Court Opinion

ID: 2971505
Source: CourtListenerOpinion
Date Created: 2015-09-22 16:36:07.578943+00
Date Added: 2024-06-11T15:29:43.411083
License: Public Domain

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION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

                                                  6
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.

                                                   7
       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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