In its recent decision in Columbia Casualty Company v. SMI Liquidating, Inc., 2012 U.S. Dist. LEXIS 162892 (D. Utah Nov. 14, 2012), the United States District Court for the District of Utah had occasion to consider the concept of “related claims” in the context of claims made products liability policies.

The insurance dispute in SMI Liquidating arose out of defective shoulder pain pumps manufactured by Sorenson Development, which was insured by Columbia Casualty under successive policies.  The first such policy, issued for the period July 1, 2007 through July 1, 2008, had limits of liability of $10 million per claim and in the aggregate, subject to a $25,000 deductible per claim and a $125,000 deductible aggregate.  Notably, the 07-08 policy contained a “related claims” provision that stated, in pertinent part:

If related claims are subsequently made against the Insured and reported to the Company, all such related claims, whenever made, shall be considered a single claim first made and reported to the Company within the policy period in which the earliest of the related claims was first made and reported to the Company.

The policy defined “related claims” as all claims arising out of the same occurrence or related occurrences.  Further, the policy defined related occurrences as those “that are logically or casually connected by any common fact, circumstance, condition, situation, transaction, event, advice or decision in the design, formulation, manufacturing, distribution, sale, testing, use, operation, maintenance, repair or replacement of your product or your work.”

While the 07-08 policy was in effect, Sorenson was named as a defendant in four lawsuits relating to its pain pumps.  Columbia initially treated these suits as separate claims, each triggering a separate deductible.  Columbia did, however, have internal deliberations between its claim and legal departments as to whether the four suits should be considered related claims triggering only a single deductible. 

Toward the end of the 07-08 policy period, Columbia began the underwriting process for a renewal.  During this process, the Columbia underwriter learned of the pending pain pump claims and became concerned about future claims.  She determined that the renewal would have different deductible terms than the 07-08 policy.  She offered a renewal on the terms that all claims other than shoulder pump claims would be subject to the original $25,000 deductible per claim, with a $125,000 deductible aggregate, but that shoulder pump claims would be subject to a $250,000 deductible per claim, unaggregated.  Sorenson’s risk manager understood  at the time why the renewal would be on different terms and reluctantly agreed to it.  The renewal became effective on July 1, 2008.

Claims continued to be made against Sorenson during the end of the 07-08 policy period and into the 08-09 policy period.  In August 2008, some seven weeks after the 08-09 policy became effective, Columbia’s claim department decided to treat all pending claims as being related and thus covered only under the 07-08 policy.  Notwithstanding its decision, Columbia continued charging Sorenson separate deductibles for each new claim made.  Over the next year, as new claims were made against Sorenson, Columbia issued supplemental correspondence amending the grounds on which Columbia determined that the underlying claims were related.  Thus, whereas Columbia initially took the position that various claims were related because they involved the same pain pump model, this later evolved into the position that any claims involving any pain pump model manufactured by Sorenson were related. 

During a mediation in November 2009, the issue of related claims was brought to a head. Columbia advised that it would be tendering the remaining limits of its 07-08 policy in connection with an upcoming mediation, and that at that point, its coverage obligations would be terminated.  Around the same time, Columbia learned of the fact that it had been charging multiple deductibles instead of a single deductible as it should have in light of its related claims position.  Columbia tried to refund the “erroneously” paid amounts to Sorenson, but Sorenson refused to accept the check.  Columbia subsequently filed a coverage action against Sorenson seeking a declaration that the pain pump claims were related claims covered only under the 07-08 policy, and not covered under the 08-09 policy.

In considering the issue, the court focused primarily on the deductible language contained in the 08-09 policy that specifically distinguished pump claims from non-pump claims.   This deductible scheme, concluded the court, indicated “a clear and unequivocal agreement that shoulder pump claims would be covered, subject to specialized deductibles.”  Columbia’s “related claims” position, observed the court, would negate this express and specific language.  The court further concluded the concept of related claims in the 07-08 policy could be harmonized with coverage for pump claims in the 08-09 policy, agreeing with Sorenson’s contention that “whatever was intended to fall within the scope of the related claims’ clause, the parties specifically agreed that it would not include the expressly dealt with shoulder pump claims.”

While the court reached its conclusion based on the plain terms of the 08-09 policy, it noted that extrinsic evidence would have compelled the same holding.  Specifically, the fact that Sorenson and Columbia negotiated the deductible scheme for the 08-09 policy indicated to the court that the parties considered and agreed on the manner in which the 08-09 policy would provide coverage for pain pump claims.  Absent from these negotiations was any discussion that the specialized deductible would apply only if Columbia decided that pump claims made in 08-09 were not related to those made in the 07-08 policy.  In this regard, the court found it “significant that Columbia’s decision to treat all shoulder pump claims as ‘related claims’ under the Year One policy post-dates the effective date of the Year Two policy by over a month.”  Thus, the court concluded that the parties’ contemporaneous communications, at least at the time the 08-09 policy was issued, reflected a mutual understanding that pump claims would be covered under the 08-09 policy.   Columbia’s subsequent decision that the claims would only be covered under the 07-08 policy “fundamentally altered the allocation of risk bargained for by the parties in the Year Two policy and was contrary to the parties’ express intentions at the time of contracting.”