No Duty to Defend Drug Makers in Actions Alleging Deceptive Marketing Fueled Opioid Abuse and Addiction

On November 6, 2017, the California Court of Appeal for the Fourth Appellate District affirmed a trial judge’s decision that The Traveler’s Property Casualty Company of America (“Travelers”) did not owe a duty to defend various pharmaceutical manufacturers in two actions alleging deceptive marketing of opioid products because the alleged injuries in the underlying actions were not caused by an accident. Traveler’s Prop. Cas. Co. of Am. v. Actavis, Inc. (Nov. 6, 2017, No. G053749) 2017 Cal. App. LEXIS 976.

The County of Santa Clara and the County of Orange brought a lawsuit (the “California action”) against Actavis, Inc. and other pharmaceutical companies engaged in a “common, sophisticated, and highly deceptive marketing campaign” designed to increase the sale of opioid products by promoting them for treatment of long-term chronic pain, a purpose for which Actavis allegedly knew its opioid products were not suited. The City of Chicago brought a separate lawsuit (the “Chicago action”) against Actavis making essentially the same allegations. Both actions alleged that Actavis’ marketing scheme resulted in a “catastrophic” and nationwide “opioid-induced ‘public health epidemic’” and a resurgence in heroin use. Both actions also alleged that the Counties and City have and will incur increased costs of care and services to their citizens injured by prescription and illegal opioid abuse and addiction.

Travelers declined any duty to defend under commercial general liability policies issued by Travelers and St. Paul Fire and Marine Insurance Co. (collectively “Travelers”), and brought this action seeking a declaration that it had no duty to defend or indemnify Actavis with respect to both actions.

The St. Paul policies cover “damages for covered bodily injury or property damage” that are “caused by an event.” The policies defined “event” to mean “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Similarly, the Travelers policies cover damages “because of ‘bodily injury’ or ‘property damage’” caused by an “occurrence.” The term “occurrence” is also defined as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The St. Paul and Travelers policies also include product exclusions that bar coverage for bodily injury or property damage resulting from or arising out of “your product” or “your work.”

Following a bench trial on stipulated facts, the trial court issued a statement of decision concluding that neither the California nor Chicago action alleged an “accident” as required by the policies to create a duty to defend, and the product exclusions precluded coverage for the claims.

The Court of Appeal agreed, noting that under California law, a deliberate act is not an accident, even if the resulting injury was unintended, unless the injury was caused by an additional, unexpected, independent, and unforeseen happening. The Court found that the allegations that Actavis engaged in “a common, sophisticated, and highly deceptive marking campaign” to increase the sale of opioids and corporate profits “can only describe deliberate, intentional acts” for which there could be no insurable “accident” unless “some additional, unexpected, independent, and unforeseen happening” produced the injuries alleged in the underlying actions.

The Court rejected Actavis’ assertion that the injuries were indirect and unintended results caused by “mere negligence and fortuities” outside of Actavis’ control. “[W]hether [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.” Instead, the Court must look to “whether the California Complaint and the Chicago Complaint allege, directly or by inference, it was [Actavis’] deliberate conduct, or an additional, unexpected, independent, and unforeseen happening, that produced the alleged injuries.” The Court found that it was neither unexpected nor unforeseen that a massive marketing campaign to promote the use of opioids for purposes for which they are not suited would lead to a nation “awash in opioids” or an increase in opioid addiction and overdoses.

The Court also rejected Actavis’ contention that the alleged injuries are not the “normal consequences of the acts alleged” because in order for the opioid products to end up in the hands of abusers, doctors must prescribe the drugs to them. “The test, however, is not whether the consequences are normal; the test is whether an additional, unexpected, independent, and unforeseen happening produced the consequences.” The Court opined that the role of doctors in prescribing, or even misprescribing, opioids is not an independent or unforeseen happening.

Although the trial court declined to determine whether the California or Chicago actions sought damages because of potentially covered “bodily injury,” the Court found that those actions alleged two categories of “bodily injury”: (1) the use and abuse of opioid painkillers including overdose, addiction, death, and long-term disability; and (2) use and abuse of heroin, the resurgence of which was alleged to have been triggered by use and misuse of opioids. Applying a broad interpretation of “arising out of” as used in the product exclusions, the Court held that both categories of “bodily injury” arise out of Actavis’ opioid products, and are, therefore, barred by the product exclusions in the policies.

The Court also noted a split of authority whether product exclusions apply only to defective products. Although recognizing that the California Supreme Court has not addressed the issue, the Court agreed with the Florida Supreme Court’s reasoning in Taurus Holdings v. U.S. Fidelity (Fla. 2005) 913 So.2d 528, that the term “any product” in the product exclusions applies broadly and does not limit the application of the exclusions to defective products.

Actavis reaffirms California law that a deliberate act resulting in unintended injuries is not an “accident,” unless the injuries were caused by an additional, unexpected, independent, and unforeseen happening. This decision also reiterates California’s broad interpretation of “arising out of” as used in coverage provisions and exclusions.

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.

Hello, Kitty! Can You Smell That Smell? It’s a Covered Loss!

*Republished with permission of the Insurance Coverage Law Bulletin and Connecticut Law Tribune.

The New Hampshire Supreme Court’s recent decision in Mellin v. N. Sec. Ins. Co., 115 A.3d 799, 2015 N.H. LEXIS 32 (N.H. 2015), is getting some attention, and not just because it’s fun to talk about cat pee. The case sets a very important precedent regarding the definition of the term “physical loss” and the construction of pollution exclusions in New Hampshire property insurance policies. It is a decision that is likely going to create uncertainty and increased risk for insurers going forward. The scent-illuminating subject matter is just an added bonus.

1-26The facts started out simply enough. The plaintiffs owned a condominium unit, and their downstairs neighbor had two feline cohabitants. The plaintiffs leased their unit to a tenant in 2009 and 2010, and that tenant was the first person to notice that something didn’t smell right. In November 2010, the tenant decided that he would rather find a new place to live than continue to put up with the noxious odors emanating from below. Undeterred, the plaintiffs moved in themselves and promptly filed an insurance claim under their homeowner’s policy. That claim was denied.

In a continued attempt to take control of the odiferous situation, the plaintiffs contacted the local building and health inspector. After examining the unit, the inspector advised, by way of a letter dated Dec. 22, 2010, that the plaintiffs had “a health problem existing,” and the odor was such that they needed “to move out of the apartment temporarily and have a company terminate the odor.” Unfortunately, remediation efforts were no match for the persistent and pervasive smell of cat urine. The plaintiffs apparently steeled themselves, presumably invested in some scented candles or at least a large can of air freshener, and moved back into the condo until Feb. 1, 2011. At that point, the plaintiffs sold the unit after determining that they could no longer lease it to tenants. Unsurprisingly, they asserted that “the sale price for the unit was significantly less than that for a comparable condominium in the area which was unaffected by cat urine odor.”

In light of this loss and the denial of their claim by the homeowner’s insurer, Northern Security Insurance Company, Inc. (“Northern Security”), the plaintiffs ultimately brought suit, seeking a declaration that they were entitled to coverage for a “direct physical loss” to the unit, namely odor from cat urine. Northern Security moved for summary judgment on the grounds that the smell did not constitute a “physical loss,” and that the claim was barred by the policy’s pollution exclusion.

The trial court ruled in the insurer’s favor, and the plaintiffs appealed. The Supreme Court of New Hampshire began by reciting familiar principles of insurance contract construction: terms shall be accorded their plain meaning; the burden of proof rests with the insurer in a declaratory judgment action; and ambiguities must be construed in favor of coverage.

Are Noxious Odors a ‘Physical Loss’?

The first issue on appeal was whether the trial court erred in holding that the term “physical loss” required a “tangible physical alteration” of the unit, and that the continuous and noxious wafting of cat urine odor did not constitute such a tangible ­physical ­alteration. In addressing this issue, the court noted that the term “physical loss” was undefined in the plaintiffs’ policy, and cited the sixth edition of the Shorter Oxford English Dictionary for the definition of “physical”: “[o]f or pertaining to matter, or the world as perceived by the senses; material as [opposed] to mental or spiritual.” Based on that definition, the court concluded that the term “physical loss” need not be read to include only tangible changes to the property that can be seen or touched, but can also encompass changes that are perceived by the sense of smell.

Turning to case law, the court first recognized that some jurisdictions, like Michigan, have adopted a definition of “physical loss” that is, in fact, restricted to “tangible” changes. In support of its conclusion, however, the court went on to note “a substantial body of case law in which a variety of contaminating conditions, including odors, have been held to constitute a physical loss to property.” Here, the court cited cases from several jurisdictions that, in its view, support a more liberal interpretation of “physical loss.” Among those cases, the court cited decisions from Connecticut (asbestos and lead contamination was physical loss), New Jersey (ammonia release), and Colorado (gasoline vapors).

While the insurer urged the court to follow its own prior definition of the term “physical injury,” the court refused because the case relied upon by Northern Security, Webster v. Acadia Insurance Company, 156 N.H. 317 (2007), turned on the interpretation of the term “property damage” contained in Coverage E, pertaining to personal liability. While the Mellins’ homeowner’s policy contained that same definition, the personal liability coverage part of that policy was not at issue. Simply put, the Mellins’ claim was one for first-party, not third-party, coverage, and was thus distinguishable from Webster.

In ultimately rejecting the trial court’s holding that “physical loss” required “tangible changes,” the New Hampshire Supreme Court articulated the standard that “physical loss” ­requires only a “distinct and demonstrable alteration to the unit” not limited to structural changes and including changes perceived by smell. Interestingly, the trial court’s holding gave effect to the “physical” component of the term “physical loss” by including an ostensible synonym — “tangible” — in its standard of interpretation, while the court did not. Rather than deciding the coverage issue however, the court instead remanded the case to the trial court to apply the newly articulated standard for “physical loss.”

Is the Noxious Odor of Cat Urine Excluded By the ‘Pollution’ Exclusion?

The court next considered the issue of whether the policy’s pollution exclusion would allow Northern Security to relieve itself of its coverage obligation. The operative exclusion disclaimed coverage for “pollutants,” which were defined, in pertinent part, as: “any … irritant or contaminant, including … vapor … [and] fumes.” You may have read that definition, looked at the legal standard above that states that terms must be accorded their plain meaning, and assumed that this second issue would be easily resolved in the insurer’s favor. If so, you would be wrong.

The court began by stating that this definition did not render the term “pollutant” unambiguous. The terms “irritant” and “contaminant” were impugned as “virtually boundless, for there is no substance or chemical in existence that would not irritate or damage some person or property.” As such the definitional phrase “any … irritant or contaminant” was held to be too broad to meaningfully define “pollutant.” Further, the court was persuaded that because other courts have construed similarly worded pollution exclusions in different ways, this meant that the exclusion was ambiguous.

Curiously, nowhere in the court’s analysis did it consider the Oxford definition of the word “fumes”: “Gas, smoke or vapor that smells strongly or is dangerous to inhale; a pungent odor of a particular thing or substance.” It would appear that the latter portion of this definition would end the inquiry, since the smell of cat urine is quite plainly “a pungent odor of a particular thing or substance.” Yet, the court did not engage in this analysis.

Instead, the court held that the policy’s invocation of “vapor” and “fumes,” among other terms, “brings to mind products or byproducts of industrial production that may cause environmental pollution or contamination.” As such, the court held that a reasonable policyholder would not expect these terms to exclude damage resulting from everyday activities gone awry. The court concluded its analysis by construing the ambiguous term “pollutants” in favor of coverage, and holding that the exclusion did not serve to preclude coverage.

In a stinging dissent, Justice Robert J. Lynn harshly criticized the majority’s holding that the pollution exclusion did not apply. Justice Lynn reasoned that “[t]he cat urine at issue in this case fits squarely within the plain and ordinary meaning of contaminant, and is thus a pollutant as defined in the pollution exclusion clause.” He pointed out that the breadth of the exclusion does not mean that it eluded definition and was rendered ambiguous, and further urged that it is ambiguity, not over-breadth, that provides the court with a license to look beyond the plain meaning of the policy. He went so far as to call the majority’s approach “dubious” in following a case that was focused on the historical genesis of environmental pollution exclusions rather than focusing on the plain meanings of the terms at issue. Justice Lynn pointed out that “when a policy’s meaning and intent are clear, it is not the prerogative of the courts to create ambiguities where none exist or rewrite the contract in attempting to avoid harsh results.” He concluded by stating that if the pollution exclusion was overly broad, the remedy must be provided by the open market or the legislature, and not through “creative judicial construction of clear policy language.”

Looking Ahead

All kittens aside, the Mellin decision is bound to leave a physical mark on first-party coverage suits involving “property damage” claims. New Hampshire insurers are going to have a hard time figuring out what isn’t covered as a “physical loss.” The new standard that any “distinct and demonstrable alteration of the unit” could constitute a “physical loss” exposes insurers to endless possibilities of property damage. Since the irremediable stench of cat urine emanating from an adjacent property can satisfy this standard, there is no telling what other odors may satisfy the standard as well. The smell of garbage, sewage, fertilizer, or farm animals kept at a nearby property could potentially trigger coverage, not just for homeowners, but for businesses as well. Likewise, a restaurant moving into the neighborhood and filling the air with the fragrance of faraway spices and fry-a-lator oil might be a covered loss, not otherwise excluded by the pollution exclusion. Looking beyond smells, it stands to reason that an increase or decrease in the amount of sunlight an insured property receives could cause a “distinct and demonstrable change.” Now that there is no requirement of a “tangible” loss, the barn door seems to be wide open for new and creative claims.

Second, it is not clear what language insurers could include in their policies, short of adding increasingly specific language, which would persuasively exclude claims of this type. On its face, it would seem that an exclusion referring to “fumes” would serve to exclude a claim based on urine smells. Yet this is obviously not the case, at least in New Hampshire, and potentially not in any state recognizing the reasonable expectation of the insured over the plain language of the policy. For insureds, on the other hand, it may be viewed as the cat’s whiskers — at least until premiums catch up to the risk.


In sum, the facts of the Mellin case may seem trivial, but the holding is significant as it has far-ranging repercussions for property insurance in New Hampshire and beyond.

Liquor Liability Exclusion Bars Coverage for the Four Loko Bodily Injury Lawsuits

In Phusion Projects, Inc. v. Selective Ins. Co., No. 1-15-0172, 2015 Ill. App. LEXIS 942 (Ill. App. Dec. 18, 2015), the manufacturers of the alcoholic beverage “Four Loko” (collectively “Phusion”) filed a declaratory judgment action seeking a declaration that their commercial liability insurer was required to defend and indemnify Phusion in six underlying bodily injury claims. Selective claimed it was not required to defend Phusion because of the policy’s liquor liability exclusion. The trial court agreed and dismissed Phusion’s complaint. Phusion appealed, and the Appellate Court affirmed the underlying decision.

Four Loko is a fruit-flavored malt beverage which contains 12% alcohol by volume, as well as taurine and guarana. During the relevant time period, Four Loko also contained 135 milligrams of caffeine. The underlying suits alleged that the plaintiffs’ injuries were caused by either their own or another individual’s consumption of Four Loko and subsequent intoxication, mainly due to the inclusion of the stimulants in the Four Loko product.

The CGL policy excluded coverage for “bodily injury…for which any insured may be held liable by reason of (1) causing or contributing to the intoxication of any person.” The exclusion applied only where the insured was “in the business of manufacturing, distributing, selling, serving, or furnishing alcoholic beverages.”

In its initial motion to dismiss the declaratory judgment action, Selective relied on the policy’s liquor liability exclusion. Selective cited to a Federal District Court opinion excluding coverage for Phusion based on an identical liquor liability exclusion. Netherlands Insurance Co. v. Phusion Projects, Inc., 2012 WL 123921 (N.D. Ill. Jan 17, 2012). Phusion argued the underlying lawsuits were not based on liquor liability, but were based on “stimulant liability,” pointing to the allegations that Phusion was liable for adulterating its Four Loko products with caffeine, guarana, and taurine. Phusion pointed to the underlying plaintiffs’ claims that the addition of these stimulants desensitized consumers of Four Loko to the symptoms of intoxication, and caused them to act recklessly. In its reply, Selective relied on the Seventh Circuit’s holding in Netherlands, which recognized that “the presence of energy stimulants in a [sic] alcoholic drink has no legal effect on the applicability of a liquor liability exclusion.” The trial court held the terms of the insurance policy and liquor liability exclusion made it “clear that coverage is excluded when there are claim[s] that an individual sustained bodily injury caused by intoxication,” and therefore Selective had no duty to defend or indemnify Phusion for the lawsuits.

On appeal, Phusion argued that the exclusion did not apply to manufacturers, but rather only to “those in the liquor business to preserve host liquor liability coverage.” Phusion relied on cases establishing that the voluntary consumption of alcohol is the proximate cause of an injury rather than the manufacture of the beverages. The Appellate Court rejected this argument as relevant only to Phusion’s liability in the underlying suits, and not Selective’s duty to defend or indemnify Phusion in those suits. The court instead followed the Seventh Circuit’s interpretation of the exclusion in Netherlands, finding the plain and ordinary meaning of the exclusion applied to “claims of bodily injury…where Phusion may be held liable because it either caused or contributed to the intoxication of any person,” an exclusion which applied specifically to those in the business of manufacturing alcoholic beverages.

Phusion also argued that intoxication was not the “sole and proximate cause” of the injuries asserted in the underlying lawsuits, but that some allegations such as the addition of stimulants to the product fell outside the liquor liability exclusion and were therefore potentially covered by the policy. The court disagreed, finding that Illinois law actually requires an allegation of a proximate cause “wholly independent” from the excluded coverage. The court found that “in order for the underlying lawsuits at issue here to fall within the insurance policy and, thus, outside the liquor liability exclusion, each of the complaints must allege facts that are independent from the event that led to the injury,” requiring that the underlying complaints allege facts “that are independent of ‘causing or contributing to the intoxication of any person.’” Here, it was impossible for anyone to suffer injuries due to the inclusion of stimulants in the product absent consumption of and subsequent intoxication due to Four Loko. It was “[t]he supply of alcohol, regardless of what it is mixed with,” that was “the relevant factor to determine whether an insured caused or contributed to the intoxication of any person.” Quoting the Seventh Circuit, the Court found Phusion’s decision to mix energy stimulants and alcohol “might not have been a very good one,” but did “not amount to tortious conduct that is divorced from the serving of alcohol.” Therefore, the allegations of the underlying complaint fell within the liquor liability exclusion, and Selective had no duty to defend Phusion in the underlying actions.

Courts often struggle with whether to apply policy exclusions in the face of alternative theories of liability in the underlying case, especially when one of those theories arguably falls outside the scope of the exclusion. Here, however, the court appropriately relied on the broad scope of the exclusion and rejected the insured’s efforts to circumvent the exclusion by parsing the allegations of the underlying complaint.

Ninth Circuit Zaps Insured’s Suit Seeking Coverage for Zip Code Claims

In Big 5 Sporting Goods Corp. v. Zurich American Ins. Co., et al., Case No. 13-56249 (9th Cir. Dec. 7, 2015), the Ninth Circuit, interpreting California law, held that underlying putative class action lawsuits asserting Song-Beverly Act claims alongside causes of action for invasion of privacy and negligence were not covered and did not trigger a duty to defend under CGL policies issued by Zurich and Hartford. The Ninth Circuit affirmed the decision of the Central District Court Judge Dolly Gee.

The Song-Beverly Act prohibits retailers from requesting and recording personal identification information (e.g., Zip codes) in conjunction with point-of-sale credit card transactions. Big 5 was sued in a series of underlying class action lawsuits asserting causes of action based on alleged violations of the Song-Beverly Act. Some of those complaints also asserted common law and constitutional invasion of privacy claims as well as negligence causes of action.

The policies included “Distribution of Material” exclusions which eliminated coverage for personal and advertising injury arising directly or indirectly out of any act or omission that violates or is alleged to violate any statute that prohibits or limits the sending, transmitting, communicating, distribution, etc., of material or information. Additionally, the Hartford policy included a “Right of Privacy Created by Statute” exclusion which eliminated coverage for personal and advertising injury arising out of the violation of a person’s right of privacy created by statute.

The Ninth Circuit affirmed District Court, holding that these exclusions eliminated coverage and any duty to defend the underlying suits based on the alleged violations of the Song-Beverly Act. The Court determined that the Act was undeniably a statute and that the alleged violations of the Act amounted to acts or omissions that were excluded from coverage.

Significantly, the Ninth Circuit rejected Big 5’s argument that the underlying common law and California constitutional invasion of privacy claims independently triggered a duty to defend. In doing so, the Court determined that in the context of the at-issue garden variety Song-Beverly Act complaints, such invasion of privacy claims “simply do not exist.” The Court further stated:

California does not recognize any common law or constitutional privacy right causes of action for requesting, sending, transmitting, communicating, distributing, or commercially using ZIP Codes. The only possible claim is for statutory penalties, not damages.

As support for this conclusion, the Ninth Circuit recognized that the Song-Beverly Act created a new right to protection in a consumer’s personal identification information that that did not previously exist and that the remedy for violations of the Act were specified statutory penalties. It also relied on the decision in Fogelstrom v. Lamps Plus, Inc. (2011) 195 Cal. App. 4th 986, which concluded that in the context of Song-Beverly class actions, there was no actionable invasion of privacy cause of action as the required element of a serious invasion of privacy or egregious breach of social norms was not present.

The Ninth Circuit further held that the underlying negligence causes of action did not trigger a duty to defend, stating that “[j]ust as a rose by any other name is still a rose, so a ZIP Code case under any other label remains a ZIP Code case.” The Court recognized that under California law, artful drafting and the assertion of superfluous negligence claims does not create a duty to defend where such a duty does not otherwise exist under the facts alleged.

With its decision in Big 5, the Ninth Circuit joins a growing number of Courts from across the country that have held that statutory class action lawsuits do not trigger a duty to defend under CGL policies.

The Ninth Circuit’s decision in Big 5 is not published and its citation is governed by 9th Cir. R. 36-3.

Federal District Court Rejects Insureds’ $40 Million Bad Faith Claim

In Kollman v. National Union Fire Insurance Co. of Pittsburgh, Pa., No. 1:04-cv-3106-PA, Judge Owen Panner of the United States District Court for the District of Oregon recently ruled as a matter of law that even though National Union incorrectly denied coverage to its insureds, National Union did not act in bad faith in refusing to defend the underlying case. Therefore, the Court found that National Union was not liable for a $40 million judgment against the insureds.

The coverage litigation stemmed from a lawsuit filed in 2002 by Daryl Kollman against National Union’s insureds. The insureds tendered Kollman’s claims under an Executive and Organization Liability Policy. National Union denied coverage, relying primarily upon the “insured-versus-insured” exclusion, which excluded coverage for claims brought by an insured against another insured. Kollman was a former director of the insured’s subsidiary, and National Union stated that coverage for his claim was excluded. National Union declined to participate in the defense of the insureds and did not attempt to settle the matter within the $5 million policy limits.

The state court trial resulted in a $40 million judgment against the insureds. The insureds sued National Union, alleging they were entitled to coverage and that National Union acted in bad faith by unreasonably denying coverage and by failing to settle with Kollman for policy limits when it purportedly had the opportunity to do so. The insureds sought to hold National liable for the $40 million judgment, plus attorney fees and costs.

On summary judgment, the Court concluded that National Union had incorrectly denied coverage based on the policy’s insured-versus-insured exclusion, and it therefore had a duty to defend. However, the Court granted National Union’s Motion for Summary Judgment on the bad faith claims. Relying upon Georgetown Realty v. Home Ins. Co., 313 Or. 97, 831 P.2d 7 (1992), the Court ruled that Oregon law did not permit a bad faith failure-to-settle claim against an insurer that did not assume the duty to defend in the first instance. The Court also ruled that even though National Union was incorrect in its coverage determination with respect to the insured-versus-insured exclusion, its coverage decision was reasonable. The Court therefore dismissed all bad faith claims.

Pennsylvania Supreme Court Holds That Employer’s Liability Exclusion Does Not Exclude Coverage for Employee Claim Against Non-Employer Additional Insured

The Pennsylvania Supreme Court recently held that an employer’s liability exclusion in an umbrella policy did not apply to a claim brought by the named insured’s employee against an additional insured. Mutual Benefit v. Politsopoulous, — A.3d — (Pa. 2015). In Politsopoulous, the insurer issued a commercial umbrella liability policy to a restaurant that conferred additional insured status on the restaurant’s landlord by virtue of the policy’s blanket additional insured endorsement and the corresponding insurance requirements of the lease agreement. A restaurant employee sued the landlord for injuries sustained when she fell down a flight of stairs. The insurer denied the landlord’s request for coverage based on the employer’s liability exclusion and filed a declaratory judgment action in the Lancaster County Court of Common Pleas.  That exclusion barred coverage for an injury to “[a]n ‘employee’ of the insured arising out of and in the course of . . . [e]mployment by the insured].” Mutual Benefit contended that the phrase “the insured” meant that coverage was excluded for injuries to employees of the named insured, while the additional insured contended that the exclusion should be applied separately to each insured seeking coverage. In other words, because the plaintiff was not the landlord’s employee, the exclusion should not apply.

The trial court granted summary judgment in favor of Mutual Benefit explaining that it was bound by Pa. Mfrs’ Assoc. Ins. Co. v. Aetna Cas. & Sur. Ins. Co., 233 A.2d 548, 549 (Pa. 1967). In that case, the court held that the phrase “’[t]he insured’ has not been interpreted to mean ‘an insured’ or ‘any insured.’ It has merely been interpreted as the language dictates, to include the named insured.” 33 A.2d at 550. Because it was bound by PMA, the trial court held that the phrase “the insured” in the restaurant policy’s employer’s liability exclusion encompassed the named insured as a matter of law. Accordingly, the trial court held that the exclusion applied because the employee suing the additional insured was an employee of the named insured. The trial court, however, criticized the logic of the PMA decision and invited appellate review.

The Superior Court reversed the trial court on the basis of the policy’s severability clause, explaining that the severability clause required the court to take the following approach to policy interpretation:

When determining coverage as to any one insured, the policy must be applied as though there were only one insured, i.e., the one as to which coverage is to be determined . . . [this] policy language directs us to evaluate coverage as though Employer does not exist.

Mut. Benefit Ins. Co. v. Politopoulos, 75 A.3d 528, 536 (Pa. Super. Ct. 2013). Accordingly, the Superior Court reasoned that, when treating the landlords as the only insureds under the policy, the employer’s liability exclusion did not apply since the landlords did not employ the underlying plaintiff. Id. at 537.

The Supreme Court affirmed the Superior Court’s decision, but disagreed with its reasoning. Though it did not overrule PMA, the Politsopoulous Court “decline[d] to extend PMA’s expansive construction of the term ‘the insured’ to an instance in which a commercial general liability policy variously makes use of the terms ‘the insured’ and ‘any insured.’” Accordingly, the Court held that the phrase “the insured” was ambiguous: “[A]t least where a commercial general liability policy makes varied use of the definite and indefinite articles, this, as a general rule, creates an ambiguity relative to the former, such that ‘the insured’ may be reasonable taken as signifying the particular insured against whom a claim is asserted.” Since, under Pennsylvania law, ambiguous exclusionary language is construed against the insurer, the Politopoulos court held that the exclusion did not apply because “the ambiguous exclusionary language pertains only to claims asserted by employees of ‘the insured’ against whom the claim is directed.”

Although the outcome of this particular case is not surprising, the Supreme Court provided an articulate analysis of how the use of definite and indefinite articles in association with the word “insured” throughout a policy can give rise to an ambiguity when considered in the context of particular policy exclusions. The debate over “the insured” versus “any insured” is sure to continue, but we can expect the Politopoulos case to be a part of that discussion in Pennsylvania going forward.