PetSmart Fights Insurer for Defense Costs in 'Deadly Hamster' Case

PetSmart Inc. is suing its insurer for allegedly failing to properly defend the pet supply retailer against two lawsuits filed by families of organ transplant recipients who died because the donor was sickened by a diseased pet hamster.

PetSmart owes its lawyers close to $1 million because Travelers Property Casualty Co. has refused in bad faith to pay the firm's reasonable fees under an excess liability policy, according to the complaint, filed in the U.S. District Court for the District of Arizona.

Travelers' conduct is impairing PetSmart's ability to defend itself against the underlying suits, which present complex issues and the potential for "substantial exposure," the complaint says.

The underlying suits allege that in March 2005 an unidentified woman bought a hamster infected with lymphocytic choriomeningitis virus, or LCMV, from a PetSmart in Warwick, R.I. The woman died a short time later.

Several of her organs, including both kidneys, a lung and her liver, were used in transplants. The organs carried LCMV, and the recipients contracted the virus as a result, the complaints say.

Three of the patients died, but a fourth survived after doctors determined what was wrong and treated him in time.

LCMV is an infectious disease in rodents that can be transmitted to humans through contact with urine, droppings, saliva and nesting materials. The virus causes few or no symptoms for most people but is dangerous to pregnant women and anyone whose immune system is compromised, according to the Centers for Disease Control and Prevention.

The organ recipients' families say PetSmart should have known that its hamsters and other rodents might carry LCMV and should have screened for the disease.

PetSmart held a "self-insured excess liability policy" from Travelers covering Feb. 1, 2005, through Feb. 1, 2006.

According to PetSmart's complaint, the policy promised to cover any damages, beyond a $500,000 self-insured retainer, for which the company was legally liable. Such damages include attorney fees in excess of the retainer, the suit says.

PetSmart hired lawyers from Nixon Peabody to defend it in the underlying litigation and negotiated a discount from the firm's usual rates. For example, the complaint says, lead counsel on the defense team normally charges $670 per hour, but PetSmart is paying $475. Similar discounts apply to the fees of other attorneys working on the cases, according to the suit.

The policy does not give Travelers any right to select PetSmart's counsel, the retailer says.

The complaint says Travelers has thus far refused to honor the rates PetSmart negotiated with Nixon Peabody, instead using its own fee structure that it "unilaterally and arbitrarily invented."

Travelers failed to remit to Nixon Peabody the full $500,000 that PetSmart was required to pay out of its own pocket, the suit says, and is now applying the unrealistic fee structure to the bills beyond that amount that Travelers is required to pay.

The result, PetSmart says, is that it now owes Nixon Peabody nearly $1 million, putting a financial strain on the law firm and interfering with its ability to adequately defend PetSmart.

The complaint alleges breach of contract and bad faith.

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PetSmart is represented in this case by Michael R. Ross and Michael K. Kennedy of Gallagher & Kennedy in Phoenix.