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2nd Circuit Upholds Insurer’s $70 Million Coverage Win

June 2, 2022

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In <em><a href="">Lantheus Medical Imaging Inc., v. Zurich American Insurance Company</a></em>, the Second Circuit Court of Appeals affirmed a district court order upholding an insurer’s disclaimer in a $70 million loss of business income action. Although the basis of the suit was highly technical, the key issue was whether the claimed loss was caused by an excluded peril in an all-risk insurance policy.
Lantheus Medical Imaging is a pharmaceutical company with a focus on manufacturing and selling medical imaging products. One such product is a generator sold to hospitals that produces a medical isotope required for many imaging procedures. In order to manufacture such a generator, Lantheus purchases radioactive molybdenum-99 from a Canadian nuclear reactor (National Research Universal reactor).
In May 2009, a power outage caused the reactor to go off-line. When attempts were made to turn the reactor back on, it malfunctioned. Reactor workers discovered corrosion on the inside of the reactor, and it took 15 months to correct the issue. During this time Lantheus was unable to properly manufacture its generator because it could not obtain molybdenum-99.
Zurich issued an all-risk property insurance policy to Lantheus that covered contingent business income loss with a sub-limit of $70 million. Lantheus claimed it sustained over $70 million in lost business income and replacement costs due to the reactor shutdown. However, Zurich denied Lantheus’ claim because the all-risk policy excluded any damages resulting from deterioration, depletion, rust, [or] <em>corrosion. </em>Zurich disclaimed coverage on this exclusion because its investigation revealed the shutdown was due, at least in part, to corrosion of materials inside the reactor.  Lantheus then commenced a DJ for a declaration that Zurich is required to provide coverage under the policy.
As is usually the case in coverage disputes, the issue boiled down to the interpretation of one word: corrosion. Lantheus claimed the shutdown was due to a lightning strike causing a sudden pressure surge in the reactor. It asked the court to adopt a definition of corrosion to mean gradual corrosive damage that takes place inevitably over the useful life of property. According to Lantheus, the shutdown would not have occurred if not for the sudden (i.e., non-corrosive) effect of lightning. Therefore, Lantheus claimed, its business losses did not result from gradual corrosion (an excluded peril), but rather a covered peril such as lightning.
Both the district court and the Second Circuit rejected this argument. The Court of Appeals stated, “there is no question of material fact that the NRU Reactor shutdown falls into [the corrosion exclusion], even accepting Lantheus’s proposed version of events.” The Second Circuit came to this conclusion because the Zurich policy contained an anti-concurrent clause. Specifically, as long as corrosion—or any other excluded peril for that matter—contributes in any way to the claimed damages, whether concurrently or in any other sequence, there is no coverage. The Second Circuit agreed with the district court that even if the predominant cause of the shutdown was due to a covered peril (i.e., lightning), the inclusion of the anti-concurrent clause makes this a moot issue. Moreover, the Circuit affirmed the district court’s finding that Lantheus’ definition of corrosion incorrectly implies that a gradual process cannot also occur rapidly.
The importance of the anti-concurrent clause in the Zurich’s policy cannot be overstated; it saved Zurich $70 million. Without the clause, Zurich likely would have had to cover at least some part of the claim. There was strong evidence that the power outage from a lightning strike caused the initial reactor shutdown. As such, if the lightning was the predominant trigger for the reactor shutdown, then it would have been a covered peril under the Zurich policy.  The district court opinion also evidences that Lantheus’ interpretation of the policy was grasping at straws. The court rejected Lantheus’ “obscure” arguments of reverse <em>ejusdem generis </em>and <em>noscitur a sociis</em> for insurance policy interpretation.
Thanks to Dan Beatty for his contribution to this post. If you have any questions about this post, please email Brian Gibbons at <a href="">Brian Gibbons</a> for additional information.

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