In Target Corporation v. Golden State Ins. Co. Limited (No. B279995, filed 10/10/19), a California appeals court held that there was no duty to defend or indemnify a retail pharmacy against allegations that it had mislabeled a prescription drug under either a contractual indemnity clause with the drug’s bulk supplier or a vendor’s additional insured endorsement on the supplier’s liability policy.
A customer purchased the drug from a Target store pharmacy and had a severe adverse reaction. The pharmacy had obtained the drug in bulk and packaged it in pill bottles for resale. The customer sued both the pharmacy and the supplier, alleging that the bottle was mislabeled in that it instructed her to finish all of the drug unless otherwise ordered by her physician and did not contain an FDA-approved warning that use of the drug should be discontinued at the first sign of a rash or any adverse reaction. She developed a rare condition that caused her skin to peel all over her body, requiring seven weeks in a hospital burn unit.
The pharmacy tendered its defense and indemnity to the supplier and the supplier’s insurer under a Pharmaceutical Supply Agreement and the vendor’s additional insured endorsement of the supplier’s policy. Although initially agreeing to defend, the supplier and its insurer withdrew when the case was narrowed to pure failure to warn allegations, and the supplier was dismissed. The plaintiff made clear that she was not alleging that the drug was defective, but that it had been mislabeled and there was a failure to warn. The pharmacy then sued the supplier and its insurer for breach of contract and bad faith. But the court in that action granted summary judgment to the defendant supplier and its insurer, and the appeals court affirmed.
The Pharmaceutical Supply Agreement contained an indemnification clause requiring the supplier to “indemnify, hold harmless, and defend [retailer]… against any and all actions [or] claims . . . relating to or arising out of . . . Products purchased by [retailer] from [supplier],. . . provided however, that the foregoing indemnity shall not apply to any claims … arising out of or due to the negligence or willful misconduct or omission of [retailer]. . . .” The Agreement said that “[supplier] shall obtain and maintain … commercial general liability insurance . . . , including products liability/completed operations. . . [and] coverage for contractual indemnification obligations.” The policy will “provide that [retailer] is included as an additional insured.”
The supplier’s additional insured endorsement provided that coverage applied “only with respect to ‘bodily injury’ or ‘property damage’ arising out of ‘your products’ [supplier’s products] … which are distributed or sold in the regular course of the vendor’s business [retailer’s business].” There was an exclusion stating that additional insured coverage did not apply to “[r]epackaging” of products or “[p]roducts which, after distribution or sale by you [supplier] have been labeled or relabeled.”
The Target court quoted the additional insured endorsement’s coverage for bodily injury “arising out of ‘your products’” and said “It is settled that this language does not import any particular standard of causation or theory of liability into an insurance policy. Rather, it broadly links a factual situation with the event creating liability, and connotes only a minimal causal connection or incidental relationship.” (Citing Acceptance Ins. Co. v. Syufy Enterprises (1999) 69 Cal.App.4th 321, 328.) However, the Target court said that “[t]here is no ‘minimal causal connection or incidental relationship’ between the product distributed by supplier and customer’s injury.  Customer claimed that her injury arose not from a defective product, but from retailer’s failure to warn of the risks and possible side effects of the product. Supplier did not distribute or have any role in preparing the information about the product that retailer provided.” Moreover, the Target court noted that the pharmacy admitted it had repackaged and labeled the drug, which came within the vendor’s endorsement exclusion.
The Target court went on to hold that the same result followed under the supply agreement. First, the court rejected a failure to procure insurance argument, on the ground that the supply agreement did not require the supplier to procure coverage insuring the pharmacy against its own liability for mislabeling.
As to the indemnity clause, the Target court said that it was actually broader than the additional insured endorsement, because it obligated the supplier to defend and indemnify claims “relating to or arising out of” its products. The court cited an arbitration agreement decision for the proposition that the contractual phrase “arising out of” is “generally considered to be more limited in scope than would be … a clause … arising out of or relating to.” (Quoting Rice v. Downs (2016) 248 Cal.App.4th 175, 186.) But the Target court agreed that there was nonetheless no obligation under the indemnity clause because the customer lawsuit was based solely on the pharmacy’s own negligence in mislabeling the pill bottle.
Finally, the Target court rejected the pharmacy’s argument that mere allegations that it was negligent were insufficient to deny a defense, and that negligence would have to be established in fact. Here, the Target court took a detour from California law, because the supplier agreement had a Minnesota choice of law provision. And the court noted that there was no controlling Minnesota law on duty to defend under indemnity agreements. So the court instead relied on Minnesota insurance decisions stating that “in determining whether an insurer has a duty to defend, Minnesota courts consider the nature of the claim against the insured and whether that claim is covered by the policy, not whether the claim is meritorious. If the claim is within the policy’s coverage, the duty to defend is triggered. It is not triggered if the claim falls outside the policy’s coverage…. The practical effect of retailer’s theory is that the distributor would have to defend the vendor until a final judgment was entered in the negligence action. This would render meaningless the exception to the Agreement’s duty to defend.”