Originally published by Corporate Counsel Business Journal, July/August 2018

The pharmaceu­tical industry is under siege by opioid litigation. Opioid producers and dis­tributors are the targets of dozens of suits brought by states and municipali­ties, and the situation will only worsen. As with other catastrophic corpo­rate liabilities, companies have turned to their insur­ance companies for relief. Judging by emerging case law, insurance companies are fighting back fiercely against assuming respon­sibility for these claims.

To date, coverage liti­gation has centered on the insurance companies' duty to defend their policyholders. The cost of defending against multiple opioid suits can cripple a company. Insurance should be a first line of defense. The insurance company's duty to defend is much broader than its duty to indemnify. In most states, it is based solely on the allegations of the underlying complaint. The court must scrutinize the complaint liberally in favor of coverage, and the insurance company must defend if there is a poten­tial for coverage. However, since the duty to defend is based on the allegations of the underlying complaint, the policyholder may be at the mercy of the way in which the underlying plaintiff has drafted its complaint.

Intentional vs. Negligent Conduct

This is what happened to Actavis. Two California counties and Chicago sued Actavis over opioids. Actavis sought a defense from its insurance com­pany, Travelers, which instead sued Actavis in California in 2014. The California Court of Appeal issued its decision in 2017 (The Travelers Property Casualty Company v. Actavis, Inc.), 16 Cal. App. 5th 1026, 225 Cal. Rptr. 3d 5, 20 (Cal. Ct. App. 2017), sub judice (Cal.). The court held that Travelers did not have a duty to defend because the underlying complaints "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." Id. at 1030, 225 Cal. Rptr. 3d at 10. The court rea­soned that insurance pol­icies do not cover inten-tional wrongdoing and that since the underlying complaints only alleged intentional wrongdoing, Actavis did not have any coverage. The manner in which the underlying plaintiffs drafted their complaints proved decisive on coverage.

The court in Actavis distinguished between the case before it and a decision that found a duty to defend against an opioid complaint brought by the attorney general for West Virginia (Cincinnati Ins. Co. v. H.D. Smith Wholesale Drug Co., 2016). The complaint contained seven causes of action, sounding in both negligence and intentional wrongdoing. The court held that since the complaint contained allegations of negligence, the insurance company had to defend. Moreover, under the applicable law, the insur­ance company had to defend the entire suit even if there was only one covered cause of action.

Opioid companies must cope with the public per­ception of them as villains. Some courts will believe the worst of them. For example, in Actavis, it is at least open to question whether Actavis actually believed that its product would lead to a resurgence of heroin use. In Liberty Mutual Insur­ance Co. v. J M Smith Corp., No. 7:12-2824-TMC, 2013 U.S. Dist. LEXIS 136448, at *15 (D.S.C. Sep. 24,(2013), Liberty Mutual, like Travel­ers in Actavis, based its cov­erage defense on intention, arguing that by pumping massive quantities of pills into West Virginia, J M Smith had to know that it was contributing to opioid addiction. In J M Smith Corp., though, the court rejected that argument and found that Liberty Mutual had a duty to defend because, again, the complaint contained allegations of neg­ligent conduct. Id. at *18.

Bodily Injury vs. Economic Harm

All of the opioid insurance coverage litigation to date has involved general liability policies, which contain coverage for damages because of bodily injury. Whether an opioid complaint alleges damages because of bodily injury, or whether the alleged con­duct is purely economic, as the insurance companies argue, is another contested insurance coverage issue.

Cincinnati Ins. Co. v. Richie Enterprises LLC, 2014 BL 58698 (W.D. Ky. Mar. 4, (2014)) also con­cerned the West Virginia opioid complaint. In Richie, the court held that of the seven causes of action, only medical monitoring involved allegations of bodily injury. Id. at *23. As a result, it ordered the insurance company to defend the entire case. Ultimately, however, West Virginia dropped the med­ical monitoring count. As a result, the court in Richie revisited the issue and held that insurance coverage did not exist. Cincinnati Ins. Co. v. Richie Enters. LLC, 2014 BL 197097 (W.D. Ky. July 16, 2014).

Cincinnati Ins. Co. v. H.D. Smith Wholesale Drug Co., 829 F.3d 771 (7th Cir. 2016) reached the exact opposite conclusion addressing the same West Virginia complaint. The court emphasized that the insurance policy did not just cover bodily injury, but covered damages "because of bodily injury." Id. at 774 (emphasis in original). The court stated that "West Virginia alleged that its citizens suffered bodily injuries and the state spent money caring for those injuries – money that the state seeks in damages." As a result, the court found that the damages incurred by the state were because of bodily injury and the insurance company had a duty to defend. Id. at 775.

The issue of whether the complaint alleges bodily injury also arises in a dif­ferent context. An opioid complaint brought by the state of New Jersey contains three causes of action under the Consumer Fraud Act and one under the False Claims Act. Porrino v. Insys Therapeu­tics, Inc., (N.J. Super. Ct. Ch. Div. filed Oct. 5, 2017). None of these causes of action necessarily involves bodily injury. Moreover, the complaint principally seeks penalties and fines, which insurance compa­nies regularly assert are not covered.

The city of Newark framed its 2017 opioid complaint differently (City of Newark, New Jersey v. Purdue Pharma) L.P., et al., (N.J. Super. Ct. Law Div. filed Oct. 4, 2017). While the com­plaint brought a count under the Consumer Fraud Act, it also brought counts for pub­lic nuisance and fraudulent and negligent misrepre­sentation. The complaint, inter alia, sought damages for public nuisance and compensatory damages for fraud and negligent misrep­resentation. A defendant in the City of Newark case has a better chance of obtaining a defense than a defendant in the state of New Jersey case.

Directors & Officers Liability Insurance and Opioid Litigation

Even aside from the bodily injury issue in Richie and J M Smith Corp., an opioid complaint may only allege economic harm. In such a case, a private company may look to its directors and officers (D&O) insur­ance policy. Public compa­ny D&O policies normally only provide insurance coverage for the corpora­tion for securities claims. However, private company D&O policies generally do not have this restriction and respond to a broad range of financial claims against the company.

D&O policies are crit­ical in another context. The federal prosecutor in Massachusetts sued John Kapoor, the director and founder of Insys, and six of his colleagues; the state of New Jersey then added Mr. Kapoor to its action. The company's D&O policy should respond and advance defense costs for the individuals. D&O policies, however, do have limitations. They purport not to cover bodily injury or property damage. They do not respond solely to complaints, but more broadly to "claims." How­ever, definitions of "claim" may vary dramatically. These policies contain numerous exclusions, the most important of which for these purposes are the "conduct" exclusions, which essentially foreclose conduct for fraud and intentional wrongdoing. A D&O policy should contain limiting language on these exclusions. The best such language, which is increasingly common, is that these exclusions do not apply until there is a final non-appealable adjudication of fraud or intentional wrongdoing in the underlying case.

Policyholders should be careful to note that D&O policies have "burning limits." Every dollar spent on defense erodes the policy limit, which means one dollar less for settle­ment. If a company that has insurance coverage intends to settle an opioid claim, it is better off doing it quickly, before defense costs eat away at the limit. Policyholders also need to carefully supervise defense counsel, especially those appointed by the insurance company, to make sure that the attorneys' fees are not exorbitant.

In the Insys case in Massachusetts, each of the seven individuals may need his or her own lawyer. Attor­neys' fees for seven individuals can quickly exceed a D&O policy's limit. When purchasing D&O insurance, companies must carefully review worst-case scenarios and ascertain if the policy limits are sufficient.

Finally, opioid litigation can result in related share­holder derivative litigation against the defendant company's directors and officers. The D&O policy is designed to defend and indemnify against such suits. However, policyholders and their insurance brokers need to be wary. The insur­ance industry is reportedly contemplating the addition of opioid exclusions to D&O insurance policies.

No End in Sight

The furor over opioids is growing more intense, and companies with opioid exposures can only expect more litigation. Insurance is an essential bulwark in fighting off these claims. However, the insurance industry is struggling mightily to avoid paying opioid claims. Policy­holders must navigate numerous difficult issues before reaching the haven of insurance coverage for their opioid liabilities.

Robert D. Chesler is a share­holder in the Newark, New Jersey, office of Anderson Kill. He represents policyholders in a broad variety of coverage claims against their insurers and advises companies with respect to their insurance programs. A leader in areas of insurance cov­erage including cyber insurance recovery, directors and officers insurance, intellectual property, privacy and "green" insurance, he has served as the attorney of record in more than 30 reported insurance decisions. Reach him at rchesler@andersonkill.com.

Carrie Maylor DiCanio is a shareholder in the New York office of Anderson Kill. She concentrates her practice on corporate and commercial litiga­tion and insurance recovery. She has recovered valuable insurance proceeds for corporate policy­holders in state and federal courts throughout the U.S. and has advised clients on pre-litigation insurance matters. She also co-chairs Anderson Kill's Women's Network. Reach her at cdicanio@andersonkill.com.

Anderson Kill practices law in the areas of Insurance Recovery, Commercial Litigation, Environmental Law, Estates, Trusts and Tax Services, Corporate and Securities, Antitrust, Banking and Lending, Bankruptcy and Restructuring, Real Estate and Construction, Foreign Investment Recovery, Public Law, Government Affairs, Employment and Labor Law, Captive Insurance, Intellectual Property, Corporate Tax, Hospitality, and Health Reform. Recognized nationwide by Chambers USA and best-known for its work in insurance recovery, the firm represents policyholders only in insurance coverage disputes - with no ties to insurance companies and has no conflicts of interest. Clients include Fortune 1000 companies, small and medium-sized businesses, governmental entities, and nonprofits as well as personal estates. Based in New York City, the firm also has offices in Philadelphia, PA, Stamford, CT, Washington, DC, Newark, NJ and Los Angeles, CA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.