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.