Allied World Policy Doesn’t Cover Troubled Sperm Bank’s Lawsuits, Court Says

At what point does a demand from an injured party constitute an insurance claim? In the case of a Georgia-based sperm bank, it’s when the injured party sends the letter – a date that came before the clearly worded policy took effect, a federal judge in Georgia decided last week.

The judgment by U.S. District Judge Thomas Thrash means that Allied World Surplus Lines Insurance Co. does not have to defend the sperm company, which has made headlines after being accused of providing semen to Canadian and U.S. couples despite knowing about donors’ genetic conditions or failing to screen for abnormalities.

Several Canadian babies were born and two tested positive for Charcot-Marie-Tooth Disease, a hereditary disorder that damages nerves and causes foot contractions and difficulty walking. Two others were found to have the genetic mutation for the disease. Georgia Cryoservices, the holding company of Xytex Corp., the sperm bank, was notified of the problems and went about notifying other recipient couples about the issues, according to Allied World’s lawsuit complaint.

By February 2019, several Canadian families were outraged and some demanded refunds and other compensation from Xytex. At some point, Xytex had purchased a professional liability policy from Allied World, but the policy period did not begin until March 2020. The policy had a $1 million limit for each claim and $3 million aggregate limit, inclusive of claim expenses. It also had a $250,000 deductible for each claim.

Allied World argued that the policy did not cover the legal claims because notices came well before the policy period. Xytex attorneys countered that the letters and emails from the angry Canadian couples were not legal claims until 2020, when lawsuits were filed.

But the judge pointed out that Allied World’s policy is very clear: The insurer agrees to pay legal obligations from a claim resulting from medical incidents, as long as the claim is made during the policy period. Crucially, a claim is defined in the policy as “a judicial proceeding or other written demand seeking monetary damages otherwise covered by this Policy.”

Xytex contended that emails from the couples provided only a notice of a wrongful act. The judge said at least two of the emails met the policy’s requirement of “other written demand” seeking damages.

“…The Defendants contend that the email contains no demand for money, but instead ‘her demand is for a response to the email.’ This is sophistry. The response she is asking for is a ‘response to my requests,’” Judge Thrash wrote, noting that the request is for thousands of Canadian dollars.

At another point in his ruling, the judge noted: “The timing of the lawsuits or whether these Clients were a part of those lawsuits are irrelevant. The Policy does not require any lawsuit at all.”

The heart-wrenching demand letters later became part of the many wrongful birth and negligence lawsuits that would be filed in the U.S. and Canada against the sperm bank firm, alleging that Xytex had failed to screen for many conditions, including schizophrenia, bipolar disorder, and other genetic problems – from multiple donors through the years.

In the case of Donor 3116, as alleged in the lawsuit underlying the Allied World request for declaratory judgment, Xytex had falsely represented that the donor was a Ph.D. candidate and was a cytogeneticist. In reality, the donor was only a lab technician and shown obvious signs of the Marie-Tooth disease when he donated semen, the complaints allege.

Allied World Surplus Lines is owned by Fairfax Financial Holdings Ltd.

Related: Liquid Nitrogen Leak at Xytex Sperm Bank Kills Deputy Sheriff

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