RECOMMENDED FOR FULL-TEXT PUBLICATION

Pursuant to Sixth Circuit Rule 206

File Name: 12a0168p.06

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT _________________

STRYKER CORPORATION and HOWMEDICA

OSTEONICS CORPORATION, 

Plaintiffs-Appellees/Cross-Appellants,

STRYKER SALES CORPORATION,

Plaintiff,

v.

XL INSURANCE AMERICA, fka Winterthur

International America Insurance Company, 

Defendant-Appellant/Cross-Appellee,

NATIONAL UNION FIRE INSURANCE CO. OF

PITTSBURGH, PENNSYLVANIA, 

Defendant.

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Nos. 09-2332; 10-2383

Appeal from the United States District Court for the

Western District of Michigan at Kalamazoo.

No. 4:01-cv-157—Robert Holmes Bell, District Judge.

Argued: April 10, 2012

Decided and Filed: June 5, 2012 

Before: GUY, COLE, and ROGERS, Circuit Judges.

_________________

COUNSEL

ARGUED: Jonathan D. Hacker, O’MELVENY & MYERS LLP, Washington, D.C., for

Appellant. David J. Gass, MILLER JOHNSON, Grand Rapids, Michigan, for Appellees.

ON BRIEF: Jonathan D. Hacker, O’MELVENY & MYERS LLP, Washington, D.C.,

Michael W. Betz, David J. Bloss, BLOSS BETZ, Grand Rapids, Michigan, for

Appellant. David J. Gass, D. Andrew Portinga, J. Michael Smith, MILLER JOHNSON,

Grand Rapids, Michigan, for Appellees. Michael F. Smith, THE SMITH APPELLATE

LAW FIRM, Washington, D.C., for Amicus Curiae.

1
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 2

_________________

OPINION

_________________

COLE, Circuit Judge. Stryker Corporation (“Stryker”), a manufacturer of

medical devices, brought an insurance coverage action against its umbrella insurer XL

Insurance America, Inc. (“XL”), seeking coverage for claims stemming from the

implantation of expired artificial knees. The district court held that XL was liable under

the policy for the entirety of Stryker’s losses on both direct claims brought against

Stryker, as well as claims brought against Pfizer that Stryker was obligated to reimburse.

On appeal, XL challenges the district court’s ruling that the XL policy covers the claims

at issue, the ruling that XL was liable for the full amount of Stryker’s losses, and the

ruling that the entire amount owed to Stryker was subject to pre-judgment interest.

Stryker also cross-appeals the award of interest, arguing that it should run through the

entry of the amended judgment, as opposed to terminating upon the entry of the first

final judgment. For the reasons set out below, we AFFIRM the district court’s judgment

with regard to XL’s liability for Stryker’s claims and the interest calculations,

REVERSE the district court’s judgment with regard to all remaining issues, and

REMAND to the district court for further proceedings consistent with this opinion.

I. BACKGROUND

A. The Claims

In 1997 and 1998, Howmedica, Inc., an Irish company which was a whollyowned subsidiary of Pfizer, Inc. (“Pfizer”), manufactured and distributed an artificial

knee joint known as Duracon Unicompartmental Knees (“Uni-Knees”). Stryker Corp.

v. XL Ins. America, Inc., No. 4:01-cv-157, 2007 WL 1031641, at *1 (W.D. Mich. April

3, 2007) (“Stryker I Coverage Opinion”). Key components of the Uni-Knees were made

of ultra-high-molecular-weight-polyethylene (“UHMWPE”). Id. In the mid-1990s, it

was discovered that the standard procedure to sterilize medical devices after

manufacture—gamma irradiation—caused UHMWPE to degrade slowly when exposed
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 3

to the air contained in the device packaging, potentially leading to device failure. Id.

Howmedica and Pfizer determined that, because of this potential problem, Uni-Knees

should have an expiration date of five years after manufacture. Id. To ensure that

expired products did not ship to customers, Pfizer developed a computerized database

program to monitor all of their products containing UHMWPE. Id. However, as became

clear later, Uni-Knees were accidentally not entered into the database.

At the end of 1998, Stryker acquired Howmedica from Pfizer pursuant to a stock

and asset purchase agreement (“the Agreement”). Id. Under the terms of the

Agreement, Stryker was to indemnify Pfizer for any costs associated with claims brought

against Pfizer relating to Howmedica products, such as Uni-Knees. 

In late 1999, a Stryker sales representative prepared an incident report disclosing

that an expired Uni-Knee had been implanted in a patient. Id. at *11. After an

investigation, Stryker believed that the error was “at the hospital end,” i.e., that hospitals

had been using inventory that had been sitting on their shelves past the five-year

expiration date. Id. On December 30, 1999, Elizabeth Staub, Stryker’s Vice President

for Quality Assurance, Regulatory Affairs, and Clinical Research, distributed a

memorandum to Stryker sales personnel, reminding them of the five-year expiration date

and instructing them to reinforce the rule with their customers (“the Staub Memo”). Id.

at *11-12. By 2000, however, it became clear that the error was on Stryker’s

end—expired Uni-Knees were being kept in Stryker warehouses and from there sold to

hospitals and implanted in patients. Id. at *13. This fact was memorialized in a July 28,

2000, letter to Stryker personnel. Beginning in 2000, Stryker was the subject of lawsuits

from patients who received expired Uni-Knees and had those devices fail after

implantation. In total, seventy-seven suits were brought against Stryker, and many of

those cases also contained claims against Pfizer.

B. The XL Insurance Policy

For the policy year 2000, Stryker purchased a Commercial General Liability

umbrella policy from Winterthur International America Insurance Company, now known

as XL. The policy provided for $15 million in coverage for each occurrence, and $15
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 4

million in aggregate coverage, over a $2 million self-insured retention (“SIL”). The

policy (“the XL policy”) imposes a duty on the part of the insurer to defend suits that

would be covered under the policy, and that any defense costs would be in addition to

the policy limits. The XL policy also required indemnification for “[a]ny [] organization

. . . to whom [Stryker is] obligated by a written insured Contract to provide insurance

such as is afforded by this policy but only with respect to [] liability arising out of

operations conducted by [Stryker] or on [Stryker’s] behalf.” Finally, the XL policy

contained an endorsement related to medical devices (“the Medical Product

Endorsement”), which grouped all medical products with the “same known or suspected

defect or deficiency which is identified by the same advisory memorandum” into one

“batch” or occurrence for coverage purposes. The endorsement provided that the

advisory memorandum set the date at which the batch “occurred” for coverage purposes.

However, the endorsement provided that “[b]atch coverage shall not apply to any loss

which arises out of a defect or deficiency that is known or suspected prior to 1-1-

[20]00.”

Stryker tendered notice of claims to XL in August 2000, seeking defense and

indemnification under the XL policy. On October 11, 2001, XL notified Stryker that it

was denying coverage under the XL policy, arguing that the claims arise out of a “defect

. . . that [was] known or suspected prior to 1-1-[20]00,” and thus not covered pursuant

to the Medical Product Endorsement.

Stryker filed suit against XL in the Western District of Michigan on October 4,

2001, seeking defense and indemnification for claims against Stryker related to expired

Uni-Knees under the XL policy (“Stryker I”). Soon after, Pfizer brought suit against

Stryker in the Southern District of New York, alleging that Stryker was obligated to

indemnify Pfizer against claims brought against Pfizer related to the Uni-Knees. That

court eventually granted summary judgment in favor of Pfizer, holding that Stryker was

required to indemnify Pfizer under the Agreement. See Pfizer Inc., v. Stryker Corp., 348

F. Supp. 2d 131, 159 (S.D.N.Y. 2004). Stryker tendered the judgment in the Pfizer case,

$17.7 million plus interest, to XL for indemnification. XL denied that claim as well, and
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 5

so Stryker filed a second action against XL, as well as against the excess insurer, TIG.

Stryker Corp. et al. v. XL Insurance America, Inc. et al., No. 1:05-cv-051-RHB (“Stryker

II”).

C. District Court Proceedings

Over the course of the ten-year history of this case, the district court issued six

rulings that are relevant on appeal. On April 3, 2007, the district court issued the Stryker

I Coverage Opinion, stemming from a five day bench trial. In that opinion, the district

court held that the XL policy does cover direct claims against Stryker. In a separate

order in Stryker II, the district court held that XL was liable for Stryker’s obligations to

Pfizer under the Agreement

On December 15, 2008, the district court ruled on Stryker’s motion for summary

judgment, holding that Stryker’s settlements with the underlying plaintiffs, as well as

most of Stryker’s proffered defense costs, were reasonable. 2008 WL 5235886 (W.D.

Mich. Dec. 15, 2008) (“Stryker I Damages Opinion”). The opinion also established that

Stryker was entitled to pre-judgment interest on these sums, without establishing the

amount of that interest. On February 9, 2009, XL entered into a settlement with Pfizer,

under which it would pay $26 million to settle all of Stryker’s liability to Pfizer (“the

Pfizer settlement”). XL thereafter filed a motion for summary judgment, arguing that

the Pfizer settlement exhausted the XL policy, and thus XL was no longer liable for the

sums outlined in the Stryker I Damages Opinion. On October 7, 2009, the district court

denied the motion, holding that XL’s breach of the duty to defend Stryker voided any

limits of liability in the XL policy. 2009 WL 3256179 (W.D. Mich. Oct. 7, 2009)

(“Final Judgment Opinion”). Accordingly, XL was responsible for all of Stryker’s

losses associated with Uni-Knees claims. In addition, the district court entered a final

judgment on the same day, directing the parties to file a motion to amend the judgment

to add the final interest calculation.

XL appealed that final judgment. XL also filed a cross-motion for relief from

judgment, arguing that it was not subject to pre-judgment interest in light of a recent

Michigan Court of Appeals case which, XL argued, changed the governing law. The
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 6

district court denied XL’s motion. 726 F. Supp. 2d 754 (W.D. Mich. 2010) (“First

Interest Opinion”). XL appealed that determination as well. Subsequently, Stryker filed

another motion to amend the judgment, arguing that pre-judgment interest should be

recalculated based on the date of the First Interest Opinion, rather than the Final

Judgment Opinion. The district court denied this motion. 2010 WL 3937180 (W.D.

Mich. Oct. 4, 2010) (“Second Interest Opinion”). Stryker appealed this determination,

and the appeals were consolidated for purposes of review.

II. ANALYSIS

A. General Insurance Principles

Michigan law, which governs the substantive issues in the case, treats insurance

contracts in the same manner as other contracts. Rory v. Cont’l Ins. Co., 703 N.W.2d 23,

26 (Mich. 2005). Therefore, a court should “give contractual language that is clear and

unambiguous full effect according to its plain meaning unless it violates the law or is in

contravention of public policy.” Westfield Ins. Co. v. Ken’s Service, No. 300941, 2012

WL 752038 (Mich. Ct. App. Mar. 8, 2012). “Under Michigan law, exclusion clauses

and ambiguous provisions in insurance policies are strictly construed against the

insurer.” Northland Ins. Co. v. Stewart Title Guar. Co., 327 F.3d 448, 455 (6th Cir.

2003).

B. Coverage under the XL Policy

In the Stryker I bench trial, the district court found that the XL policy provides

coverage for claims made against Stryker in connection with Uni-Knees failures.

Factual findings made at a bench trial are reviewed for clear error, which occurs “if,

based on the entire record, we are left with the definite and firm conviction that a

mistake has been committed.” Solis v. Laurelbrook Sanitarium & Sch., Inc., 642 F.3d

518, 522 (6th Cir. 2011) (quoting Shelby Cnty. Health Care Corp. v. Majestic Star

Casino, 581 F.3d 355, 364-65 (6th Cir. 2009)). Legal conclusions that stem from factual

findings are reviewed de novo. Id. Under Michigan law, the proper interpretation of an
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 7

1

Strictly speaking, the Medical Products Endorsement speaks only to whether batch coverage

applies to the claims against Stryker, not whether there is coverage generally under the policy. However,

the policy limits coverage to “Bodily Injury . . . [or] Personal Injury . . . that takes place during the policy

period . . . .” The policy also contains an exclusion for “Bodily Injury . . . expected or intended from the

standpoint of the insured.” If batch coverage does not apply under XL’s theory, one or both of those

provisions would work to deny coverage to the Stryker claims in toto. 

insurance policy provision is a legal question, and thus reviewed de novo. Klapp v.

United Ins. Grp. Agency, Inc., 663 N.W.2d 447, 463 (Mich. 2003).

Whether the XL policy provides coverage turns on the interpretation of the

Medical Products Endorsement. The Medical Products Endorsement alters the definition

of “occurrence” under the policy, such that all claims arising out of a single “known or

suspected defect” are considered to be one occurrence for coverage purposes. Such

“batch coverage,” however, does not apply to “any loss, which arises out of a defect, or

deficiency that is known or suspected prior to 1-1-[20]00.” Thus, if the “defect” occurs

before January 1, 2000, then there is no batch coverage for the underlying claims.1

Thus, the heart of the dispute between the parties is the precise “defect” that

triggers the batch coverage under the Medical Products Endorsement. The district court

found that “Duracon Uni-Knees were defective if they were available in inventory for

implantation by physicians beyond their shelf-life, that is beyond five years.” Stryker

I Coverage Opinion, 2007 WL 1031641, at *10. While the phrase “in inventory” is

potentially ambiguous, the district court went on to make clear that “in inventory” means

“in Stryker’s inventory.” “In deciding to send the Staub Memo, Ms. Staub never thought

that instances of expired polyethylene that prompted Mr. Irwin’s suggestion could have

been the result of [Stryker] shipping expired polyethylene.” Id. at *12 (emphasis added).

The district court found that it was not until April 2000 that Stryker began to suspect that

the problem stemmed from its own operations. Therefore, in the district court’s view,

“prior to January 1, 2000, no employee of Stryker . . . knew or suspected that Uni-Knees

were available in inventory for implantation by physicians beyond their shelf life.” Id.

at *15.

XL does not challenge the factual findings of the district court regarding what

facts Stryker personnel knew and when they knew them. Instead, XL argues in essence
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 8

2

Stryker filed a motion to strike this portion of XL’s brief, arguing that it is inconsistent with

XL’s prior theory in the case. Because we reject XL’s argument on the merits, as discussed below, we do

not address Stryker’s argument and dismiss their motion as moot.

that “in inventory” should be read as “in anyone’s inventory.”2 XL argues that it is

undisputed that Stryker knew before 2000 (via the Staub Memo) that expired Uni-Knees

were being used by physicians, and that fact is enough to defeat coverage.

The district court’s construction of the Medical Products Endorsement is the

more reasonable interpretation. Under XL’s theory, if an insured knows that there is

some future scenario under which a product would become defective via expiration, even

if it is completely out of the insured’s hands, then there is no coverage. While XL

focuses on the Staub Memo, under XL’s theory the Uni-Knees were barred from

coverage from day one. Stryker was aware since the mid-1990s that Uni-Knees would

deteriorate after five years of shelf life. Stryker also had to know that it was possible

that some end-user would implant Uni-Knees after five years, despite the warnings

Stryker provided. That would be enough to defeat coverage under XL’s interpretation.

It would also mean that any medical product with an expiration date, such as most

pharmaceuticals, would be uninsurable under the Medical Products Endorsement, since

there is always the chance that the expiration date would not be heeded.

In addition, insurance contracts should be read “as a whole, giving harmonious

effect, if possible, to each word and phrase.” Wilkie v. Auto-Owners Ins. Co., 664

N.W.2d 776, 781 n.11 (Mich. 2003). The district court determined that the “advisory

memorandum” which locks in the occurrence for batch coverage purposes was the July

28, 2000, memo by Stryker. XL does not challenge this determination on appeal. A

“batch” is defined as “all medical products which have the same known or suspected

defect or deficiency which is identified by the same advisory memorandum.” Thus, in

the first sentence of paragraph 3 of the Medical Products Endorsement, XL does not

dispute that the “known or suspected defect or deficiency” dates to July 28, 2000. Yet,

XL argues that a few sentences later in the same paragraph “defect, or deficiency that

is known or expected” should be interpreted to refer to a different, earlier, date. This is
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 9

illogical and inconsistent with the requirement to provide a “harmonious effect, if

possible, to each word and phrase.”

Finally, any question of the interpretation of the policy must cut in favor of

Stryker. As discussed above, XL’s proposed interpretation of the policy would

completely exempt Uni-Knees, and indeed any Stryker products containing UHMWPE,

from coverage. It is highly unlikely that Stryker would have agreed to purchase such an

insurance policy. It is true that Michigan has rejected the rule, applicable in other states,

that insurance contracts should be interpreted to give effect to the reasonable

expectations of the insured. See generally Wilkie, 664 N.W.2d at 782-86. However, the

Michigan Supreme Court has equally emphasized that any ambiguities in an insurance

policy must be construed in favor of coverage and against the insurer. Id. at 786-87.

Thus, to the extent there is any ambiguity as to the meaning of the Medical Products

Endorsement, it must be construed in favor of coverage. At most, XL’s argument creates

an ambiguity in the meaning of the policy language, which would in turn support

coverage under the policy.

Therefore, we affirm the district court’s judgment that the XL policy provides

coverage for the claims made against Stryker in connection with Uni-Knees.

C. Exhaustion of the XL Policy

1. Priority of Claims under the XL Policy

Because we hold that the XL policy covers claims relating to Uni-Knees, we

must consider to what extent those claims exhaust the limits of liability under the policy.

As a preliminary matter, Stryker argues that XL may not apply the Pfizer settlement in

the Stryker II case to the XL policy prior to addressing the direct claims against Stryker

at issue in Stryker I. Stryker’s argument has both a procedural and substantive

component. On the procedural front, Stryker argues that XL’s motion for summary

judgment was rejected by the district court as untimely and improper. Substantively,

Stryker argues that the district court rejected XL’s exhaustion argument because it

violated the “district court’s roadmap” for the case and is inconsistent with the district
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 10

court’s entry of judgment in Stryker I. In addition, Stryker argues that XL’s decision to

pay the Pfizer claim first was a contrivance designed to limit XL’s exposure to prejudgment interest.

Stryker’s argument is flawed for several reasons. First, it does not appear that

the district court actually held what Stryker says it did. The district court did conclude

that summary judgment was not the appropriate vehicle for XL’s contentions. The

district court then noted that the motion could be considered a motion for relief from

judgment or reconsideration. Far from rejecting this construction, the district court

concludes that “there does not appear to be a procedural reason why the court could not

do so.” Final Judgment Opinion, 2009 WL 3256179 at *2 (emphasis in original). The

district court then proceeded to reject XL’s argument on the merits. Stryker is simply

incorrect that XL’s motion was rejected on procedural grounds. Moreover, in reaching

the merits, the district court did not mention a “roadmap,” nor discuss a categorical rule

regarding the order that XL must pay its claims. The only two grounds addressed by the

district court relate to the exhaustion (or lack thereof) of the XL policy, as discussed in

Parts II.C.2 and II.C.3, below.

In addition, even if the district court had ruled as Stryker suggests, such a ruling

would be inconsistent with the language of the XL policy. In the limits of liability

section of the policy, the “General Aggregate Limit” is defined as “the most we will pay

for all damages covered under the Insuring Agreement . . . .” Similarly, in the defense

obligation section of the XL policy, the duty to defend terminates when the “applicable

Limits of Liability have been exhausted by payment of judgments or settlements.” In

both cases, exhaustion turns on the actual payment of money on behalf of the insured,

not when a judgment that would obligate the payment of money is entered. Therefore,

the question of whether the judgment in Stryker I was fully entered prior to the Pfizer

settlement is irrelevant. Instead, the relevant question is at what point XL actually made

provision to pay a claim on behalf of Stryker. As it is clear that XL entered into the
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 11

3

In addition, Stryker cites no Michigan case law stating that an insurer has an obligation to pay

claims in a particular order. Case law in other jurisdictions, however, makes clear that the general rule is

that an insurer may pay claims in any order it chooses. See In re September 11 Prop. Damage Litig., 650

F.3d 145, 153 (2d Cir. 2011) (New York law); Elliott Co. v. Liberty Mut. Ins. Co., 434 F. Supp. 2d 483,

499 (N.D. Ohio 2006) (Ohio, Pennsylvania, Connecticut, New York, and Delaware law).

Pfizer settlement before it paid any claims under Stryker I, the Pfizer settlement can be

used to exhaust the XL policy before considering the Stryker I judgment.3

2. Consequential Damages

XL’s liability to Stryker under the policy is limited to the aggregate limit of

liability on occurrences under the XL policy, which is $15 million above the self-insured

retention of $2 million. In Michigan, insurance policies are interpreted in the same

manner as every other contract. Wilkie, 664 N.W.2d at 780. Indeed, the Michigan

Supreme Court has explicitly rejected the approach, taken in other jurisdictions, that

would apply special rules of interpretation to insurance policies distinct from those used

for other commercial contracts. See id. at 782 (rejecting the practice of ”judges

divin[ing] the parties reasonable expectations” as inconsistent with the “bedrock

principle[s] of American contract law”). Therefore, the standard contract rule that any

damages beyond the value of the contract must be proven to “arise naturally from the

breach or those that were in contemplation of the parties at the time the contract was

made,” Lawrence v. Will Darrah & Assoc., Inc., 516 N.W.2d 43, 45 (Mich. 1994)

(quoting Kewin v. Mass. Mut. Life Ins. Co., 295 N.W.2d 50, 53 (Mich. 1980)), applies

to insurance policies. Thus, when an insurer breaches the duty to defend or indemnify

under the policy, the insurer is responsible for “‘expectation interest’ through awarding

damages for the economic loss suffered by the promisee.” Frankenmuth Mut. Ins. Co.

v. Keeley, 447 N.W.2d 691, 705 (Mich. 1989) (Levin, J., dissenting) (emphasis in

original), dissent adopted on rehearing, 461 N.W.2d 666 (Mich. 1990).

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
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 12

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 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 and Wilkie. 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. See Hampton v. United States, 191

F.3d 695, 701 (6th Cir. 1999) (“[A] panel may reconsider [the panel opinion] because

the Michigan courts have expressly indicated . . . that they disagree with [the panel

opinion] and would have decided it differently.”); Harrow Prods., Inc. v. Liberty Mut.

Ins. Co., 64 F.3d 1015, 1025-26 (6th Cir. 1995) (vacating a prior panel decision in light

of a controlling state-law ruling from the Michigan Supreme Court).

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.

3. Application of the Pfizer Settlement to the XL Policy Limits

As an alternate holding, the district court determined that only the actual

settlement payments to Pfizer, not Pfizer’s defense costs or attorney’s fees in connection

with the litigation against Stryker, should count against the limits of the XL policy.
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 13

Final Judgment Opinion, 2009 WL 3256179 at *3. In reaching this conclusion, the

district court considered Pfizer’s defense costs in the tort suits together with Pfizer’s

defense costs in the litigation against Stryker. However, a close reading of the XL

policy shows that the two sources of liability for XL are conceptually distinct.

XL’s obligation to pay Pfizer’s defense costs comes from the “Insured Contract”

provision of the XL policy. The definition of an “Insured” under the XL policy includes

“[a]ny person, organization, trustee or estate to whom you are obligated by a written

Insured Contract to provide insurance such as is afforded by this policy . . . .” “Insured

Contract,” in turn, is defined as “any oral or written contract entered into by you and

pertaining to your business under which you assume the tort liability of another party

. . . .” In the separate section of the policy relating to defense obligations, the XL policy

commits XL to defending “any suit against the Insured seeking damages on account of

Bodily Injury, Property Damage, Personal Injury, or Advertising Injury.” Defense costs

are outside of the aggregate limits of liability: “All expenses we incur in the defense of

any suit or claim are in addition to our Limits of Insurance.”

Thus, with regard to costs stemming from tort suits against Pfizer, the district

court was correct. The policy defines an “Insured” to include a party to an Insured

Contract, in this case Pfizer. Thus, when Uni-Knees patients brought suits for bodily or

personal injury against Pfizer, the defense provisions of the XL policy were triggered,

and XL had a duty to defend Pfizer. This duty to defend is in addition to policy limits,

so the district court is correct that those costs should not count against those limits.

XL cites a series of cases which state that a third-party to an Insured Contract is

not entitled to a defense from the insurer. Those cases, however, deal with policies that

do not define the “Insured” to include the third-party Insured Contract beneficiary. See

Raytheon Eng’rs & Constructors, Inc. v. Erie Interstate Contractors, No. 200704705,

2008 WL 2345371, at *4 (Mass. May 14, 2008) (“The question remains, however,

whether TIG owes any duty to a party that is not a named or additional insured under

the policy.”) (emphasis added); Alliance Syndicate, Inc. v. Parsec, Inc., 741 N.E.2d

1039, 1045 (Ill. Ct. App. 2000) (holding that defense obligations do not accrue “[w]here
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 14

[the third party] was not an additional insured under the Alliance policy. . . .”); Alex

Robertson Co. v. Imperial Cas. & Indem. Co., 8 Cal. App. 4th 338, 343 (Cal. Ct. App.

1992) (“[The policy] also provides, ‘[t]he unqualified word ‘Insured’ wherever used

(including endorsements forming a part hereof), shall mean the Named Insured’”) (first

alteration in original). Under the XL policy, the definition of “Insured” includes the

party to the Insured Contract, making Pfizer an additional insured. Thus, those cases are

distinguishable.

This same logic does not apply to the costs associated with the indemnification

action. First, Pfizer filed suit against Stryker seeking indemnification under the

Agreement, so the claim was not a “suit against the Insured” [i.e. Pfizer]. This places

the action outside of the defense provisions of the XL policy. But even if Stryker had

sued Pfizer, the defense provisions are limited to “suit[s] . . . seeking damages on

account of Bodily Injury, Property Damage, Personal Injury, or Advertising Injury . . .

.” The action between Pfizer and Stryker is none of those things—the parties agree that

Stryker’s obligation for Pfizer’s costs associated with the indemnification dispute arise

out of the terms of the Agreement. Instead, the costs associated with the action between

Stryker and Pfizer stem directly from “liability . . . assumed by the Insured under an

Insured Contract”—in this case the fee-shifting provisions of the Agreement. This

liability is part of the general grant of coverage, and thus subject to the limits of liability.

Therefore, on remand, the district court should consider Pfizer’s costs stemming

from the indemnification action against Stryker as part of the sum that may be used to

exhaust the $15 million aggregate limit of liability of the XL policy. By contrast,

Pfizer’s costs stemming from defending tort actions related to the Uni-Knees may not

exhaust the XL policy, and XL is liable for those costs notwithstanding the limits of

liability.

D. Pre-Judgment Interest

The district court applied a pre-judgment interest penalty to XL with respect to

the Stryker I judgment. In doing so, the district court ultimately held that, pursuant to

Mich. Comp. Laws § 500.2006, 12% interest accrues on the indemnification portion of
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 15

Stryker I from the date Stryker settled the underlying tort law suits until entry of the first

Stryker I judgment on October 9, 2009. First Interest Opinion, 726 F. Supp. 2d at 767.

In addition, 12% pre-judgment interest applies to the defense cost portion of Stryker I

from the date the underlying tort suits were submitted to XL until the October 9, 2009

judgment. Id. at 768. XL argues that pre-judgment interest should not apply at all

because the matters were “reasonably in dispute,” and in any event should not apply to

consequential damages. Stryker cross-appeals, arguing all pre-judgment interest should

run until the second amended judgment, entered on July 22, 2010. An award of prejudgment interest is reviewed for abuse of discretion. Scotts Co. v. Cent. Garden & Pet

Co., 403 F.3d 781, 788 (6th Cir. 2005).

1. Application of Michigan Compiled Laws § 500.2006

Section 500.2006(4) divides insurance claims “not paid on a timely basis” into

two categories. For cases where “the claimant is the insured or an individual or entity

directly entitled to benefits under the insured’s contract of insurance,” the interest rate

is 12% per annum. However, for “third party tort claimant[s],” the interest rate is 12%

per annum “if the liability of the insurer for the claim is not reasonably in dispute, the

insurer has refused payment in bad faith and the bad faith was determined by a court of

law.” Michigan case law has reinforced this distinction and emphasized that first party

insurance claimants need not demonstrate that the claim was “not reasonably in dispute”

in order to recover the 12% interest. Griswold Properties, LLC v. Lexington Ins. Co.,

741 N.W.2d 549, 566 (Mich. Ct. App. 2007) (special panel). 

Relying on Griswold, the district court initially held that the entirety of the

Stryker I judgment was subject to the 12% pre-judgment interest because Stryker was

an “insured,” and thus entitled to pre-judgment interest from the tender of the claim to

XL, regardless of whether the matter was in dispute. The district court reconsidered this

award in light of the intervening Michigan Court of Appeals decision in Auto-Owners

Insurance Co. v. Ferwerda Enterprises., Inc. (Ferwerda I), 797 N.W.2d 168, 175 (Mich.

Ct. App. 2010), where the Michigan Court of Appeals held that a breach of the insurance

contract that was “specifically tied to the underlying third-party tort claim,” was subject
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 16

to the “reasonable dispute” rule in § 500.2006(4). In analyzing Ferwerda I, the district

court concluded that a claim is “tied” to the third-party tort claim up until the point

where the insured pays the claim, at which point it is converted into a first-party claim.

First Interest Opinion, 726 F. Supp. 2d at 767. Therefore, the district court modified the

pre-judgment interest award with regard to the settlements, holding that the interest

accrues from the date that Stryker settled the claim. Id. However, with regard to defense

costs, the district court held that they were always “first party” claims, since they are a

benefit due directly to Stryker. Therefore, pre-judgment interest on those claims began

to run when Stryker tendered the claim to XL. Id. at 768.

XL argues that all pre-judgment interest in this case is subject to the “reasonable

dispute” rule, per Ferwerda I, because the Stryker I judgment stems ultimately from

third-party tort claims against Stryker. Stryker, by contrast, argues that the Michigan

Supreme Court vacated Ferwerda I via its subsequent decision in Ferwerda II. 784

N.W.2d 44 (Mich. 2010) (Ferwerda II). Thus, Stryker argues that we should not

consider Ferwerda I at all, and instead reinstate the district court’s original pre-judgment

interest calculation.

Stryker’s argument goes too far, because the Michigan Supreme Court reversed

Ferwerda II on other grounds, and at no point does the court say it is vacating the

penalty interest analysis. At most, the Michigan Supreme Court’s corrections turn the

penalty interest analysis in Ferwerda I into dicta. In the absence of a clear

pronouncement from the Michigan Supreme Court, a federal court sitting in diversity

“must predict how the court would rule by looking to all the available data.” Allstate

Ins. Co. v. Thrifty Rent-A-Car Sys., Inc., 249 F.3d 450, 454 (6th Cir. 2001). Even if

Ferwerda I is in fact dicta, it was not improper for the district court to consider

Ferwerda I to predict how Michigan courts would handle penalty interest. Nevertheless,

the uncertain status of Ferwerda I does significantly undercut XL’s argument that all

claims stemming ultimately from third party tort actions are always subject to the

“reasonable dispute” rule. This is particularly true because the plain language of the

statute focuses on the identity of the claimant who is seeking benefits from the insurer,
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 17

not the underlying source of the claim. 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.

XL also argues that any consequential damages for which it is liable, such as

attorney’s fees, should not be subject to penalty interest. The district court held that

Stryker’s attorney’s fees were subject to the penalty interest statute, accruing on the date

Stryker submitted the underlying tort claims to XL. First Interest Opinion, 726 F. Supp.

2d at 768. XL argues that this is in error, relying on a provision of § 500.2006(4) which

states that, “[i]f 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.” XL reads “interest shall be payable based upon the limits of insurance coverage

rather than the amount of the loss” to mean that the court can only apply penalty interest

to the sum that was used to exhaust the policy limits, and not any other sums that would

not be subject to the limits. 

XL’s reading of the statute is unnecessarily narrow. A panel of this court,

interpreting § 500.2006(4), held that attorney’s fees stemming from an insurer’s breach

of the duty to defend were subject to penalty interest. Alticor, Inc. v. Nat’l Union Fire

Ins. Co. of Pa., 345 F. App’x 995, 1001-02 (6th Cir. 2009). A reasonable reading of the

statute is that the insurer is subject to pre-judgment interest on the amount it actually has

to pay to the insured. Such payments in a real sense do not “exceed the limit of

insurance coverage available.” However, to the extent that there are amounts that the

insurer is not liable to pay because they are beyond the limits of liability, those amounts

are not subject to pre-judgment interest. On remand, the district court should follow the

same methodology it used in calculating prejudgment interest. However, the district

court should recalculate the pre-judgment award based on the total amount for which XL

is actually liable to Stryker, including any defense costs and consequential damages.
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 18

2. End-Date for Calculating Pre-Judgment Interest

Stryker in its cross-appeal argues that the district court should have re-calculated

the pre-judgment interest award from the date of the First Interest Opinion, as opposed

to using the date of the Final Judgment Opinion as the end of the interest period. The

parties agree that pre-judgment interest should run up until the point where the federal

post-judgment interest provisions are triggered. Post-judgment interest is calculated

“from the date of the entry of the judgment . . . .” 28 U.S.C. § 1961(a). The court has

interpreted “judgment,” for purposes of the statute, to mean “any judgment that is not

entirely set aside.” Skalka v. Fernald Envtl. Restoration Mgmt. Corp., 178 F.3d 414, 429

(6th Cir. 1999). By that definition, the Final Judgment Opinion would be the judgment,

as it contained findings relating to the amount of pre-judgment interest that the First

Interest Opinion did not completely vacate.

This conclusion is potentially in tension with Scotts. 403 F.3d 781. In Scotts,

the first judgment was followed by two subsequent judgments that modified the total

award, but did not set aside the conclusions of the first judgment. The district court used

the first judgment as the cut-off for pre-judgment interest, but the panel reversed and

remanded to the district court to recalculate interest from the last judgment in the case.

Id. at 792-93. Stryker argues that the court’s rationale in Scotts—that the prevailing

party should be entitled to an extended period of pre-judgment interest—applies with

equal force here.

Scotts is distinguishable. In Scotts, the first mention of pre-judgment interest in

the opinions of the district court was the final judgment, not any of the earlier judgments.

Id. at 783, 786-88. As the district court stated, the Scotts opinion “merely aligned the

accrual of prejudgment interest with the date that prejudgment interest was first

awarded.” Here, there is no question that pre-judgment interest was awarded by the

district court in the First Interest Opinion. This makes this case factually closer to

Skalka than to Scotts. Thus, we affirm the district court’s judgment with regard to the

date that pre-judgment interest terminates.
Nos. 09-2332; 10-2383 Stryker Corp., et al. v. XL Ins. America Page 19

III. CONCLUSION

Accordingly, we AFFIRM the district court’s judgment in part, REVERSE in

part, and REMAND for further proceedings consistent with the opinion. In addition, we

DISMISS AS MOOT Stryker’s motion to strike a portion of XL’s Reply Brief.