Chubb’s Opioid Insurance Loss Opens New Front for Similar Claims

An opioid wholesaler’s insurance win against Chubb Ltd. presents a new avenue for pharmaceutical companies defending themselves in litigation stemming from the opioid crisis to recoup their legal bills.

A federal district court said this month that a Chubb unit must pay for North Carolina Mutual Wholesale Drug Co.’s defense costs in 115 lawsuits from local governments alleging it oversold opioid painkillers to pharmacies. The distributor held private company director and officer insurance with Chubb, which covers a broader category of losses compared with the narrower liability policies.

The decision is one of the first policyholder D&O insurance wins covering defense costs for opioid suits, in an area dominated by general liability policies, industry attorneys say. The federal court’s broad reading of D&O insurance, and its rejection of two common policy exclusions, will give a boost to drug companies hit with such suits.

“This decision will certainly open the eyes of policyholders and get them to think about their D&O coverage,” said Mike Levine, a partner at Hunton Andrews Kurth LLP who represents policyholders.

Drugmakers, distributors, and pharmacies including Johnson & Johnson, CVS Health Corp., Walgreens Boots Alliance Inc., and Walmart Inc. have agreed to pay billions of dollars in settlements to governments and hospitals over allegedly mishandling opioid painkillers. Insurers are fighting hard to avoid being on the hook.

A private company’s D&O policy, like the one Mutual Drug held, has much broader terms than that of a public company, which typically covers only securities claims, said Jodi Green, counsel at Feldman Legal Advisors who has represented insurers. Many businesses involved in the opioid crisis are private companies like Mutual Drug and stand to benefit from the district court’s ruling.

“It’s possible that some insureds overlooked D&O as an option,” Green said.

Chubb is likely to appeal the ruling to avoid setting such a broad precedent, attorneys said.

Policy Exclusions

Mutual Drug, which distributes prescription drugs to about 450 member pharmacies, held a $10 million D&O policy with Federal Insurance Co. starting in 2013. The drug wholesaler filed claims for the insurer to foot the legal bills after local governments sued, alleging negligence and public nuisance for mishandling prescription opioids.

Federal Insurance argued the policy’s exclusion for breaches of contract relieves the insurer from paying Mutual Drug’s legal defense costs because the underlying claims stem from the wholesaler’s agreements with pharmacies.

But the opioid lawsuits never alleged breach of contract, so the exclusion doesn’t apply, District Judge Catherine C. Eagles of the US District Court for the Middle District of North Carolina said in an order this month siding with Mutual Drug.

The insurer also asked the court to enforce a professional services exclusion, noting the underlying litigation included allegations about the wholesaler’s compliance review services for customers.

Eagles pointed out, however, that the policy defines professional services as “services which are performed for others for a fee,” and that Mutual Drug never charged for the compliance reviews. The wholesaler only collected payments for the drugs it sold, the judge said.

The court defined “selling products for a price” as distinct from professional “services for a fee” that are excluded by D&O policies, said Ray Tittmann, a managing partner at TittmannWeix who advises insurers. “This will be raised in future cases as the distinction is not limited by industry. Insureds producing or distributing goods will cite this precedent to fend off a professional services exclusion,” he said.

The potential implications for pharmaceutical and other businesses are far-reaching. The professional services exclusion is “ubiquitous” in D&O policies, said Jonathan Schwartz, a partner who represents insurers at Freeman Mathis & Gary LLP.

Drug companies can now argue they never performed a service and were only selling commodities, insurance attorneys say.

Insurance Law Clashes

Insurance law over opioid legal defense costs is still evolving.

The dispute so far has centered largely on general liability insurance policies, which cover physical harms and injuries resulting from an accident. Some federal courts, including the Sixth Circuit, have ruled that liability insurers have no duty to cover opioid-related claims because the underlying lawsuits alleged economic harms resulting from a public nuisance instead of a bodily injury.

Other courts, including the Seventh Circuit, have taken the opposite view, holding that financial losses in the opioid epidemic alleged by state governments and municipalities were “because of” bodily injuries to individuals using drugs. The only state high courts that have ruled on the matter, Delaware and Ohio, have sided with general liability insurers.

The Chubb ruling will spur policyholders to think more broadly about all of their insurance options, especially D&O policies, attorneys say.

But the question of who pays for opioid litigation costs is far from settled.

An appeals court could, for instance, take a different approach on the professional services exclusion in D&O policies, said Paul Curley, a partner at Kaufman Borgeest & Ryan LLP who represents insurers.

In reasoning the exclusion doesn’t apply, the North Carolina federal court said Chubb failed to show that Mutual Drug provided professional services to the underlying plaintiffs, the local governments that brought the opioid suits.

“But the exclusion doesn’t require that. It just requires services performed for others for a fee,” Curley said.

The recipients of professional services in Mutual Drug’s case were pharmacy customers not involved in the litigation, Curley pointed out. The policy doesn’t mandate that the services be provided to plaintiffs in underlying litigation for the exclusion to apply, he said.

The district court decision “is very likely to be appealed,” said Bradley Nash, a partner at Hoguet Newman Regal & Kenney LLP who represents policyholders. “Chubb is not going to want this precedent to stand.”

The case is North Carolina Mutual Wholesale Drug Co. v. Federal Insurance Co., M.D.N.C., Docket No. 1:22-cv-00553.