Stryker Corporation v. National Union Fire Insurance

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 14a0603n.06
Nos. 13-1992/13-1993/13-1994
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
Aug 07, 2014
STRYKER CORPORATION and ) DEBORAH S. HUNT, Clerk
HOWMEDICA OSTEONICS )
CORPORATION, )
Plaintiffs-Appellants/Cross-Appellees, ) ON APPEAL FROM THE UNITED
) STATES DISTRICT COURT FOR
TIG INSURANCE COMPANY, ) THE WESTERN DISTRICT OF
Interested Party-Appellant ) MICHIGAN
)
v. )
)
XL INSURANCE AMERICA, fka Winterthur )
International America Insurance Company, )
Defendant-Appellee/Cross-Appellant. )
_________________________________________
BEFORE: GRIFFIN and DONALD, Circuit Judges; GRAHAM, District Judge.*
JAMES L. GRAHAM, District Judge. Stryker Corporation appeals the district court’s
ruling that Stryker is obligated to pay a $2 million self-insured retention (“SIR”) under an
insurance policy it held with XL Insurance America. XL cross-appeals the district court’s
rulings that XL is not entitled to recoup overpayments it made as part of a settlement with a third
party and that XL must pay pre-judgment penalty interest.
For the reasons set forth below, the district court is AFFIRMED in all respects.
*
The Honorable James L. Graham, Senior United States District Judge for the Southern
District of Ohio, sitting by designation.
Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
I.
The matter before the Court presents questions concerning the implementation of the
Court’s prior decision in this case, Stryker Corp. v. XL Ins. America, Inc., 735 F.3d 349 (6th Cir.
2012) (hereinafter the “Stryker I Appellate Opinion”).1 In the Stryker I Appellate Opinion the
Court affirmed the district court’s holding that XL was obligated to defend and provide coverage
to Stryker under a Commercial General Liability umbrella policy for tort claims made against
Stryker relating to defective artificial knee joints known as Uni-Knees. Id. at 356. The policy
provided for $15 million in aggregate coverage, over a $2 million self-insured retention that
Stryker was liable to pay.
Though affirming on the coverage issue, the Court reversed the district court’s holding as
to the consequences under Michigan law of XL’s breach of its duty to defend and indemnify
Stryker. The district court, relying on the Sixth Circuit’s interpretation of Michigan law in
Capitol Reproduction, Inc. v. Hartford Insurance Co., 800 F.2d 617, 624 (6th Cir. 1986), had
held that XL became liable for the full amount of Stryker’s losses, including the SIR and
amounts exceeding the policy’s $15 million limit. This Court held that Capitol Reproduction
was no longer good law and that XL was not liable for losses beyond $15 million unless Stryker
could prove that they constituted consequential damages. Stryker I Appellate Opinion, 735 F.3d
at 358.
1
In the Western District of Michigan, Stryker filed two lawsuits, known as Stryker I and
Stryker II, in 2001 and 2005. See Stryker Corp. v. XL Ins. America, Inc., No. 4:01–cv–157,
(W.D. Mich.) (“Stryker I”); Stryker Corp. v. Nat’l Union Fire Ins. Co., et al., No. 1:05-cv-51
(W.D. Mich.) (“Stryker II”).
It has been accurately observed that these insurance cases have “a long and tortured
history.” Stryker II, 2013 WL 5533609, at *1 (W.D. Mich. Oct. 7, 2013). Much of that history
was described in the Stryker I Appellate Opinion, 735 F.3d at 352-54.
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
The Court next dealt with the issue of pre-judgment penalty interest under Michigan
Compiled Laws § 500.2006. The Court affirmed the district court’s finding that the statute
applied against XL and affirmed the district court’s methodology in calculating interest. Stryker
I Appellate Opinion, 735 F.3d at 360-61. But because the Court had reversed the district court’s
ruling that XL was liable for losses beyond $15 million, it remanded for the district court to
recalculate interest based on amounts for which XL was actually liable to Stryker. Id. at 361.
On remand, the parties disputed how the Stryker I Appellate Opinion should be
implemented. The district court’s prior rulings as to Capitol Reproduction had been delivered in
two separate opinions. The first ruling held that XL’s breach made it liable for the SIR, Stryker
I, 2008 WL 68958 (W.D. Mich. Jan. 4, 2008) (“First SIR Opinion”), and the second held that
XL’s breach made it liable for losses in excess of the policy’s limit of liability, Stryker I, 2009
WL 3256179 (W.D. Mich. Oct. 7, 2009) (directing the entry of final judgment) (“Final Judgment
Opinion”). Stryker argued on remand that XL was still liable for the SIR because the Stryker I
Appellate Opinion did not reverse the First SIR Opinion and that XL had waived its right to
challenge the First SIR Opinion on appeal. The district court rejected both arguments. Though it
found that the Stryker I Appellate Opinion did not expressly state that it was reversing the First
SIR Opinion, the district court concluded that the Court’s rejection of Capitol Reproduction
meant that the First SIR Opinion was erroneous. See Stryker I, 2013 WL 504646, at *4 (W.D.
Mich. Feb. 8, 2013) (“Second SIR Opinion”). The district court further declined to find a waiver
where the Sixth Circuit had not found one. Id. (“This Court is not inclined to find a waiver of an
appellate argument absent an explicit finding of waiver by the Sixth Circuit, especially when
waiver was expressly argued to the appellate court.”). The district court thus held on summary
judgment that “[b]ecause the Sixth Circuit reversed this Court’s SIR ruling, and because Stryker
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
has never contended that the $2 million in damages were proximately caused by XL’s breach of
the duty to defend, XL is entitled to rely on the $2 million SIR.” Id., 2013 WL 504646, at *5.
Stryker now appeals that ruling.
XL cross appeals a separate aspect of the Second SIR Opinion concerning XL’s assertion
that it was entitled to recoup an alleged overpayment. This aspect of the district court’s ruling
requires a brief explanation of background. In 1998 Stryker acquired Howmedica, Inc., the
manufacturer and distributor of Uni-Knees, from Pfizer, Inc. Under a stock and asset purchase
agreement, Stryker agreed to defend and indemnify Pfizer for costs associated with any claims
brought against Pfizer relating to Uni-Knees sold after the closing of the stock and asset
purchase. Such claims were in fact brought against Pfizer, and Pfizer obtained a declaratory
judgment that Stryker was liable to defend and indemnify Pfizer as to those claims. See Pfizer,
Inc. v. Stryker Corp., 348 F. Supp. 2d 131 (S.D.N.Y. 2004). After XL denied Stryker’s demand
for coverage, Stryker brought suit in Stryker II against XL for coverage under the XL policy of
Stryker’s obligations to Pfizer. The court below held that XL was obligated to indemnify Stryker
for an interlocutory judgment that had been entered in the Pfizer action. Stryker II, 2009 WL
56292 (W.D. Mich. Jan. 8, 2009). XL and Pfizer entered into a settlement on February 9, 2009
by which XL agreed to pay Pfizer $26 million to settle all of Stryker’s liability to Pfizer.
XL structured the Pfizer settlement in a way that allocated certain amounts to the
following categories: Pfizer’s settlements with Uni-Knee tort plaintiffs, Pfizer’s costs in
defending the tort suits, Pfizer’s litigation expenses in bringing suit against Stryker, and interest.
The Stryker I Appellate Opinion held that XL could apply the settlement portion and the
litigation expense portion toward the policy limit. 735 F.3d at 358-59. The amounts of those
portions are not now in dispute – the settlement portion was $12,840,111 million and the
4
Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
litigation expense portion was $3,054,344 – and together they exceed the $15 million limit by
$894,455. On remand, XL argued that, assuming Stryker was liable for the SIR, XL was entitled
to a credit for the overpayment. The district court rejected this argument, finding that XL had
not made the overpayment under a mistake of fact, as XL had argued, but had made it voluntarily
to a third party in order to settle a judgment. See Second SIR Opinion, 2013 WL 504646, at *5.
The Pfizer settlement also came into play on remand with respect to implementing the
Stryker I Appellate Opinion on the issue of pre-judgment penalty interest. The district court’s
original interest award accrued on the amount of Stryker’s settlements with tort plaintiffs who
made direct claims against Stryker (as opposed to Pfizer). See Stryker I, 726 F. Supp. 2d 754,
754-74 (W.D. Mich. 2010) (“First Interest Opinion”). The Stryker I Appellate Opinion
instructed the district court on remand to award interest on amounts “for which XL is actually
liable to Stryker.” 735 F.3d at 361. XL then argued on remand that because XL exhausted the
policy limit by paying the Pfizer settlement, it was no longer actually liable to Stryker for the
settlements of direct Uni-Knee claims. The district court rejected XL’s argument, holding that
the Stryker I Appellate Opinion “did not disturb” its ruling that interest should accrue “on
settlement payments Stryker made prior to the Pfizer settlement. . . . XL was actually liable for
Stryker’s settlements and was liable for penalty interest on those settlements until XL paid out
the policy limits with the Pfizer settlement.” Stryker I, 2013 WL 1194917, at *3 (W.D. Mich.
March 22, 2013) (“Third Interest Opinion”).2
II.
“‘The trial court must implement both the letter and the spirit of the mandate, taking into
account the appellate court’s opinion and the circumstances it embraces.’” United States v.
2
A Second Interest Opinion was issued by the district court concerning the end-date in the
calculation of interest. See Stryker I, 726 F. Supp. 2d 754, 774-78 (W.D. Mich. 2010).
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
Moored, 38 F.3d 1419, 1421 (6th Cir. 1994) (quoting United States v. Kikumura, 947 F.2d 72, 76
(3d Cir. 1991)). The mandate “‘must be read with the analysis offered in the opinion.’ United
States v. Santonelli, 128 F.3d at 1237-38 (8th Cir. 1997). Thus, context matters.” United States
v. O’Dell, 320 F.3d 674, 681 (6th Cir. 2003).
“Interpretation of an appellate mandate is a legal issue which [this Court] reviews de
novo.” United States v. Haynes, 468 F.3d 422, 425 (6th Cir. 2006). To the extent the
proceedings on remand raised issues not covered by the mandate, the Court reviews de novo the
district court’s Second SIR Opinion in which it granted in part and denied in part XL’s motion
for summary judgment, see Int’l Union v. Cummins, Inc., 434 F.3d 478, 483 (6th Cir. 2006), and
reviews for abuse of discretion the district court’s Third Interest Opinion in which it awarded
interest, see Stryker I Appellate Opinion, 735 F.3d at 359.
A.
1.
The Stryker I Appellate Opinion held that Capitol Reproduction no longer reflected
Michigan law as to the liability imposed upon an insurer for breaching its duty to defend:
The district court found that the self-insured retention and the aggregate limits of
liability do not apply to the XL policy, because XL breached its duty to defend
Stryker against both the direct claims and the claims in the Pfizer litigation. Final
Judgment Opinion, 2009 WL 3256179 at *4. In reaching both conclusions, the
district court relied on Capitol Reproduction, Inc. v. Hartford Insurance Co., 800
F.2d 617, 624 (6th Cir. 1986), which held that “an insured is not required to prove
that the amount of the judgment in excess of the policy limits was caused by the
failure of the insurer to provide a reasonable defense....” (internal quotation marks
and citation omitted). In other words, any losses resulting from a breach of the
duty to defend could be assumed to be consequential losses, and thus would not
account against any limits of liability.
While the Capitol Reproduction court may have correctly applied Michigan law
at the time of the decision, subsequent Michigan decisions have undermined the
rationale and holding of the case. Capitol Reproduction holds that, in an
insurance context only, all losses are assumed to be consequential losses, without
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
the breached party’s having to demonstrate the connection between the loss and
the breach. This is an extra-contractual rule of the kind the Michigan Supreme
Court rejected in [Frankenmuth Mut. Ins. Co. v. Keeley, 433 Mich. 525, 447
N.W.2d 691 (1989) (Levin, J., dissenting), dissent adopted on rehearing,
436 Mich. 372, 461 N.W.2d 666 (1990)] and [Wilkie v. Auto–Owners Ins. Co.,
469 Mich. 41, 664 N.W.2d 776 (2003)]. As a federal court sitting in diversity, we
are obligated to apply the law of Michigan as it currently stands, even if such an
application is inconsistent with prior case law from this circuit. . . .
For these reasons, we reverse the district court’s judgment that the aggregate limit
of liability of the XL policy does not apply to the judgments in Stryker I and II.
On remand, the district court should consider what portion, if any, of the total
liability for Stryker I and II judgments beyond $15 million represents
consequential damages as defined under Michigan contract law.
Stryker I Appellate Opinion, 735 F.3d at 358.
Using the statement of “we reverse the district court’s judgment that the aggregate limit
of liability of the XL policy does not apply,” Stryker argues that the prior panel intentionally
refrained from reversing the First SIR Opinion. In further support, Stryker notes that the First
SIR Opinion was not among the district court rulings identified by the Court in its review of
Stryker I’s procedural history as among “six rulings that are relevant on appeal.” Id. at 353.
We disagree and find that the Stryker I Appellate Opinion reversed the First SIR Opinion.
Whether the First SIR Opinion was mentioned in the procedural history section is less significant
than its inclusion in the Court’s legal analysis on the issue of whether Capitol Reproduction was
still good law. See O’Dell, 320 F.3d at 681 (stating that the appellate court’s analysis must
inform implementation of the mandate). And on that issue, the Court was clear that it was not.
The Stryker I Appellate Opinion overturned Capitol Reproduction – the very holding that the
Court had expressly stated was the underpinning of the district court’s First SIR Opinion. The
panel’s rejection of Capitol Reproduction vitiated the legal basis of the First SIR Opinion, and it
would not be within the spirit of the mandate to leave intact a lower court decision based upon a
legally-erroneous foundation.
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Stryker Corp. v. XL Insurance America, Inc.
Capitol Reproduction concerned whether an insurer’s breach of a duty to defend negated
the insured’s liability under the policy to pay a retained limit of liability. Capitol Reproduction,
800 F.2d at 624 (holding that the insured would be awarded “the full amount paid in settlement
of the claim, along with fees incurred in the settlement, without deducting the $25,000 retained
limit of liability provided for in the policy.”). If Capitol Reproduction itself was a self-insured
retention case, then the foremost implication of the Stryker I Appellate Opinion’s overturning of
Capitol Reproduction is that the First SIR Opinion is erroneous.
Having rejected Capitol Reproduction, the Court then stated what the consequence of its
ruling would be: “On remand, the district court should consider what portion, if any, of the total
liability for Stryker I and II judgments beyond $15 million represents consequential damages as
defined under Michigan contract law.” Stryker I Appellate Opinion, 735 F.3d at 358 (emphasis
added). The mandate thus made clear that XL would be liable for no more than the $15 million
limit unless additional losses were consequential damages. Had the Court not been reversing the
First SIR Opinion, then XL’s base liability would have been $17 million. The Court’s ruling
thus restored the provisions of the XL policy, with Stryker being responsible for the $2 million
SIR and XL liable for the $15 million limit.
2.
Stryker protests that XL waived its right to appeal the First SIR Opinion by failing to
challenge it on appeal. Stryker made this argument to the prior panel, which chose not to address
it and instead held that Capitol Reproduction was no longer good law. Moreover, Stryker’s
argument is unpersuasive in any event. XL’s original Notice of Appeal and Amended Notice of
Appeal both included the First SIR Opinion as a ruling it was appealing. And while XL did not
explicitly request reversal of the First SIR Opinion in its appellate briefs, it consistently
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
maintained that the contractual limits and the face of the XL policy should be enforced, such that
XL would be liable for no more the $15 million limit. Further, XL argued at length in its briefs
that Capitol Reproduction was contrary to Michigan law. XL thus presented on appeal the legal
argument that the district court had rejected in the First SIR Opinion, by implication taking the
position that the First SIR Opinion was wrongly decided.
Stryker makes other waiver arguments that likewise lack merit. Stryker argues that XL’s
decision to settle with Pfizer constituted a waiver because XL structured the settlement in a way
that allocated $17 million (rather than $15 million) to items that XL believed would count
toward the policy limit.3 However, the district court correctly observed that the Pfizer settlement
“was not an admission of liability for the $2 million SIR.” Second SIR Opinion, 2013 WL
504646, at *4. The manner in which XL allocated funds in settling a separate suit with a non-
party to this action did not, without more, have a binding effect as between XL and Stryker with
respect to the SIR. Stryker was not a party to the Pfizer settlement, and it has not offered any
coherent legal theory in support of its argument that the settlement constituted a waiver of the
SIR issue.
Finally, Stryker argues that XL waived its right to challenge the First SIR Opinion by
making certain representations to the district court and to this Court in the first appeal. See
United States v. Johnson, 752 F.2d 206, 210-11 (6th Cir. 1985) (attorney statements may bind
the client). These representations concerned XL’s assurance that it would pay Stryker’s defense
costs in full. Because some portion of the SIR includes defense costs, Stryker tries to argue that
XL’s statements were incompatible with the position that Stryker is liable for the SIR. This
argument is unpersuasive and ignores the context in which the statements were made. At the
3
It would later be held that XL’s payment of $1.1 million for Pfizer’s costs in defending
the tort suits did not count toward the policy limit. Stryker I Appellate Opinion, 735 F.3d at 359.
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
time, XL was operating under the district court’s legal ruling that it was liable for the SIR.
Rather than being admissions of liability for the SIR, XL’s statements reflected its proper
intention to comply with adverse rulings by the district court while those rulings were on appeal.
B.
With the district court’s holding that Stryker is liable for the SIR affirmed, we turn to
XL’s assertion that it is entitled to a “credit” for the amount it paid over the policy limit to Pfizer.
Before the district court, XL’s legal theory was not clear; it did not file a counterclaim for
recoupment, restitution or unjust enrichment,. In a one paragraph assertion that it should receive
a credit, XL cited two cases standing for the proposition that a payment made pursuant to an
insurance contract may be recovered it is was made under a mistake of material fact. See Couper
v. Metro. Life Ins. Co., 250 Mich. 540, 544, 230 N.W. 929, 931 (Mich. 1930); Auto–Owners Ins.
Co. v. Fabian, No. 213706, 2000 WL 33529723, at *1–3 (Mich. Ct. App. Feb. 25, 2000).
We affirm the district court’s holding that XL has not demonstrated any mistake of fact in
its payment to Pfizer. The settlement was a calculated decision to exhaust the policy limit and
thereby bring a halt to pre-judgment interest. XL now cites § 35 of the Restatement (Third) of
Restitution and Unjust Enrichment, arguing that, in light of the significant interest accruing, it
had no reasonable choice but to make the overpayment. We find that § 35 offers no refuge to XL
because it expressly provides that a contracting party, which is compelled by the circumstances
to render over-performance, is entitled to restitution only if it performs under protest or with
reservation of rights. See Restatement (Third) of Restitution and Unjust Enrichment § 35(1).
XL did not do so here.
On appeal, XL raises another theory for the first time – that an insurer is entitled in equity
to reimbursement if it made overpayments pursuant to a legal obligation that is later nullified by
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
judicial opinion. In support, XL cites a Michigan case regarding equitable restitution, Mich.
Educ. Emp. Mut. Ins. Co. v. Morris, 460 Mich. 180, 197, 596 N.W.2d 142, 150-51 (Mich. 1999),
and argues that it made the overpayment at a time when the district court’s First SIR Opinion
was still in effect.
Because this argument is raised for the first time on appeal, it need not be addressed. See
City of Detroit v. Simon, 247 F.3d 619, 630-31 (6th Cir. 2001). A review of Morris underscores
the problematic nature of XL asserting its theory for the first time on appeal. Morris states that
under Michigan law an equitable right of restitution is recognized “when a person has been
unjustly enriched at the expense of another.” Morris, 460 Mich. at 197, 596 N.W.2d at 151.
XL’s theory is in fact an independent cause of action, id., 460 Mich. at 197-98, 596 N.W.2d at
151, yet XL did not file, or seek leave to file, a counterclaim for equitable restitution.
C.
1.
We affirm also the district court’s holding on remand that Stryker is entitled to pre-
judgment penalty interest under Michigan Compiled Laws § 500.2006 on the Stryker I
indemnification portion, which is the amount of Stryker’s settlements with direct Uni-Knee tort
plaintiffs. XL argues that it should not be required to pay pre-judgment interest on the
indemnification portion because, having exhausted the policy limit in payments to Pfizer, XL
was not actually liable for that portion. XL points to language in the Stryker I Appellate Opinion
stating that on remand the district court “should recalculate the pre-judgment award based on the
total amount for which XL is actually liable to Stryker . . . .” Stryker I Appellate Opinion, 735
F.3d at 361. XL contends that it was merely potentially liable to Stryker for the indemnification
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Stryker Corp. v. XL Insurance America, Inc.
portion and never became actually liable because the limit was exhausted by the Pfizer
settlement.
XL’s focus on the “actually liable” language ignores the analysis employed in the Stryker
I Appellate Opinion and the circumstances it embraced. The Court upheld the district court’s
application of § 500.2006 to the indemnification portion, rejecting XL’s argument that an award
of interest was subject to the “reasonable dispute” rule:
Here, it is undisputed that Stryker is the claimant, because Stryker already paid
off the third-party tort claims. The district court’s rule is therefore a logical one
and one that is consistent with the statutory language—as long as the “claimant”
is a third-party, the “reasonable dispute” rule applies; the moment the “claimant”
becomes the insured, it ceases to apply.
Stryker I Appellate Opinion, 735 F.3d at 361. The district court, however, had awarded interest
on all of Stryker’s losses, based on its application of Capitol Reproduction. With Capitol
Reproduction repudiated, when the Court said that XL should not pay interest on amounts for
which it was not actually liable to Stryker, it meant that XL should not pay interest on amounts
“beyond the limits of liability.” Id. at 361.
The Court expressly authorized an award of pre-judgment penalty interest on amounts
within the limit, and it approved the district court’s methodology in calculating interest. This is
not a situation where the Pfizer settlement occurred after the issuance of the Stryker I Appellate
Opinion. The settlement was already in place, and the Court held that certain Pfizer settlement
portions could be used to exhaust the policy limit. Id. at 358-59. Against that backdrop, the
Court affirmed the district court’s holding that XL was liable to pay interest and said that interest
should be assessed on amounts within the policy limit.
As the district court stated on remand, “XL was actually liable for Stryker’s settlements
and was liable for penalty interest on those settlements until XL paid out the policy limits with
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the Pfizer settlement.” Third Interest Opinion, 2013 WL 1194917, at *3. The district court
entered final judgment in Stryker I after holding that XL was liable for the indemnification
portion of Stryker’s losses. The Stryker I Appellate Opinion affirmed the coverage ruling and the
district court’s holding that § 500.2006 applied. While clarifying that XL could use certain
portions of the Pfizer settlement toward the policy limit, the Court left no doubt that XL had
wrongfully denied Stryker’s demand for coverage as to direct Uni-Knee claims. Stryker
tendered its demand in August 2000, over two years prior to the filing of the Pfizer suit and over
eight years prior to the Pfizer settlement. XL thus was liable for the Stryker I indemnification
portion and wrongly refused to pay until it chose to pay the Pfizer settlement. In these
circumstances, an award of penalty interest under § 500.2006 on the Stryker I indemnification
portion is appropriate.
2.
XL argues that this interpretation of the Stryker I Appellate Opinion is contrary to the
language of § 500.2006 itself. Its argument concerns two provisions of the statute. First, XL
contends that the “benefits paid” element of the statute is not satisfied: “If benefits are not paid
on a timely basis the benefits paid shall bear simple interest . . . at the rate of 12% per annum, if
the claimant is the insured or an individual or entity directly entitled to benefits under the
insured's contract of insurance.” Mich. Comp. Laws § 500.2006(4) (emphasis added).
According to XL, it never paid benefits to Stryker and cannot be assessed interest.
Second, XL argues that an award of interest here would violate the following provision of
the statute: “If the loss exceeds the limits of insurance coverage available, interest shall be
payable based upon the limits of insurance coverage rather than the amount of the loss.” Mich.
Comp. Laws § 500.2006(4). XL contends that the indemnification portion of Stryker’s loss is
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beyond the policy limit, because the limit was exhausted by the Pfizer settlement and thus is
ineligible for an interest award.
We disagree on both counts. A reasonable reading of the “benefits paid” language is that
it refers to benefits that are not timely paid. The purpose of the statute is to penalize insurers
who fail to timely pay benefits. See Mich. Comp. Laws § 500.2006(1); Yaldo v. N. Pointe Ins
Co., 457 Mich. 341, 348, 578 N.W.2d 272, 277 (Mich. 1998) (finding that the statute “applies
when the insurance company is dilatory in making timely payments to the insured. Its purpose is
to punish the insurance company.”). Therefore, interest applies when a benefit is not timely paid
or not paid at all. This Court has confirmed this seemingly obvious point. See Stryker I
Appellate Opinion, 735 F.3d at 359-60 (noting that § 500.2006(4) applies to claims “not paid on
a timely basis”); see also Alticor, Inc. v. Nat’l Union Fire Ins. Co., 345 Fed. App’x 995, 1001
(6th Cir. 2009). XL’s reading of the statute would produce the absurd result that interest could
never apply when an insurer permanently refuses to pay benefits because there never would be
“benefits paid.”
XL’s second argument too is unavailing. After the entry of final judgment in Stryker I,
this Court affirmed the district court’s coverage ruling and its holding that § 500.2006 applied.
XL denied Stryker’s demand for coverage for well over eight years, and § 500.2006(1) clearly
imposed an obligation on XL to either timely pay its insured or pay penalty interest. The
provision to which XL cites should not be used to defeat a straightforward application of the
statute. Were it the case that the amount of the Stryker I indemnification portion alone exceeded
the policy limit, then § 500.2006(4) would apply here to reduce the amount on which interest
would be payable. But in the circumstances of this case, the language and intent of § 500.2006 is
best effectuated by requiring XL to pay interest.
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3.
Finally, XL argues that it entitled to set off the interest that XL paid Pfizer against its
interest liability to Stryker. XL allocated $8.5 million of its settlement with Pfizer to pre-
judgment interest. In support of its argument, XL cites the following statutory provision:
“Interest paid pursuant to this section shall be offset by any award of interest that is payable by
the insurer pursuant to the award.” Mich. Comp. Laws § 500.2006(4).
This provision operates to prevent an insured from receiving both an award of pre-
judgment penalty interest under § 500.2006 and a standard prejudgment interest award under
Mich. Comp. Laws § 600.6013. See McCahill v. Commercial Union Ins. Co., 179 Mich. App.
761, 776-80, 446 N.W.2d 579, 586-88 (Mich. Ct. App. 1989); Angott v. Chubb Group Ins.,
270 Mich. App. 465, 487 n.12, 717 N.W.2d 341, 355 n.12 (Mich. Ct. App. 2006).
XL’s argument for an offset is novel and not supported by the statutory language. The
difficulty arises from XL’s attempt to match a payment of ordinary interest made to a party in
one suit against an award of § 500.2006 interest payable to a different party in a separate suit.
Courts have applied the offset only in situations where the right to standard interest and the right
to penalty interest arise from the same award of benefits to an insured. See, e.g., McCahill,
179 Mich. App. at 780, 446 N.W.2d at 588; Angott, 270 Mich. App. at 487 n.12, 717 N.W.2d at
355 n.12; Michigan First Credit Union v. Cumis Ins. Soc. Inc., No. 05-cv-74423, 2009 WL
2245128, at *4 (E.D. Mich. July 27, 2009) (“[U]nder Michigan law . . . any penalty interest
awarded under M.C.L. § 500.2006(4) shall be offset by any award of interest payable by the
insurer pursuant to that award.”) (emphasis added), aff’d 641 F.3d 240 (6th Cir. 2011).
With this traditional understanding of the statute and case law in mind, the district court
found that XL is not entitled to the offset because § 500.2006 “is limited by its terms to interest
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Nos. 13-1992/13-1993/13-1994
Stryker Corp. v. XL Insurance America, Inc.
that it payable pursuant to ‘the award.’ [Mich Comp. Laws § 500.2006(4)]. Assuming the Pfizer
settlement is ‘an award,’ it is not ‘the award’ that generated the penalty interest.” Third Interest
Opinion, 2013 WL 1194917, at *4. We agree and affirm with the observation that allowing an
award of penalty interest does not contravene the purpose of the offset provision because Stryker
has not otherwise received an award of pre-judgment interest.
III.
We AFFIRM the district court’s Second SIR Opinion and Third Interest Opinion in their
entirety.
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