The New Wave of Coverage Issues Presented by Opioid-Related Liability

This article examines the new wave of coverage issues presented by allegations of opioid-related liability and provides the historical context for this wave. Although each coverage demand carries its own considerations, holdings on some issues are beginning to reach a consensus, and predictions on other issues are available because of judicial holdings on parallel policy language.

The Underlying Litigation: Setting the Stage

As with any liability coverage dispute, the coverage issues began with allegations. The first wave of opioid-related coverage litigation, involving CGL policies, began with complaints filed by government entities and private parties asserting that pharmaceutical market players were at least partially responsible for the various harms produced by opioid addiction. Although certain lawsuits preceded 2016, that year marked a significant increase in the number of complaints against manufacturers, distributors, and retailers of opioid-related products. Government entities—state and federal—filed the majority of those suits, with the remaining plaintiffs comprised of personal injury representatives, hospitals, emergency services providers, third-party payers (health insurers and unions), and Native American tribes. Plaintiffs asserted causes of action for public nuisance, negligence, and violations of state and federal statutes, including the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Controlled Substances Act.

The First Wave: CGL Policies

Certain common attributes of CGL policies provided the foundation for policyholders to look first to CGL coverage for their alleged opioid-related liability. Under most CGL policies, defense costs are supplemental to limits. As a consequence, policyholders would be able to access defense coverage for complaints that raised the potential for indemnity without reducing the policies’ indemnity limits. Additionally, courts in other contexts have found that CGL policy terms presented the potential to trigger multiple policy periods, allowing access to the limits of policies issued for consecutive policy periods. Another common attribute of CGL coverage, favorable to insureds, is that many courts do not permit a CGL insurer to deny coverage based on late notice unless the insurer proves that it was prejudiced by such late notice, placing the burden on the insurer.

In response to policyholders’ demands under CGL policies for defense and indemnity coverage, many insurers maintained that the underlying complaints filed by government entities did not seek damages “for” or “because of” “bodily injury”; and even if there was “bodily injury,” it was not caused by an “occurrence,” as those terms are typically defined in CGL policies.

The “bodily injury” requirement. Most CGL policy insuring agreements require damages “for” or “because of” “bodily injury.” “Bodily injury,” in turn, is often defined as “bodily injury, sickness, or disease, including death resulting from any of these”; even if the definition includes mental anguish, the policies typically require that the mental anguish be related to the physical injury. CGL policies also may include other language in the “bodily injury” definition, such as “damages because of bodily injury include claims by any person or organization for care, loss of services, or death at any time resulting from bodily injury.”

In the first wave of coverage issues, courts addressed whether the various causes of action asserted by government entities against manufacturers, distributors, and retailers of opioid-related products sought damages for or because of bodily injury. Courts differ in their conclusions about whether government entities seek damages for or because of bodily injury.

The “occurrence” requirement. CGL policies also require that the bodily injury be caused by an “occurrence.” The policies typically define “occurrence” as “an accident,” often continuing that “all exposure to substantially similar conditions shall constitute one occurrence.”

Courts again differ in their assessment of whether the underlying claims satisfied the CGL policies’ “occurrence” requirement. In examining allegations against manufacturers, distributors, and retailers of opioid-related products, some courts held that the conduct did not result from an accident, with the consequence that the definition of “occurrence” precluded coverage. Other earlier courts focused instead on the general nature of the litigation—namely, that nobody could have originally predicted an endemic.

Specific language drives the results. Apart from the definitions of “bodily injury” and “occurrence” common to most CGL policies, other specific language in those programs and policies drives the results of coverage litigation. For example, certain CGL policies issued to pharmaceutical manufacturers include an exclusion precluding coverage for any liability related to the insured’s “products,” with the insured maintaining separate claims-made coverage for their products liability. If the CGL policy precludes coverage for an insured’s products and an insured has requested coverage for opioid-related liability as a result of the manufacture, distribution, or retail sale of a product, courts have not hesitated to find that the CGL coverage is not available.

The first wave of coverage litigation for opioid-related liability provides takeaways for the industry despite the lack of uniformity. The number of opinions finding no CGL coverage for opioid-related liability (due to either an unsatisfied insuring agreement requirement or an exclusion) decreases the number of policyholders who can seek to trigger consecutive CGL policy periods or obtain defense coverage without reducing indemnity limits. At the same time, the number of opinions finding no CGL coverage for opioid-related liability also increases the likelihood that policyholders will look to other types of coverage for their alleged liability.

The Claims-Made Wave: Life Sciences Policies

With the battle lines drawn under occurrence-based CGL policies, many policyholders sought coverage under claims-made or claims-made-and-reported policies, and a specific subset of those policies—life sciences policies. Although some of the coverage issues in this life sciences wave presented similar issues as in CGL litigation (such as language-driven results), they also carry their own unique considerations.

Attributes of claims-made programs drive the results. As a general principle, claims-made policies require that any underlying claim be made during the policy period. Claims-made-and-reported policies require that the underlying claim be made during the policy period and reported during the policy period or extended reporting period, if applicable. Despite this difference, courts and commentators (including the author) shortcut the reference to both types of coverage as “claims-made.” Notably, courts across the country recognize that the notice/prejudice rule often applied to CGL policies does not apply to claims-made policies or claims-made-and-reported policies.

Claims-made life sciences policies require the same analysis. The issue arose prominently in KVK Tech, Inc. v. Navigators Specialty Insurance Co., where an Alabama court granted summary judgment to an excess insurer, finding that the insured did not report in compliance with the underlying primary policy’s timing requirement. The underlying policy required notice within 30 days after expiration of the policy in which the first claim in any particular “batch” was made. The court rejected the insured’s contention that late reporting did not cause the excess insurer to sustain prejudice and held that no coverage was available.

Substantive considerations different from CGLs. Claims-made coverages (including claims-made life sciences policies) typically require a report of the claim or circumstance during the policy period. Report of a claim refers to the reporting of an actual claim made against the insured. Notice of a circumstance (NOC), on the other hand, is broader, enabling the insured to give notice during the policy period of incidents that may mature into claims after the policy period, so that the later-filed claims are deemed made during the policy in effect at the time of the NOC. As a practical matter, the opportunity to provide a broad NOC can aid a policyholder seeking coverage for opioid-related liability but limits the available coverage to a single policy period.

Perhaps the most unique feature of coverage litigation under claims-made life sciences policies is the impact of the “batch” provision on coverage for opioid-related liability. As a general summary, batch provisions can render all injuries attributable to the same alleged event or deemed to be one “claim” and one “occurrence.” If a batch provision applies, the insured is obligated for a single self-insured retention, and only one policy period is implicated. When policyholders sought to set aside these provisions to expand coverage, courts largely agreed with insurers, finding that batch clauses are not ambiguous and should be enforced by their own terms.

In addition to batch provisions or related claims provisions, life sciences policies are often subject to exclusions not often found in standard CGL policies, such as exclusions for unfair competition or claims by government entities. In the opioid context, courts have not hesitated to enforce those exclusions, where appropriate.

In sum, the availability of life sciences coverage for opioid-related liability rests on the particular policy language at issue, the timing requirements, and the nature of any particular exclusions relative to the coverage that the insured purchased. The text-based approach informs the next predicted wave of coverage litigation issues, presented by demands for coverage under errors and omissions (E&O) policies and professional liability (PL) policies.

The Next Wave: Applying Past Lessons to Claims-Made E&O and PL Programs

Moving forward from unfavorable holdings under CGL policies, or alternatively looking for additional coverage for high-dollar settlements, policyholders are now pressing for coverage under non-CGL and nonproducts policies, such as E&O and PL policies. These categories of policies share certain features with life sciences policies but again present their own unique issues.

Timing requirements. E&O and PL policies are typically written on a claims-made basis or claims-made-and-reported basis. Enforcement of the timing requirement is an element of coverage (i.e., part of the insuring agreement) and does not require the insurer to prove prejudice. Insureds may “lock in” the timing of a later claim by an NOC during the policy period, which can produce its own set of issues. For example, claims-made policies typically specify the type of information that a policyholder must provide as part of an NOC or report of a claim; the absence of required information raises issues regarding the sufficiency of the NOC. Other similar factors include whether the NOC is deemed notice of a single claim or a broader circumstance.

Defense costs and retentions. The retentions applicable to E&O and PL policies also present coverage issues not typically presented by CGL policies. Many CGL policies are subject to a deductible that applies only to indemnity, not to defense coverage. On the other hand, the retentions or deductibles applicable to E&O and PL policies typically apply to defense costs. While a favorable implication may be that defense within the retention allows the policyholder to select defense counsel, policies under which defense costs erode the deductible typically also require that defense costs erode indemnity limits. The erosion or exhaustion of limits by defense may explain, at least in part, why policyholders first sought coverage under CGL policies. Additionally, the applicable retention(s) may—or may not—be subject to an aggregate. The potential for a large retention obligation often can be the predicate for litigation over whether the underlying claims implicate a single retention or multiple retentions. The prudent practitioner would be wise to become familiar with any “retained limits” endorsement in one of these policies, given that it will often advise, among other issues, if defense costs are inside or outside of any applicable retention.

“Related acts” or “related claims” provisions. Most, if not all, E&O and PL policies are also subject to some version of “related acts” or “related claims” provisions. A finding that claims are “related” for purposes of a related acts or related claims provision can limit the availability of coverage to a single claim (and single retention) within a single policy period. A finding that claims are not related can increase exposure for either the policyholder or the insurer. The significant economic consequence of the issue explains the large number of cases in which the test for related claims is the predominant issue.

Coverage-specific exclusions. Just as life sciences policies preclude coverage for certain special risks, E&O and PL policies also often have their own unique exclusions. The exclusions often differ substantively from exclusions found in CGL policies and/or life sciences policies, given that these types of policies are intended to respond to different types of exposures. For instance, PL and E&O policies may be subject to a “bodily injury” exclusion, precluding coverage for one of the exposures contemplated by CGL coverage. Somewhat similar to life sciences policies, these types of policies also may preclude coverage for damages arising from allegations made by government entities and preclude coverage for claims of which the insured had notice prior to inception of the policy. And, of course, all types of policies may share a common feature: opioid exclusion. The prudent practitioner again should be on the lookout for any such exclusion in evaluating the potential presence—or complete absence—of exposure under the policy.

Scope of coverage issues. Given that PL and E&O policies contemplate specific risks different from the exposure contemplated by CGL policies, PL and E&O policies are subject to different defined terms—and a body of case law interpreting these terms. In any given dispute, under any given policy, questions may arise regarding whether any alleged conduct constituted “professional services,” for which E&O or PL policies may provide coverage and CGL policies may exclude coverage. The questions raised by terms directed to the type of exposure are whether the policy defines “professional services”; whether the insured has committed any “wrongful act,” as that term may be defined; and whether damages asserted qualify as a “loss,” as that term may be defined. “Loss” may also carve out any particular category of damages, or even provide a sublimit for specific types of risks. Each of these issues should be at the forefront of any coverage analysis in the opioid-related context, on both sides.