the valve began to deteriorate after implant due to design and manufacturing defects. (Id. at 82:02-15, 148:23-149:05.)
But the Court does not find credible the testimony of Dr. Gilchrist to support the broader proposition that every Shiley heart valve was defective, and so regardless of the date of fracture or the date of experiencing the emotional distress of fear of failure, the insertion of every Shiley valve is when the injury occurred or began to occur.
If Dr. Gilchrist's testimony is carefully examined, he is really saying that the Shiley heart valve as compared to a class of non-Shiley heart valves presents a propensity for failure. Some batches may have been under-engineered, others not properly inspected, others not properly welded. All of this explains why a Shiley heart valve fractured when it did. ...