National Union Fire Insurance Company of Pittsburgh, Pa., Plaintiff/Counterclaim-Defendant-Appellee,
Mead Johnson & Company LLC, et al., Defendants/Counterclaim-Plaintiffs-Appellants. and Lexington Insurance Company, Counterclaim-Defendant-Appellee,
Argued September 24, 2013
Appeals from the United States District Court for the Southern District of Indiana, Evansville Division. Nos. 3:11-cv-00015-RLY-WGH, 3:11-cv-00161-RLY-WGH — Richard L. Young, Chief Judge.
Before Posner, Tinder, and Hamilton, Circuit Judges.
Posner, Circuit Judge.
Before us are consolidated appeals in a pair of diversity suits governed, the parties agree, by Indiana law. One suit pits two insurance companies, National Union and Lexington (both subsidiaries of American International Group), against Mead Johnson, which purchased liability coverage from them. The other suit is just between National Union and Mead Johnson. We can ignore the procedural tangle reflected in the caption.
Mead Johnson had purchased a primary Commercial General Liability policy (a standard policy issued by many insurance companies) from National Union. The policy has a limit of $2 million for liability for what is called "personal and advertising injury." Mead also has an excess liability policy from Lexington (a policy that kicks in when an insured's liability exceeds the limit in his primary policy) that has a limit of $25 million. The insurance companies sought and obtained (on motions for summary judgment) declaratory judgments that they have no duty to pay claims that Mead Johnson filed with them regarding two tort suits against it. So Mead has appealed.
A recent spinoff from Bristol-Myers Squibb, Mead Johnson is virtually a one-product company. That product is the upscale infant formula Enfamil. See "Enfamil, " Wikipedia, http://en.wikipedia.org/wiki/Enfamil (visited Oct. 24, 2013). It is sold worldwide, and is alleged to have accounted for 60 percent of Mead Johnson's $2.88 billion earnings in 2008 on the eve of the tort suits that have given rise to these appeals. The tort suits are a reflection of Mead's efforts to maintain its dominance of the global baby-formula market, efforts that have resulted in repeated legal skirmishes with a major competitor, PBM Products, LLC (part of a much larger company, Perrigo). In two earlier suits, both settled, PBM had sued Mead for false advertising. PBM Products, Inc. v. Mead Johnson & Co., 03:01-cv-199 (E.D. Va. 2001); PBM Products, Inc. v. Mead Johnson & Co., 03:02-cv-944 (E.D. Va. 2002). Turning the tables on its opponent, Mead had sued PBM for trade dress infringement. Mead Johnson & Co. v. PBM Nutritionals, LLC, 1:06-cv-1246 (S.D. Ind. 2006). That case was settled too.
The insurance suits that the current appeals bring before us arose out of PBM's third lawsuit against Mead (again for false advertising), plus a class action suit against Mead for consumer fraud. PBM's suit, filed in 2009, eventuated in a jury award of $13.5 million, affirmed in PBM Products, LLC v. Mead Johnson & Co., 639 F.3d 111, 128 (4th Cir. 2011). Mead wants its insurers to pay that judgment, plus the $15 million settlement that it made to resolve the class action suit.
PBM's suit claimed that Mead had falsely asserted that PBM's less expensive infant formula (a "store brand"—that is, a generic rather than a branded product, to which the retail outlet that sells it attaches its own brand name) lacked two key fats that promote brain and eye development. Filed in April 2009, the suit sought some $500 million in damages for product disparagement, a tort that the insurance policies that Mead Johnson had bought from National Union and Lexington expressly cover as a form of "advertising injury." But Mead did not notify National Union or Lexington of the suit until December 2009—by which time the trial in PBM's suit had ended in the $13.5 million verdict against Mead. (Why Mead Johnson didn't notify its insurers about the PBM suit until losing at the trial is the abiding mystery of this case. At oral argument we asked Mead Johnson's counsel why, and he said he didn't know. We find this hard to believe, but are left in the dark.)
Both insurance policies required Mead to notify the insurance companies "as soon as practicable." The National Union policy required notice of any occurrence or claim as soon as practicable after the occurrence or claim. The Lexington policy, being an excess policy, required notice only of a claim or suit, and only if the claim or suit was "reasonably likely" to trigger coverage on the "assumption that an Insured is liable for the damages claimed, " namely damages of more than $2 million, the limit of National Union's policy.
These are important provisions. If a claim against an insured is covered by the insurance policy, the insurer has a vital interest in supervising the defense against the claim, for its money is riding on the outcome. And so the policies entitle the insurers to control the insured's defense against a covered claim and negotiate a settlement. But this is subject to their fiduciary duty to the insured: the insurer is forbidden to "sell out" an insured, for example by settling for the policy limit without making a reasonable effort to reduce the insured's liability above that limit. Lockwood Int'l, B.V. v. Volm Bag Co., 273 F.3d 741, 744–46 (7th Cir. 2001); see also Erie Ins. Co. v. Hickman by Smith, 622 N.E.2d 515, 518–19 (Ind. 1993); Economy Fire & Casualty Co. v. Collins, 643 N.E.2d 382, 385–86 (Ind. App. 1994); Schwartz v. Liberty Mutual Ins. Co., 539 F.3d 135, 142 (2d Cir. 2008); Venn v. St. Paul Fire & Marine Ins. Co., 99 F.3d 1058, 1064–65 (11th Cir. 1996).
National Union's policy has separate notice provisions for an occurrence, defined as "an accident" ("an unexpected happening without an intention or design, " Auto-Owners Ins. Co. v. Harvey, 842 N.E.2d 1279, 1283 (Ind. 2006)) and for a claim or suit against the insured. An amendment (called an "endorsement") to the policy provided that the insured would not be deemed to have "knowledge" of an occurrence until the insured's "Director of Risk Management" received notice of the occurrence, so only then would the clock start running on notifying the insurer. Mead Johnson claims that its Director of Risk Management did not learn of the $500 million suit by PBM until the trial ended, days before Mead notified the insurers. We find this hard to believe. This was the fourth recent suit between the companies. Even to a company the size of Mead Johnson, $500 million is a lot of money, though doubtless an extravagant estimate of PBM's actual damages; the jury's award of damages to PBM was, after all, only 2.7 percent of $500 million.
It is understandable why an insured would not want its duty of notifying its insurers to kick in whenever there was an occurrence, which might well be trivial (baby cried after swallowing Enfamil; crack appeared in Enfamil container); hence the amendment. But it would be absurd to allow a company served with a summons and complaint or other legal claim to obtain an indefinite extension of its duty of notice simply by hiding the claim from its Director of Risk Management. Especially when the claim is as large as PBM's claim, filed by a competitor who had obtained more than $46 million from Mead in settlement of two previous suits both quite similar to the one that Mead failed to notify its insurers of in timely fashion. The fact that the notice provision relating to a claim or suit was not amended to require notice to the Director of Risk Management can't be considered an oversight, though oversight or not Mead would be bound by the amendment's unequivocal language.
Remarkably, in its opening brief on behalf of its client Mead Johnson, the well-known law firm of Cadwalader, Wickersham & Taft argued that the amendment does apply to claims and suits as well as to occurrences, because the caption of the amendment is "Duties in the Event of Occurrence, Offense, Claim or Suit." That is a misrepresentation. The caption is "Duties in the Event of Occurrence, Offense, Claim or Suit, a. is hereby deleted and replaced with the following, " the "following" being the passage relating to notice to the risk manager of occurrences, not claims. The new provision "a, " like the old one that it replaced, begins: "You must see to it that we are notified as soon as practicable on [sic] any 'occurrence' or an offense which may result in a claim." ("Offense" is not defined, but the policy contains a list of covered "offenses, " such as copyright infringement— and, as we'll see when we come to the second suit by Mead Johnson, product disparagement.) Claim and suit are mentioned not in provision ...