Maryland Policyholder Succeeds in Shifting Defense Costs to Insurer

The Fourth Circuit Court of Appeals recently upheld a trial court verdict ordering insurers to pay $87 million to a Maryland-based company to defend lawsuits, even though much of the attorneys’ fees were incurred by an uninsured third party, who also paid for all of the attorneys’ fees. The decision highlights how creative lawyering can assist insureds in leveraging Maryland’s relatively liberal insurance law to maximize coverage.

The case, Charter Oak Fire Ins. Co. v. Am. Capital, Ltd., 760 F. App’x 224 (4th Cir. 2019), involved American Capital, Ltd., the corporate parent of an entity that manufactured Heparin. The subsidiary entity was alleged, in hundreds of suits, to have sold contaminated Heparin and to have caused injury.

As a matter of fact, it became clear early-on that the contaminated Heparin was sold through a joint-venture that was not covered by the Policy. Nevertheless, the lower court held, under Maryland’s “potentiality” standard, the relevant claims in some of the lawsuits weren’t dismissed until late in the day – so that the claims themselves had the “potentiality” of being covered. Under Maryland’s potentiality standard, defense of the entire lawsuit was required.

But coverage did not rest there. The insured in American Capital did not itself incur any legal fees at all. Instead, it entered a joint-defense agreement with a pharmaceutical company, in which the pharmaceutical company agreed to front all litigation costs in exchange for an assignment of prospective insurance proceeds. The court nevertheless held that all defense costs incurred in the joint-defense arrangement were reasonably related and inextricably intertwined, and that all costs incurred, whether by the insured or the uninsured pharmaceutical company, must be paid. Ultimately, the insurance company paid out $87 million to defend the cases, even though the wrongful conduct was engaged in by an uncovered joint venture, and a substantial portion of the fees were devoted to defending a third-party defendant.

Maryland insureds who face lawsuits should pay heed. Thoughtful and creative litigation strategies may enable them to maximize insurance coverage even for claims that, on first blush, don’t seem to be insured at all.

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