Opioid Case May Guide Climate Change Insurance Suits

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Law360 Insurance Authority
May 11, 2022

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The rising tide of climate change lawsuits is sure to bring with it a wave of declaratory judgment actions on the issue of whether liability insurers have an obligation to defend fossil fuel producers and other climate change defendants.

Courts considering declaratory judgment cases are likely to be tasked with deciding, among other things, whether the allegations in the underlying complaint constitute an occurrence within the meaning of a liability insurance policy.

Liability insurers seeking guidance on this issue should consider AIU Insurance Co. v. McKesson, a recent opioid decision from U.S. District Judge Jacqueline Scott Corley of the U.S. District Court for the Northern District of California.[1]

Based on allegations analogous to those in many climate change lawsuits, Judge Corley, applying California law, concluded that the allegations did not establish an "occurrence," thus eliminating the possibility of coverage under the policy and any obligation on the part of the liability insurer to defend or indemnify the insured.

AIU Insurance v. McKesson Corp.

McKesson Corporation manufactures and distributes opioids and other pharmaceutical products.

In 2017, two counties in Ohio sued McKesson, asserting several claims including a negligence claim. The counties alleged that McKesson contributed to the opioid crisis by intentionally marketing opioids in a deceptive manner, pushing as much of its product into the market as possible, shipping quantities of product far beyond the amounts necessary for legitimate use, and filling suspicious orders without investigation.

In 2020, the state of Oklahoma filed a similar suit, asserting negligence, nuisance and unjust enrichment claims based on McKesson's alleged failure to control its supply chain, prevent diversion and report suspicious orders. The Oklahoma suit also alleged that McKesson shipped opioids in quantities it knew, or should have known, could not be justified by legitimate use, and that the surplus was being diverted for illegal use.

McKesson tendered defense of the suits to two of its insurers. Both insurers' policies required a covered occurrence for coverage to apply. The policies defined an occurrence as "an accident, including continuous or repeated exposure to substantially the same general harmful conditions." Both insurers declined to provide a defense, and a declaratory judgment suit in the Northern District of California followed.

The underlying complaints alleged that McKesson knew or should have known that its actions would cause harm. McKesson argued the allegation that it should have known indicated McKesson did not actually know that its actions would cause the alleged injuries.

Therefore, McKesson argued, the allegations established the potential existence of an accident, which in turn would constitute an occurrence under the policies, triggering at least the duty to defend, if not also the duty to indemnify.

The insurers argued that whether McKesson intended for the injuries to happen was beside the point because the injuries resulted from intentional acts by McKesson — the excessive distribution of opioid — and were the foreseeable outcome of those intentional acts.

The insurers asserted that, therefore, the injuries were not "accidental" as contemplated by the policies and could not possibly constitute an occurrence triggering coverage. With no possibility of coverage, there is no duty to defend.

The court agreed with the insurers, holding that they "ha[d] established that the two insurance policies at issue have no potential to cover the ... underlying lawsuits." Judge Corley noted that, per California case law, "an accident ... is never present when the insured performs a deliberate act unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage."

The court went on to say that, "where the insured intended all of the acts that resulted in the victim's injury, the event may not be deemed an 'accident' merely because the insured did not intend to cause injury."

Judge Corley observed that the negligence claims in the underlying suits were based on alleged deliberate conduct: distribution and sale of opioids in a way that fostered an illegal, secondary opioid market.

Regarding foreseeability, Judge Corley noted that under California law, "whether [the insured] intended to cause injury or mistakenly believed its deliberate conduct would not or could not produce injury is irrelevant to whether an insurable accident occurred."

Instead, California courts consider whether the complaint alleges that the injury was caused by the insured's deliberate conduct, or by an additional, unexpected, independent, unforeseen cause.

The complaints in the underlying cases alleged that the injuries resulting from diversion of McKesson's opioids were expected and foreseeable based on the excessive volume McKesson was distributing. Judge Corley therefore concluded that the occurrence requirement was not met because the underlying suits did not allege an accident within the meaning of California law. Accordingly, there was no potential for coverage, and no duty to defend.

The holding in AIU v. McKesson could have an impact upon climate change lawsuits.

The types of allegations plaintiffs typically make in climate change lawsuits are analogous to allegations in opioid lawsuits to the extent plaintiffs in both categories of cases generally allege that the defendants' deliberate conduct resulted in a foreseeable injury: In the climate change context, plaintiffs allege that the release of fossil fuels caused climate change, and in the opioid context, plaintiffs allege that overproduction caused addiction, overdose, and related harm.

Under the broad interpretation of expected or intended injury applied in AIU v. McKesson, damage to property resulting from the intentional production, distribution and burning of fossil fuels could be deemed nonaccidental — and therefore not an occurrence triggering liability coverage — even if the plaintiff alleges that the producer knew or should have known that its intentional acts would cause the damage.

As a result, courts following McKesson may find that the liability insurer has no duty to defend or indemnify the insured where such allegations have been made.

AES v. Steadfast — A Similar Outcome in a Climate Change Case

In 2012, the Virginia Supreme Court applied an analysis similar to the one employed in AIU v. McKesson in a climate change declaratory judgment action and reached a similar outcome.

AES Corporation v. Steadfast Insurance Co.[2] arose out of a climate change suit brought by the Native Village of Kivalina, which is located on a barrier island in Alaska. Kivalina sued Virginia-based AES and other energy companies in the Northern District of California, alleging that the defendants' intentional acts damaged the village by causing global warming.

AES tendered its defense to its liability insurer under a policy governed by Virginia law. The insurer provided a defense under a reservation of rights and commenced a declaratory judgment action in Arlington County, Virginia. The district court held that the insurer had no duty to defend, and AES appealed.

On appeal, the insurer argued that it had no duty to defend or indemnify its insured because Kivalina's complaint did not allege property damage caused by an occurrence as required to trigger coverage under the policy at issue.

The Supreme Court of Virginia affirmed the district court's ruling. The court noted Kivalina had alleged that the insured intentionally released tons of carbon dioxide and greenhouse gasses into the atmosphere as part of its electricity-generating operations, and that under Virginia law, "an intentional act is neither an 'occurrence' nor an 'accident' and therefore is not covered by the standard [liability] policy."

The court acknowledged that the outcome may be different when the alleged injury results from an unforeseen cause beyond the ordinary expectations of a reasonable person.

But whether an intervening cause is unforeseen, or unforeseeable, does not depend on whether the action taken by the insured was intentional. Rather, it depends on whether the complaint alleges that the resulting harm was reasonably anticipated or was the natural and probable cause of the intentional act.

Applying a broad concept of expected or intended injury, similar to the broad concept the court applied in AIU v. McKesson, the AES court turned to the complaint, in which Kivalina alleged that AES knew or should have known the damage its activities would cause.

The court held that allegations of negligence are not synonymous with allegations of accident, and that in this case there was no allegation of accident because AES' acts were alleged to be intentional, and the village's injury was alleged to be the natural and probable consequence of AES' intentional greenhouse gas emissions. Crucially, Kivalina alleged that AES' acts were intentional and not negligent. The court concluded:

Where the harmful consequences of an act are alleged to have been not just possible, but the natural or probable consequences of an intentional act, choosing to perform the act deliberately, even if in ignorance of that fact, does not make the resulting injury an "accident" even when the complaint alleges that such action was negligent.

Accordingly, the AES court held that the allegations in Kivalina's complaint, if accepted as true, would not establish the existence of an occurrence under the insurer's policy, meaning there was no possibility of coverage and no duty to defend.

What AIU v. McKesson Means for Climate Change Lawsuits

In climate change lawsuits, as in opioid lawsuits, whether a liability insurer has a duty to defend depends on the wording of the underlying complaint and which jurisdiction's law applies.

Both AIU v. McKesson and AES v. Steadfast demonstrate that allegations that an insured knew or should have known its conduct would result in injuries may not constitute an accident or occurrence under California law or Virginia law, because those states apply a broad concept of expected or intended injury.

It should be noted, however, that similar facts and similar policy language may lead to a different outcome in jurisdictions that take a narrower view of what constitutes expected or intended injury.

AIU v. McKesson's impact on climate change litigation will depend on whether other judges find its reasoning persuasive. As a federal district court decision, the case is not binding on any other court. But AES v. Steadfast and AIU v. McKesson may mark the start of a trend among courts that operate under a broad concept of expected or intended injury, which results in a narrower definition of "accident" and "occurrence" in a liability policy.

For liability insurers assessing whether they have a duty to defend — and those considering whether to seek a declaratory judgment — the takeaway is to be aware of the nuances of the law in the governing jurisdiction and the allegations in the underlying complaint. Those two factors may make all the difference.

[1] AIU Ins. Co. v. McKesson Corp., No. 20-CV-07469-JSC, 2022 WL 1016575 (N.D. Cal. Apr. 5, 2022)

[2] AES Corp. v. Steadfast Ins. Co., 725 S.E. 2d 532 (Va. 2012).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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