Sixth Circuit Clarifies “Batch” Coverage for Medical Products
In a decision released earlier this month, the Sixth Circuit Court of Appeals clarified that the defect triggering batch coverage under a medical product endorsement is knowledge by the manufacturer that the problem stemmed from its own operations. Stryker Corp. v. XL Ins. America, No. 4:01-cv-157 (June 5, 2012).
In 1997, Howmedica, a Pfizer subsidiary, manufactured and distributed an artificial knee joint known as Duracon Unicompatmental Knees (“Uni-Knees”). In the mid-1990s it was discovered the procedure used to sterilize the Uni-Knee, caused the product to degrade slowly from the air in its packaging. To combat this problem, Pfizer and Howmedic placed a five-year expiration date on all Uni-Knees, and used a computerized database to prevent sales of expired products. In 1998, Stryker Corporation (“Stryker”) acquired Howmedica and shortly thereafter it was discovered that expired Uni-Knees were implanted in patients. It was initially unclear whether Stryker or hospitals were at fault, but by mid-2000 it was apparent Stryker warehouses stored expired Uni-Knees and sold them to hospitals.
Stryker’s insurance policy from XL Insurance Company of America, Inc. (“XL”) contained a “medical products endorsement provision” providing “batch” coverage for all medical products with the same defect or deficiency, where the defect or deficiency was not known prior to January 1, 2000. Stryker filed for coverage under its policy but XL denied coverage, arguing that the claims arose out of a defect that was known prior to January 1, 2000 and thus, not covered by the policy. The district court held XL liable under the policy for the entirety of Stryker’s losses because “prior to January 1, 2000, no employee of Stryker knew or suspected that Uni-Knees were available in inventory for implementation by physicians beyond their shelf life.”
On appeal, XL challenged the district court’s rulings, arguing that Stryker knew prior to 2000 that expired Uni-Knees were being used and this fact defeated “batch” coverage under the policy. The Sixth Circuit rejected XL’s argument and upheld the district court, holding XL’s theory as unreasonable because under XL’s theory, “if an insured knows that there is some future scenario under which a product would become defective via expiration, even if it is completely out of the insured’s hands, then there is no coverage.” The Court also held that XL was within its rights to consider the costs stemming from Pfizer’s indemnification action as part of the sum that may be used to exhaust the $15 million limit of liability under the XL policy.