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U.S. Specialty Insurance Co. v. Catalent Inc.

United States District Court, S.D. New York

February 24, 2017

U.S. SPECIALITY INSURANCE COMPANY, Plaintiff,
v.
CATALENT, INC., Defendant.

          For the Plaintiff: Jeffrey S. Weinstein Emilie Bakal-Caplan Sara F. Lilling Mound Cotton Wollan & Greengrass LLP.

          For the Defendant: Elizabeth A. Edmondson Jenner & Block LLP John H. Mathias, Jr. David M. Kroeger Jenner & Block LLP.

          OPINION AND ORDER

          DENISE COTE United States District Judge.

         This declaratory judgment action arises out of an insurance claim filed by the defendant Catalent, Inc. (“Catalent”) for financial losses it sustained during a government-mandated suspension of manufacturing at Catalent's softgel manufacturing facility in Beinheim, France. A five month suspension of operations followed the discovery of softgel capsules “out-of-place” in the manufacturing facility. U.S. Specialty Insurance Company (“USSIC”) denied coverage and filed the instant action seeking a declaration that there is no coverage under the insurance policy (the “Policy”).

         The parties have cross-moved under Rule 12(c) for judgment on the pleadings based on their competing readings of the Policy terms. They agree that the financial damage to Catalent caused by the suspension of manufacturing is not a defined “LOSS” under the Policy. Catalent, however, proffers several arguments in favor of finding coverage. For the reasons that follow, USSIC's motion is granted.

         Background

         USSIC issued a “Special Coverages Policy” to Catalent effective June 9, 2014 to June 30, 2017. On January 4, 2016, Catalent submitted an initial notification of a claim under the Policy for business interruption losses.

         Events Leading to Suspension of Operations

         Between January and October of 2015, [1] Catalent's manufacturing facility in Beinhem, France detected several instances of “out-of-place” capsules during the execution of its quality control procedures, [2] including incidents in which a capsule from one batch of product was found in another product batch, as well as instances of capsules found on an empty shelf or the floor. In particular, Andriol capsules, [3] which are normally processed on a dedicated line, were found in groupings of other capsules. Catalent concluded that the incidents could be due to deliberate, malicious acts. Because of the contaminations, the National Agency for the Safety of Medicines and Health Products (“ANSM”), the primary French pharmaceutical regulatory agency, suspended operations at Catalent's manufacturing facility on November 13, 2015.

         The parties disagree as to whether ANSM concluded that these contaminations could be considered malicious in nature or were malicious in nature. The person or persons that may have caused the contaminations have not been identified. ANSM lifted the suspension on manufacturing on April 28, 2016.

         Catalent sustained losses in excess of $10, 000, 000 related to the five-month suspension in manufacturing. Catalent never received a written or oral demand for money related to the contamination and admits that it has not identified a “sum of monies or the monetary value of any other consideration surrendered by or on behalf of the INSURED as an extortion payment” arising from these events.

         The Policy

         The Policy is organized into three sections. Section I includes a Declarations page and several endorsements that add coverage to the Policy. The Declarations page states that “insurance afforded is only with respect to such of the hazard parts and coverages indicated below.” Below is listed: “Hazard Applicable: 1, 2, 3, 4.” The “Limit of Liability” for “Each Loss” is $10, 000, 000. Section I also contains Endorsements 5 & 6, which amend Section III, paragraph 6, and are described below.

         Section II, titled “LOSS DEFINED AND SCOPE OF COVERAGE, ” begins with a preamble:

The Company hereby agrees, subject to the terms, limitations and conditions set forth herein, to indemnify the Named Insured specified in Item 1 of the Declarations for LOSS (as hereinafter defined):

         Section II then sets out descriptions of Hazards 1, 2, and 3, which are for “Kidnap/Ransom, ” “Extortion Bodily Injury, ” and “Detention, ” respectively. The following paragraph defines “LOSS” for Hazards 1 and 2, and separately for Hazard 3.[4] The next page, titled “EXTORTION PROPERTY DAMAGE, ” sets out Hazard 4. It is Hazard 4 that is at issue here.

         Hazard 4 covers extortion payments. It reads:

         DESCRIPTION OF HAZARD 4

         Hazard 4. Extortion Property Damage:

by reason of the receipt of a threat, communicated directly or indirectly to the INSURED to cause physical damage or loss ...

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