Contractual Liability Exclusion Not a Basis to Deny Coverage for Consumer Claims Against Genetic Testing Company

The Federal District Court in San Jose, California, issued a recent decision interpreting a contractual liability exclusion issued by IronShore to 23andMe, Inc. Ironshore Specialty Ins. Co. v. 23andMe, Inc., 2016 U.S. Dist. LEXIS 96079 (N.D. Cal. July 22, 2016). 23andMe provided a “personal genomic service” to consumers wishing to access and understand their personal genetic information. The consumer purchases a DNA saliva collection kit and then sends the sample back to 23andMe for testing. The FDA objected to the marketing of the product under the Federal Food, Drug and Cosmetic Act. Civil litigation resulted including class actions filed by consumers in federal court, class arbitration complaints under AAA, as well as a Civil Investigative Demand (“CID”) from the State of Washington. The 23andMe customers alleged a variety of legal theories, principally asserting that 23andMe falsely represented the outcome of the personal genome services and that the testing yielded inaccurate and incomplete results.

Although the court agreed with IronShore that under California law a CID does not constitute a claim triggering the duty to defend, the court rejected the principle defense offered by IronShore that it had no duty to defend because of a contractual liability exclusion which provided that “this insurance does not apply…to claims based upon, arising out of, directly or indirectly resulting from or in any way involving:

  1. Contractual Liability

Your assumption of liability or obligations in a contract or agreement.

The court rejected IronShore’s argument that the broad language of the exclusion would include contracts made between 23andMe and its customers. Instead, adopting what the court viewed as the majority rule, the court held that this form of contractual liability does not apply to liabilities or obligations arising from the insured’s own contracts but rather only applies to liabilities and obligations that were originally those of a third party which were subsequently “assumed” by the insured. The court comprehensively reviewed the case law around the country but relied most heavily on a decision from the Michigan Court of Appeals in Peeker which concluded that the phrase “assumption of liability” in the context of a contractual liability exclusion refers to those contracts or agreements in which the insured assumes the liability of another. The court also emphasized that if the court were to adopt in IronShore’s construction of the contractual liability exclusion, virtually all claims relating to 23andMe’s professional services would have been excluded from coverage.

New Jersey Supreme Court Rewrites Carter-Wallace Allocation Rules in Cases Involving State Guaranty Association

In a critical insurance decision, the New Jersey Supreme Court ruled on Sept. 24 that liability insurers covering a long-tail loss cannot seek contribution from the New Jersey Property-Liability Insurance Guaranty Association for the Carter-Wallace shares of insolvent insurers. More importantly, while perhaps not a true holding, the court rebuffed an argument that the insured would have to bear the burden of the insolvent insurer’s Carter-Wallace allocation to the extent the Guaranty Association was not required to pay.

INS BLOG_courthouseIn Farmers Mut. Fire Ins. Co. v. New Jersey Property-Liability Ins. Guar. Assoc., Farmers Mutual sued the Guaranty Association to recover a portion of environmental remediation costs that were allocable to Newark Insurance Company, which was declared insolvent in 2007.  The Guaranty Association argued that the New Jersey Property-Liability Insurance Guaranty Association Act (PLIGA Act) required exhaustion of all available solvent coverage before it had any payment obligation. The PLIGA Act’s exhaustion provision “requires the exhaustion of all insurance benefits from solvent insurers on the risk before [the Guaranty Association], standing in the shoes of an insolvent insurer, must pay statutory benefits.” (N.J.S.A. 17:30A-5).  The PLIGA Act was amended in 2004 to further define exhaustion: “[I]n any case in which continuous indivisible injury or property damage occurs over a period of years as a result of exposure to injurious conditions, exhaustion shall be deemed to have occurred only after a credit for the maximum limits under all other coverages, primary and excess, if applicable, issued in all other years has been applied[.]”  (N.J.S.A. 17:30A-5)

The New Jersey Supreme Court affirmed the Appellate Division’s ruling in favor of the Guaranty Association, holding that “when one of several insurance carriers on the risk is insolvent in a continuous-trigger case, then the limits of the policies issued by solvent insurers ‘in all other years’ must first be exhausted before the Guaranty Association is obligated to pay statutory benefits.”  Because the Farmers policies were not fully exhausted, it could not tap the Guaranty Association for Newark’s Carter-Wallace share of remediation costs.

The court also rejected an argument made by another insurer, appearing amicus curiae, that the insured should bear responsibility for insolvent insurers and then seek reimbursement from the Guaranty Association.  The court, noting that, in its view, the insurers’ interpretation “would turn the PLIGA Act on its head,” stated that the aim of the PLIGA Act “would be defeated by making the insured bear the loss for the carrier’s insolvency before the insured received any statutory benefits from the Guaranty Association.”

Image courtesy of Flickr by