This month’s edition of For the Defense magazine focuses on insurance law. That makes sense. It is difficult to do much defending without bumping against insurance issues. Our torts professor constantly emphasized the relevance, sometimes even the primacy, of insurance considerations. But law school being law school, we learned precious little of the mechanics of insurance. Some companies self-insure, some use captive insurers, and some have some/several/many complicated insurance policies where the scope of coverage becomes a question of theoretical majesty. A colleague of ours, Rick Berkman, probably knows as much as about settling cases and dealing with insurers as anyone on the planet. He once told us that insurance policies seem to contain a clause written in invisible ink: “Void upon claim.” There are lawyers who devote their careers to representing insurers. There are lawyers who devote their careers to harassing insurers -- come to think of it, quite a few of these folks have offices quite close to us. And then there are lawyers (we count ourselves among them) who often do a delicate dance of collaboration and conflict with insurers. Whether there is insurance overage, or what is the extent of such coverage, plays a huge role in case disposition. Think of the simplest auto accident case and how the policy limits drive the settlement numbers.
We have not represented an insurer for a good long while. As a summer associate, we had a case where the issue was whether an auto insurance policy covered the death of a man who, after experiencing car trouble, entered a phone booth (remember those?) to call for road service and was then shot by a street criminal. We do not remember how that one turned out. You name a bizarre fact pattern, and there is probably an insurance case that comes close to it. Insurers naturally would rather pay less or not at all, but they are in a sticky spot, particularly when the insured seeks litigation defense. If the insurer denies coverage, including denial of a defense, and then turns out to be wrong, that insurer is in a heap of trouble. After all, when someone buys insurance, what they are really buying is peace of mind. Otherwise, just based on the actuarial numbers, it is a dodgy investment. But if the insurer wrongly denies coverage, there is a betrayal of that peace of mind. It is one of the areas of the law (along with mishandling of corpses) where psychic injury damages cropped up relatively early in our jurisprudence and did not seem entirely nonsensical. The rational thing for an insurer to do – and insurers are nothing if not rational – is to tender a defense whilst reserving rights. In the meantime that defense can turn out to be terribly expensive. Consequently, there is something else an insurer can do: file a declaratory judgment action seeking a ruling that the underlying case is outside coverage. One wonders whether that fairly typical maneuver by the insurer might exhaust a penurious insured, at least giving the insurer some leverage in the coverage dispute. But we hate to indulge our cynical side.
An insurer filed such a declaratory judgment action in Ironshore Specialty Ins. Co. v. 23andMe, Inc., 2015 U.S. Dist. LEXIS 64145 (N.D. Cal. May 14, 2015). The defendant in that case provided a Personal Genome Service (“PGS”) directly to consumers who want to know about their personal genetic information. The results consisted of raw genetic data obtained by saliva testing (“DNA Data”), information regarding ancestry (“Ancestry Component”), and information regarding personal health (“Health Component”). On November 22, 2013, the FDA issued a warning letter stating that sales of the PGS without market clearance or approval violated the Food, Drug and Cosmetic Act because the Health Component of the PGS was not so accurate. The defendant stopped offering the Health Component to new consumers, but not quickly enough to avoid a couple of federal class actions, arbitrations, and a Civil Investigative Demand (“CID”) by the state of Washington. The federal actions and arbitration complaints alleged that the defendant had (1) falsely represented in advertising that the PGS would give consumers knowledge about their health conditions and their status as carriers of genetic disorders when, in fact, the results provided were inaccurate and incomplete; (2) misled consumers into believing that the PGS had received government approval; and (3) failed to disclose to consumers that their genetic information would be used to create a database that the defendant would market to physicians and pharmaceutical companies. The claims asserted various theories, including the inevitable violations of California Business & Professions Code § 17200.
Just as inevitably, the defendant tendered the defense of the federal actions and arbitration complaints to its insurer under a “Products/Completed Operations Liability and Professional Liability Policy for Life Sciences.” The insurer accepted the defense of the actions, and of the CID, but with the inevitable reservation of rights. Maybe it was not quite inevitable, but it was at least unsurprising for the insurer to file an action seeking a judicial declaration that it did not have a duty to defend or indemnify the defendant in the underlying actions because the claims were outside the scope of the insurance policy. Then, inevitably, the defendant moved to stay the declaratory relief action pending resolution of the underlying litigation. The court’s resolution of this dispute was not exactly inevitable, but neither was it crazy.
Whether or not to stay an insurer’s declaratory action largely turns on whether the declaratory action poses the risk of inconsistent factual determinations that could prejudice the insured. More concretely, the court examines whether: (1) the insurer might “join forces with the plaintiffs in the underlying actions as a means to defeat coverage”; (2) the insured might be “compelled to fight a two-front war, doing battle with the plaintiffs in the third party litigation while at the same time devoting its money and its human resources to litigating coverage issues within its carriers”; and (3) “the insured may be collaterally estopped from re-litigating any adverse factual findings in the third party action, notwithstanding that any fact found in the insured’s favor could not be used to its advantage.” A stay is required in the first and third type of prejudice involving factual overlap. Otherwise, whether to grant a stay or fashion some other remedy is left to the discretion of the trial court. In Ironshore, the court ended up staying parts of the insurer’s declaratory actions and not staying other parts, depending on which arguments for non-coverage were asserted by the insurer.
First, the insurer argued that all of the claims in the underlying action sought either equitable relief or restitution, which are not recoverable under the terms of the policy, or disgorgement of profits, which is not insurable under California law. But it was by no means apparent from the pleadings that the underlying plaintiffs were limiting the damages sought in the way characterized by the insurer. The insurer tried to bolster its position by submitting the mediation statement submitted by the plaintiffs in the underlying actions. No fair, said the court, because that statement is protected by California’s mediation privilege. Accordingly, the insured succeeded in staying that portion of the declaratory action with respect to the insurer’s contention that the underlying actions did not seek covered or insurable damages.
Second, the insurer denied coverage on the grounds of the policy’s exclusion for any liability or obligation assumed by the insured via a contract or agreement. The insurer argued that all of the underlying claims were barred by the exclusion because each plaintiff and class member entered into a contract with the defendant, and thus their claims sought damages arising out of the defendant’s “assumption of liability or obligations in a contract or agreement.” The court did not indicate whether it bought the insurer’s argument (to us it seems to make coverage illusory in a situation involving the sale of anything), but it acknowledged that the parties’ dispute regarding applicability of the defense turned largely upon construction of the language used in the policy exclusion. The lawyer for the insurer did a very smart thing at oral argument by representing that the insurer could demonstrate a complete absence of coverage under the policy exclusion in a limited early motion for summary judgment, without the necessity for discovery. Such a potential resolution seemed easy, potentially dispositive, and, therefore, appetizing to the court, so it denied the stay request on that coverage issue. The insurer would get its shot at getting out of the case based on the policy exclusion.
Third, the insurer argued that the underlying claims were barred by the policy’s Off-Label Promotion exclusion, which barred coverage for damages or expenses “based upon[,] arising out of, directly or indirectly resulting from or in any way involving” the defendant’s “promotion of off-label or unapproved uses for drugs or medical devices approved by the Food and Drug Administration for other uses.” We must admit that we did not know that such a thing as off-label exclusions even existed. We wonder whether most plaintiff lawyers know about that. If so, maybe they should start laying off the allegations of off-label promotion because such allegations are mostly irrelevant and might even take insurance money off the table. The Ironshore court reasoned that the insurer’s argument would require a factual determination that the defendant had promoted “off-label or unapproved uses for drugs or medical devices” that were FDA-approved for other uses, and then would have to conclude that the underlying claims are based upon that promotion. If the court ultimately found that there was off-label promotion, that would not only be a win for the insurer, but it would be a big, big loss for the insured, both in the insurance dispute and in the underlying actions. It would be an incredible gift to the plaintiffs in the underlying actions. For that very reason, the Ironshore court granted the insured’s motion to stay the declaratory judgment action as to the off-label promotion exclusion.
Fourth, the insurer sought a declaration that it need not cover intentional acts. The policy provided coverage for “Damages that the Insured becomes legally obligated to pay because of a Claim alleging a Wrongful Act by the Insured.” “Wrongful Act” means any actual or alleged negligent act, error or omission. A “Wrongful Act” would not include intentional misconduct. The insured admitted as much. But the insured argued that no purpose would be served in the court’s fashioning a determination that the policy applied only to negligent acts, errors, and omissions, because such a determination could not possibly eliminate the insurer’s duty to defend. It is not as if the plaintiffs in the underlying actions limited their claims to intentional acts. Some of the claims were a bit unclear. For example, false advertising and unfair competition might look like excluded intentional acts. But maybe not. And there were other acts alleged that did not appear to be necessarily intentional. Thus, even if the insurer were successful on that defense it would still have a duty to defend in the underlying actions. The Ironshore court concluded that the burden to the insurer in fighting a two-front war outweighed the insurer’s interest in obtaining an immediate partial coverage determination that would not eliminate its duty to defend. That part of the declaratory action was stayed.
Finally, the insurer asserted that the CID issued by the Washington Attorney General did not qualify as a covered “claim” under the policy. “Claim” means a “written demand for Damages, services or other non-monetary relief.” The CID was issued at the outset of the state’s investigation and it merely consisted of document requests and interrogatories. There was not yet a written demand for damages, services, or other non-monetary relief. There was no lawsuit yet. Note those “yets.” The insured quite sensibly argued that the Washington Attorney General might not have initiated legal proceedings against it, but it was only a matter of time. The court disagreed. It held that the balance of prejudice favored permitting the insurer to demonstrate the application of the defense in a limited early motion for summary judgment. The stay motion was denied on this issue.
Essentially, it looks as if the Ironshore court was willing to allow the insurer to make its case for noncoverage only if the issues raised were straightforward and could not wreck the insured’s position in the underlying cases. That result seems reasonable enough.