Why it matters
When applying for product recall coverage, a drug manufacturer’s disclosure of a newspaper article referencing potential risks associated with the manufacturer’s product was sufficient disclosure to avoid rescission of its policy, the Illinois Court of Appeals recently ruled. In affirming a judgment in favor of the insured, the court rejected the insurer’s position that the insured had lied in its applications. The court also held that an insurer seeking to rescind a policy for fraud or misrepresentation must do so promptly after learning of the alleged fraud or misrepresentation.

Detailed Discussion

In April 2000 various underwriters at Lloyd’s of London issued product recall insurance policies to Abbott Laboratories. In December 2000 Abbott announced that it was acquiring Knoll Pharmaceutical, whose products included various weight-loss products.

Pursuant to the recall policies’ terms, Abbott submitted applications to Lloyd’s related to additional premium necessary to cover the additional risks associated with the acquisition. Each of the applications contained a question regarding whether Abbott had any knowledge of any current situation, fact, or circumstance that might lead to a claim under the policies, to which Abbot answered “no.”

Abbott had signed the final insurance application, but not all of the Lloyd’s underwriters had agreed to the final terms of coverage, when The Wall Street Journal ran an article regarding the possibility that the Food and Drug Administration may pull the weight-loss drugs from the market. An Abbott representative advised Lloyd’s U.S.-based agent of the article’s existence, but did not forward a copy of the article to Lloyd’s at that time. Although various Lloyd’s underwriters initially voiced objections to the additional coverage, the parties eventually reached agreement as to the additional premium. Abbott paid the premium, and at the same time provided a copy of The Wall Street Journal article to the Lloyd’s underwriters.

A few months later Abbot recalled the weight-loss drug and tendered a claim to Lloyd’s under its policies. Lloyd’s responded with a complaint for rescission of the policies, alleging that Abbott lied on the application regarding regulatory scrutiny of the now recalled weight-loss-related medication.

A bench trial followed. The judge found that Abbott did not make a material misrepresentation in its application, and that the Lloyd’s underwriters had waived any claim of rescission. The court then entered an order that Lloyd’s was liable for $84.5 million.

Lloyd’s appealed, pointing to two alleged circumstances of fraud: Abbott’s answer of “no” when asked about knowledge of facts or circumstances that might lead to a claim, and that Abbott had deliberately withheld The Wall Street Journal article until after Lloyd’s had bound the additional recall coverage for Knoll. The Court of Appeals rejected these arguments, citing “ample evidence” to support the trial court’s conclusion.

Lloyd’s further argued that they had voiced their concerns immediately regarding the weight-loss medication’s status, had launched an investigation, and had even entered a tolling agreement to preserve their rights. The Court of Appeals, however, ruled that the Lloyd’s underwriters had moved too slowly.

“It is only when the magnitude of the [weight-loss medication] claim became apparent that the underwriters then renewed their year-old request for the Knoll due diligence documentation,” the court stated. “In the exercise of ordinary diligence, the underwriters could have ascertained the pertinent facts regarding what Abbott knew about [the medication]’s regulatory status, but instead, it did nothing.”

To read the opinion in Certain Underwriters at Lloyd’s, London v. Abbott Laboratories, click here.