A very recent appellate ruling in California provides a roadmap for opioid litigation over insurance coverage that is about to ramp up all over country. In Travelers Prop. Cas. Co. of Am. v. Actavis, Inc. et al, 2017 WL 5119167 (Cal. App. 4th Dist. Nov. 6, 2017), the California court held that Travelers has no duty to defend the pharmaceutical manufacturer and distributor Actavis, Inc. and its affiliates (collectively “Actavis”) in lawsuits filed against them by the City of Chicago and two counties in California. Other states are not as tough for policyholders to obtain coverage. For example, a Fourth Circuit case out of West Virginia construed South Carolina law and found there was a duty to defend under the facts of that case. Liberty Mut. Fire Ins. Co. v. JM Smith Corp., 602 Fed.Appx. 115 (4th Cir. 2015).

By way of background, in 2014, Santa Clara County and Orange County in California sued Actavis alleging it engaged in a “common, sophisticated, and highly deceptive marketing campaign” designed to expand the market and increase sales of opioid products by promoting them for treating long-term chronic, nonacute, and noncancer pain—a purpose for which Actavis allegedly knew its opioid products were not suited (“California Action”). Also in 2014, the City of Chicago brought a lawsuit in Illinois making essentially the same allegations (“Chicago Action”). [NOTE: On Nov. 14, 2017, Buncombe County, North Carolina filed a similar lawsuit against 23 drug manufacturers and distributors in district court.]

In Actavis, Travelers denied Actavis’s demand for a defense and filed a declaratory judgment action in California state court seeking a declaration that it had no duty to defend or indemnify.

The appellate court affirmed the trial court’s ruling of no duty to defend. The court concluded that the liability policies cover damages for bodily injury caused by an “accident,” a term which has been interpreted under California law “to exclude the insured’s deliberate acts unless the injury was caused by some additional, unexpected, independent, and unforeseen happening.” The court found that neither the California Action nor Chicago Action created a potential for liability for an accident “because they are based, and can only be read as being based, on the deliberate and intentional conduct of [Actavis] that produced injuries—including a resurgence in heroin use—that were neither unexpected nor unforeseen.” The court stated that whether Actavis “intended to cause injury or mistakenly believed its deliberate conduct would not or could not produce injury is irrelevant” to determining whether an insurable accident occurred. The court also found that the role of doctors in prescribing, or mis-prescribing, opioids is not an independent or unforeseen happening because of the allegations that Actavis’s “deceptive messages tainted virtually every source doctors could rely on for information and prevented them from making informed treatment decisions.”

A second basis for the Actavis holding is that “all of the injuries allegedly arose out of [Actavis’s] products or the alleged statements and misrepresentations made about those products, and therefore fall within the products exclusions in the policies.” The exclusions bar coverage for bodily injury “arising out of” or that “results from” “[a]ny goods or products ... manufactured, sold, handled, distributed or disposed of by: [y]ou” and bars coverage for bodily injury that arises out of or results from “[w]arranties or representations made at any time, or that should have been made, with respect to the fitness, quality, durability, performance, handling, maintenance, operation, safety, or use of such goods.” In the California Action and Chicago Action, the alleged “bodily injury” relates to use and abuse of opioid painkillers and includes injuries such as overdose, addiction, death, and long-term disability and relates to use and abuse of heroin, the resurgence of which is alleged to have been triggered by use and misuse of opioids. The Actavis court noted that

California courts have interpreted the policy terms “arising out of,” “arising from,” and “as a result of” broadly, “connot[ing] only a minimal causal connection or incidental relationship,” and that this broad interpretation applies to both coverage provisions and exclusions. The court rejected the arguments of Actavis that the conduct alleged was not connected with its products, that the exclusions are limited to defective products, that the “arising out of” language does require tort causation, and the exclusions are ambiguous.

Pharmaceutical companies, like Actavis, also are the target of litigation in West Virginia for their alleged role in the opioid crisis. In two decisions, Liberty Mut. Fire Ins. Co. v. JM Smith Corp., 602 Fed. Appx. 115 (4th Cir. 2015) and Cincinnati Ins. Co. v. Richie Enterprises, LLC, 2014 WL 838768 (W.D. Ky. 2014), courts have concluded the insurer had a duty to defend the pharmaceutical companies in the West Virginia lawsuit. The Actavis court distinguished these cases. Smith and Richie arose out of the same complaint brought by the State of West Virginia against 13 pharmaceutical drug distributors. The Smith court held that the complaint alleged claims based on negligence and did not allege intentional harm and that under South Carolina law which governed the policy at issue “’accidents require that either the act or the injury resulting from the act be unintentional’; that is, a deliberate act is an accident if the resulting injury is unintentional.” Likewise, the Richie court held that under Kentucky law the allegations of negligent conduct triggered coverage under the “occurrence” provision of the policies. Distinguishing Smith and Richie, the Actavis court ruled that under California law the term “accident” does not apply “where the intentional act resulted in unintended harm.”

In sum, the contrast in how the laws in California, South Carolina and Kentucky are applied in coverage litigation will likely spur forum shopping in future coverage battles. Only time will tell whether North Carolina and South Carolina will be the next venue for coverage litigation arising out of the opioid crisis. Actavis is one of the 23 pharmaceutical defendants in the North Carolina litigation filed by Buncombe County.