Smith & Nephew Inc. v. Federal Insurance

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 04a0022n.06
Filed: October 8, 2004
No. 03-6236
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
SMITH & NEPHEW INC .,
Plaintiff-Appellant,
On Appeal from the
v. United States District Court for
the Western District of Tennessee
FEDERAL INSURANCE COMPANY,
Defendant-Appellee.
______________________________/
BEFORE: KENNEDY and COOK, Circuit Judges; and Hood, District Judge.*
KENNEDY, Circuit Judge.
This appeal arises out of a diversity action for declaratory judgment in which Smith &
Nephew sought to establish that Federal Insurance Company had breached defense and indemnity
obligations it owed to Smith & Nephew under commercial general liability policies Federal issued
on behalf of Smith & Nephew. Both parties moved for summary judgment, with Federal seeking
dismissal and Smith & Nephew requesting a declaration that Federal was liable for reasonable costs
it incurred in defending and settling a lawsuit filed against it by Lt. Col. Mary E. Reid. The district
court granted Federal’s motion for summary judgment and denied Smith & Nephew’s motion. For
the following reasons, we REVERSE.
*
The Honorable Joseph M. Hood, United States District Judge for the Eastern District of
Kentucky, sitting by designation.
1
BACKGROUND
Smith & Nephew is a Memphis based manufacturer of medical and surgical implements, and
it supplies these products to hospitals and clinics, including armed forces medical centers. Smith
& Nephew purchased commercial general liability insurance policies from Federal with coverage
effective from April 1, 1993 to September 20, 1995.
In February 1997, Reid filed a lawsuit naming Smith & Nephew as a defendant. It also
named T.G. Medical, Inc., a distributor for Smith & Nephew, and its principal, Terry Geurink, as
defendants. In May 1999, Reid filed an amended complaint. Both complaints essentially allege the
same underlying facts, namely, that Smith & Nephew conspired with T.G. Medical Inc., Terry
Geurink, and Col. Allan Bucknell, Reid’s immediate supervisor, to violate federal procurement
statutes and to conceal those violations. Specifically, Reid stated that during the course of her
service at Brooke Army Medical Center (“BAMC”), she discovered that Col. Bucknell had accepted
travel and other expense reimbursements for Smith & Nephew conferences, allegedly in violation
of federal procurement laws and regulations. After Reid filed a formal complaint regarding
Bucknell’s conduct, she claimed that he, along with the defendants, took actions to undermine
Reid’s reputation and credibility in order that her claims of procurement violations would not be
taken seriously. To conceal the procurement violations, Reid alleged, Bucknell, T.G. Medical, and
Geurink carried out a series of acts intended to discredit her and to damage her reputation. Many
of these alleged acts were in the nature of defamatory and disparaging statements about Reid’s
integrity and competence as a physician. Moreover, in furtherance of the conspiracy to conceal the
procurement violations, Reid alleged that T.G. Medical and Geurink maliciously prosecuted a civil
action against her. According to Reid, T.G. Medical and Geurink falsely claimed that she defamed
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T.G. Medical and tortiously interfered with T.G. Medical’s contracts with Smith & Nephew and
BAMC.
In May 1999, Smith & Nephew provided notice to Federal with respect to the Reid lawsuit
and forwarded to the insurer a copy of Reid’s amended complaint. After reviewing the complaint,
Federal concluded that the Reid’s lawsuit was not covered by Smith & Nephew’s policy. Thereafter,
Smith & Nephew expended sums to defend itself and eventually settled with Reid.
The commercial general liability insurance contract at issue states, in relevant parts:
COVERAGE
BODILY INJURY, PROPERTY DAMAGE, PERSONAL INJURY, AND ADVERTISING
INJURY [-] We will pay damages the insured becomes legally obligated to pay by reason
of liability imposed by law ... because of ... personal injury or advertising injury to which
this insurance applies. This insurance applies ... to personal injury or advertising injury only
if caused by an offense committed during the policy period. We will defend any claim or
suit against the insured seeking such damages.
DEFINITIONS
PERSONAL INJURY [-] means injury, other than bodily injury, arising out of one or more
of the following offenses committed in the course of your business ... 2. malicious
prosecution; ... 4. oral or written publication of material that slanders or libels a person ... or
disparages a person’s ... services.
EXCLUSIONS
This insurance does not apply to:
INTENTIONAL FALSEHOODS [-] personal injury ... arising out of oral or written
publication of material, if done by or at the direction of the insured with knowledge of its
falsity; ... 3. arising out of the willful violation of a penal statute or committed by or with the
consent of the insured.
After reading the allegations in Reid’s amended complaint against the insurance contract,
the district court held that Federal did not owe a duty to defend Smith & Nephew, because, it
concluded, Reid alleged in her amended complaint that Smith & Nephew engaged only in a
conspiracy to violate procurement statutes and to conceal their violation, which is not covered by
the policy, and not that Smith & Nephew engaged in a conspiracy to injure Reid.
3
ANALYSIS
We first consider whether Federal had a duty to defend Smith & Nephew against Reid’s
lawsuit. Tennessee courts have held that “[a]n insurer’s duty to defend is separate and distinct [as
well as broader than] the insurer’s obligation to pay claims under [a] policy.” Drexel Chem. Co. v.
Bituminous Ins. Co., 933 S.W.2d 471, 480 (Tenn. Ct. App. 1996). In determining an insurer’s duty
to defend, courts look to the insurance contract provisions and to the allegations in the relevant
action. Id. “If even one of the allegations is covered by the policy, the insurer has a duty to defend,
irrespective of the number of allegations that may be excluded by the policy.” Id. Tennessee law
further provides that “[an] insurer may not properly refuse to defend an action against its insured
unless ‘it is plain from the face of the complaint that the allegations fail to state facts that bring the
case within or potentially within the policy’s coverage.’” Id. Where the allegations of the complaint
are ambiguous, any doubts regarding their sufficiency to trigger a defense obligation are resolved
in favor of the insured. See Dempster Bros., Inc. v. United States Fid. & Guar. Co., 388 S.W.2d
153, 154-56 (Tenn. Ct. App. 1964). Finally, in determining an insurer’s duty to defend, courts
typically begin and end their analysis with the four corners of the complaint. See St. Paul Fire and
Marine Ins. Co., v. Torpoco, 879 S.W.2d 831, 834-35 (Tenn. 1994).
Following this precedent, we must read the insurance contract against the allegations in
Reid’s complaint to determine whether the contract required Federal to defend Smith & Nephew.
Rather than first read the allegations in the original complaint against the terms of the contract to
determine whether Federal had a duty to defend under the original complaint, the district court only
read the allegations in the amended complaint against the terms of the contract because it concluded,
in reliance upon Fed. R. Civ. P. 15, that an amended complaint completely supercedes the original
4
complaint. Although Rule 15 does provide that an amended complaint supercedes an original
complaint with respect to which allegations and issues are presented to the court for disposition, it
does not support the proposition that a court need not consider whether there was a duty to defend
while the original complaint was the effective pleading.1 To determine whether there was a duty to
defend under the original complaint, we must therefore read the allegations of the original complaint
against the insurance contract.2
In the original complaint, Reid alleged that “Defendants, T.G. Medical and [Smith &
Nephew] . . . conspired with Bucknell to injure [her]” by engaging in conduct intended to discredit
her. Furthermore, Reid alleged, in furtherance of the conspiracy between Defendants, T.G. Medical
maliciously prosecuted Reid by claiming that she defamed it and tortiously interfered with its
contracts with SNR and BAMC. It is clear that these allegations implicate the personal injury
coverage under the contract for malicious prosecution and defamation. Thus, Federal would have
had a duty to defend under the original complaint unless it could point to an exclusion or another
provision in the policy that would permit it to deny coverage.
1
The cases cited by the district court also do not support this proposition. See St. Paul Fire
and Marine Ins. Co., v. Torpoco, 879 S.W.2d 831, 832-34 (Tenn. 1994) (finding a duty to defend
under amended complaint, but presenting no issue as to existence of duty under original complaint);
Planet Rock, Inc. v. Regis INs. Co., 6 S.W.3d 484, 489 (Tenn. Ct. App. 1999) (finding duty to defend
with reference to both original and amended complaints).
2
Smith & Nephew notes that the district court, in choosing to focus entirely upon the
allegations of the amended complaint, may have been influenced by the fact that Smith & Nephew
did not notify Federal of the Reid lawsuit until it sent Federal the amended complaint. However,
since Federal did not raise any issue regarding timeliness of notice as a defense to its claim for
coverage, Smith & Nephew argues, Federal must be found to have waived it. We do not consider
here for the first time whether Federal waived its delayed notification defense when the issue was
never presented to the district court.
5
Federal raises three arguments in support of its contention that it owes no duty to defend
Smith & Nephew. First, Federal notes that the allegations only allege that the other defendants
committed the offenses of defamation and malicious prosecution, and that the policy does not cover
the acts of Smith & Nephew’s co-defendants. This argument misses the mark. The relevant insuring
language provides, “[w]e will pay damages the insured becomes legally obligated to pay by reason
of liability imposed by law ... because of ... personal injury ... caused by an offense.” This language
indicates, therefore, that what matters for purposes of determining coverage is the asserted liability
of the insured, not whether it committed the wrongful acts. If Smith & Nephew engaged in a
conspiracy to defame and maliciously prosecute Reid, then the policy would apply to cover it
because Smith & Nephew would be legally obligated to pay damages to Reid, even though it did not
commit any of the overt acts in furtherance of the conspiracy, since a conspirator is held liable for
the acts of its co-conspirators.
Next, Federal contends that the policy excludes coverage for Reid’s claim because she
alleged that her personal injuries arose out of Smith & Nephew’s willful violation of a penal statute.
This argument also fails. Although Federal did not identify the penal statute in issue, it can only be
referring to the procurement laws that Reid alleged Smith & Nephew violated. See 41 U.S.C. § 423.
Smith & Nephew contends that the exclusion does not apply because Reid did not allege a willful
violation of the procurement statutes. However, even if Reid had alleged a willful violation of the
procurement statutes, that would still not excuse Federal from its defense obligations. This Circuit’s
decision in Aetna Cas. & Sur. Co. v. Sunshine Corp., 74 F.3d 685 (6th Cir. 1996), is instructive. In
Sunshine, the insured (Sunshine) sought a defense in connection with a suit alleging that it had
obtained and used a confidential credit report regarding its tenants (the Crockers) in violation of the
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Fair Credit Reporting Act (“FCRA”), 15 U.S.C. §§ 1681 et seq. Id. at 686. The Crockers alleged
that this violation, among others, resulted in injuries for invasion of privacy, mental anguish, and
embarrassment. Id. The Sunshine court assumed that the injuries alleged by the Crockers were of
a type that could trigger coverage under the policy. If it were, the court thought it “clear that at the
very least Aetna has a contractual obligation to provide sunshine a defense” because even “if there
was a violation of the FCRA, ... it remain[ed] to be seen whether the violation was willful.” Id.
Because the Crockers could recover damages for a non-willful violation of the FCRA, this court
concluded that the “penal statute” exclusion could not vitiate Aetna’s duty to defend Sunshine. Id.
Similarly, even if Reid alleged that Smith & Nephew willfully violated procurement statutes,
that would not excuse Federal from defending the Reid action because Reid did not need to establish
a willful violation to prevail on her 42 U.S.C. § 1985(1) claim. To sustain that claim, Reid was
required to prove only that Smith & Nephew conspired to injure her “in [her] person or property on
account off [her] lawful discharge of the duties of [her] office.” 42 U.S.C. § 1985(1). Therefore,
since Reid could recover damages even if she were unable to prove that Smith & Nephew willfully
violated the procurement statutes, the “penal statute” exclusion does not vitiate Federal’s duty to
defend Smith & Nephew.
Finally, Federal agues that it owes no duty to defend because, it claims, Reid’s personal
injuries did not arise out of an offense committed in the course of Smith & Nephew’s business. This
argument fails because Smith & Nephew’s alleged participation in the conspiracy was to further its
business interests by ensuring that its favored relationship with Bucknell and BAMC would be
preserved.
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Next, we consider whether Federal owed a duty to defend Smith & Nephew under the
amended complaint. In Smith & Nephew’s motion for summary judgment, it submitted that Reid’s
allegations of malicious prosecution and defamation applied to it, and thus that Federal owed a duty
to defend it. The district court acknowledged that if either of these contentions implicated Smith
& Nephew, absent an exclusion in the policy, Federal would have a duty to provide a defense. Since
we conclude that Reid alleged in her amended complaint that Smith & Nephew engaged in a
conspiracy to defame her, which independently requires Federal to provide Smith & Nephew a
defense, we need not address whether Reid also alleged that Smith & Nephew engaged in a
conspiracy to maliciously prosecute her.
There are no direct allegations in Reid’s amended complaint that Smith & Nephew defamed
her. Rather, she alleged that only Bucknell, Geurink, and T.G. Medical took overt actions to defame
her. However, as the district court noted, Reid often alleged that the actions against her were the
products of conspiracies. For instance, Reid alleged that “[t]he activities of Geurink, T.G. Medical,
and Bucknell to damage Reid’s reputation were overt acts in furtherance of the conspiracy.” Thus,
if Reid claimed that Smith & Nephew was part of the conspiracy to defame her, then her allegations
would invoke the policy’s coverage.
The district court acknowledged that some ambiguity regarding which conspiracies Smith
& Nephew participated in arose from Reid’s changes to her original complaint. Throughout both
complaints, Reid plainly alleged that Smith & Nephew was involved in a conspiracy to violate
procurement statutes and to cover up those violations.3 The district court noted, however, that
3
For instance, Reid alleged that the agreement between Bucknell and Smith & Nephew
included concealment of Bucknell’s acceptance of gifts from Smith & Nephew; Smith & Nephew
concealed from the United States its payments of “gifts” through its certifications of procurement
8
Reid’s amended complaint appears to distinguish this conspiracy to conceal the procurement law
violations from the conspiracy to injure Reid, when it alleges, “[a]s a result of the continuing
conspiracy between Bucknell, [Smith & Nephew], Geurink and T.G. Medical to violate federal
procurement regulations, to conceal their violations, and the conspiracy between Bucknell, Geurink
and T.G. Medical to injure Reid to prevent discovery of the procurement violations, and the actions
taken in furtherance thereof by Defendants, Plaintiff Reid has suffered . . . injuries.”
Based upon this allegation, which appears to delineate two separate conspiracies, with Smith &
Nephew as a participant only in the conspiracy to violate procurement statutes and to conceal their
violation, and based upon the fact that Reid never directly alleged that Smith & Nephew defamed
her, the district court concluded that Federal did not owe a duty to defend Smith & Nephew because
Reid’s amended complaint did not allege that Smith & Nephew engaged in wrongdoing which
injured her.
Smith & Nephew challenges this conclusion, relying upon paragraphs 95 and 96 of the
amended complaint in support of its contention that Reid did in fact allege that Smith & Nephew
was part of a conspiracy to defame her. The paragraphs read, “the continuing conspiracy between
Bucknell and the Defendants to violate the federal statutes and regulations relating to procurement
integrity, and their continuing efforts to conceal the violations, extended to efforts to prevent Reid’s
complaints about the violations of federal statutes and regulations to be taken seriously. Bucknell,
Geurink, and T.G. Medical each took action designed to damage Reid’s reputation and credibility.”
Smith & Nephew argues that this conspiracy between Bucknell and the Defendants must have
integrity; and as part of the defendants’ agreement to conceal the “gifts” Bucknell received from
Smith & Nephew, Smith & Nephew sent a letter to Bucknell seeking reimbursement from Bucknell
of the expenses he incurred at a medical conference which Smith & Nephew had paid.
9
included Smith & Nephew because Smith & Nephew was a defendant. Since a conspirator is liable
for the acts of its co-conspirators, this allegation necessarily alleges, Smith & Nephew contends, that
Smith & Nephew is liable for defaming Reid. We agree.
Although one could reconcile the allegation that appears to delineate two separate
conspiracies, one in which Smith & Nephew conspired to violate procurement statutes, and the other
in which the remaining defendants conspired to injure Reid, with the allegations that allege that “the
Defendants” conspired to defame Reid so that her complaints would not be taken seriously, by
interpreting “the Defendants” to include all the defendants except Smith & Nephew, such a
construction would run counter to the presumptions that a court must accord to the insured. As
noted above, Tennessee law provides that an “insurer may not properly refuse to defend an action
against its insured unless ‘it is plain from the face of the complaint that the allegations fail to state
facts that bring the case within or potentially within the policy’s coverage.’” Drexel Chem., 933
S.W.2d at 480. Moreover, where the allegations of the complaint are ambiguous, any doubts
regarding their sufficiency to trigger a defense obligation are resolved in favor of the insured. See
Dempster Bros., 388 S.W.2d at 154-56. Resolving the ambiguities in Reid’s amended complaint
in favor of Smith & Nephew, we conclude that it is not “plain from the face of the complaint” that
Reid’s allegations do not allege that Smith & Nephew conspired to injure her. Thus, Federal owed
a duty to defend Smith & Nephew.
CONCLUSION
Since the amended complaint did not make the original complaint moot with respect to
whether there was a duty to defend under the original complaint, we first considered the allegations
10
made in the original complaint. The original complaint clearly alleged that Smith & Nephew
conspired to injure Reid. Since Federal can point to no exclusion in the policy that would permit
it to avoid its duty to defend, Federal thus had a duty to defend under the original complaint. With
respect to the amended complaint, we also conclude that Federal owed a duty to defend since it is
not plain on the face of the complaint that Reid did not allege that Smith & Nephew conspired to
injure her.
Therefore, we REVERSE the district court’s judgment and remand the case for further
proceedings consistent with this opinion.
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