Attempt to Avoid Multi-Million Dollar Obligation Fails

Exclusions Must be Written Carefully to be Effective

When an insurer writes an excess policy that follows the form of the first layer of coverage it is important that they understand how to interpret the language stated in the primary policy. Failure to do so will, invariably result in litigation like the case Pfizer Inc. v. Arch Insurance Company, and U.S. Specialty Insurance Company, C.A. No. N18C-01-310 PRW CCLD, Superior Court of the State of Delaware (July 23, 2019).

Pfizer Inc. (“Pfizer”) sued seeking declaratory relief and damages against Arch Insurance Company (“Arch”) and U.S. Specialty Insurance Company (“U.S. Specialty,” and together with Arch, the “Defendant Insurers”), asserting claims for breach of contract and/or anticipatory breach and repudiation of contract against Defendant Insurers in connection with certain excess directors’ and officers’ insurance policies (the “D&O Policies”) the Defendant Insurers sold to Pfizer. Pfizer asserts that the D&O Policies obligate the Defendant Insurers to pay for the costs incurred by Pfizer in connection with the defense and settlement of the action captioned Philip Morabito, et. al v. Pfizer, Inc., and Henry A. McKinnel [sic], No. 1:04-civ-9967 (LTS) (HBP) (S.D.N.Y.) (the “Morabito Action”).

Arch and U.S. Specialty argue that the Morabito Action is either: (a) a Claim “arising out of, based upon or attributable to,” Robert L. Garber v. Pharmacia Corp., et. al., No.03-1519 (AET) (D.N.J.) (the “Garber Action,” and together with the Morabito Action, the “Underlying Actions”); or (b) a Claim that shares “as a common nexus any fact, circumstance, situation, event, transaction [or] cause” with the Garber Action such that the D&O Policies’ exclusions preclude coverage.

Pfizer contended that while the two Underlying Actions involve securities claims concerning the drug Celebrex, they are unrelated for purposes of the D&O Policies because they implicate “different plaintiffs, different defendants, different alleged harms, and different alleged wrongful conduct committed by different people.”


As part of its business, Pfizer annually purchased D&O insurance to insure against third-party claims alleging wrongful conduct on the part of Pfizer’s directors and officers. For the period in effect from April 16, 2004, to April 16, 2005 (the “Relevant Period”), Pfizer had thirteen layers of D&O insurance providing $225 million in coverage, all in excess of a $10 million self-insured retention. With certain exceptions, the thirteen excess policies in effect during the Relevant Period “follow form” to the policy issued by Pfizer’s primary carrier, National Union Fire Insurance Co. of Pittsburgh, Pa. (the “National Union Policy”). National Union and each of the insurers who sold the various layers of excess policies to Pfizer (other than the Defendant Insurers) either paid Pfizer the limits of their policies or entered into settlement agreements with Pfizer for their Morabito Action coverage obligations. Defendant Insurers have refused to pay or have disputed their obligations to pay any amounts under the D&O Policies in connection with the Morabito Action refusing to follow what they believed were the errors made by their brother insurers.


Under the National Union Policy, “Claim” includes, among other things, a civil proceeding for monetary relief and “Securities Claim” includes a lawsuit alleging violation of any federal statute regulating securities. The National Union Policy further defines “Loss” to include “damages, settlements, judgments . . . [and] Defense Costs,” and “Wrongful Act” to mean “any actual or alleged breach of duty, neglect, error, misstatement misleading statement, omission or act[.]”

The National Union Policy also contains two exclusions that Defendant Insurers have raised in this dispute as bases for failing to pay under the D&O Policies. Exclusion 4(d) excludes Loss in connection with Claims made against an Insured “alleging, arising out of, based upon or attributable to the facts alleged, or to the same or related Wrongful Acts alleged or contained in any Claim which has been reported, or any circumstances of which notice has been given, under any policy of which the current policy is a renewal or replacement or which it may succeed in time” (the “Related Wrongful Acts Exclusion”). In addition, the National Union Policy’s Endorsement No. 18 provides that the insurer will not be liable for any “Loss in connection with any Claim(s) alleging, arising out of, based upon, attributable to or in any way related directly or indirectly . . . to a related Breach of Fiduciary Duty or a related Wrongful Action alleged” in a lawsuit entitled “Robert L. Garber v. Pharmacia” (the “Specific Litigation Exclusion”).


The Morabito Action was initiated on or about December 17, 2004, by lead plaintiff Philip Morabito against Pfizer and Henry A. McKinnell, then Pfizer’s Chairman of the Board and CEO, on behalf of those who purchased Pfizer’s common stock between November 1, 2000, and December 16, 2004 (the “Class Period”). The amended complaint in the Morabito Action alleged that Pfizer and the individual defendants made false representations and omissions regarding the cardiovascular risks associated with two of Pfizer’s drugs—Celebrex and Bextra.

On December 21, 2016, the federal district court granted final approval of a settlement of the Morabito Action in which Pfizer agreed to pay $486 million on behalf of itself and the individual defendants. In addition to the settlement award, Pfizer, on behalf of all defendants, incurred more than $82 million in defense costs from the Morabito Action.

Defendant Insurers have denied coverage for the Morabito Action, claiming that coverage is barred by the National Union Policy’s Related Wrongful Acts Exclusion, the Specific Litigation Exclusion and similar endorsements in the Arch and U.S. Specialty D&O Policies because the Morabito Action is allegedly related to four prior lawsuits.

By way of high level comparison, both the Morabito Action and the Garber action are securities fraud class actions. The Morabito Action was brought by the stockholders of Pfizer, whereas the Garber Action was brought by the stockholders of Pharmacia (prior to being acquired by Pfizer).


The Defendant Insurers contend that coverage is precluded by the D&O Polices’ express terms.

Pfizer says that the Underlying Actions are unrelated for purposes of the D&O Policies because they “involved different shareholder plaintiffs, different alleged wrongful conduct, committed by different corporate and individual defendants, and different alleged harm to different company stock initiated by different revelations to the market at different times of different health risks of different drugs.”


Although both are class action lawsuits alleging securities violations, the Garber Action and Morabito Action do not cover the “same subject” and the Special Litigation Exclusion, therefore, does not preclude coverage. The Garber Action was brought by Pharmacia’s shareholders seeking redress for fraudulent and misleading statements Pharmacia and its co-marketer Pfizer made regarding the gastrointestinal health risks of Celebrex; that wrongdoing lead to a loss of millions shortly after the truth was revealed on June 1, 2002.

Despite including the CLASS Study among the list of material information the defendants had access to, the alleged market harm in the Morabito Action stemmed specifically from the defendants “repeatedly touting internal safety data which they claimed demonstrated cardiovascular safety” while they “were in possession of completed drug safety studies and other data and information which documented the serious cardiovascular risks of Celebrex and/or Bextra.” Paul R. Wallace, Judge found that while there may be some thematic similarities, the Underlying Actions are truly, in all relevant respects, different.


The wrongs alleged in the Garber and Morabito Actions involved entirely distinct misrepresentations of very different health risks associated with Celebrex. Therefore, the Underlying Actions are not fundamentally identical. And so, the Court must find, as a matter of law, that the Specific Litigation Exclusion in the D&O Policies does not excuse Defendant Insurers’ coverage obligations.

Pfizer’s Motion for Partial Summary Judgment is GRANTED, and Arch and U.S. Specialty’s Cross-Motion for Partial Summary Judgment is DENIED.


I now know that I have always been a small player in insurance litigation. To me legal fees exceeding $80 million dollars is almost impossible to conceive. I understand, however, why a company like Pfizer would buy multiple layers of insurance to protect itself against major risks of loss like the two class actions. Two insurers out of more than ten decided that exclusions applied while Pfizer and the court disagreed. When big money is involved, and this case dealt with big money, judge Paul R. Wallace was required to review everything and reach a fair and reasonable decision and found the exclusions did not apply.

© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Over the last 51 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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