The Duty to Defend is Great but it is not Unlimited

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McKesson, a distributor and seller of prescription drugs, held a number of liability insurance policies with Insurers between 1999 and 2017. Two policies are at issue in the cross-motions for partial summary judgment. In AIU Insurance Company, et al. v. Mckesson Corporation, No. 20-cv-07469-JSC, United States District Court, N.D. California (April 5, 2022) McKesson sought defense costs incurred with regard to mass suits over opioid distribution.

The suits allege that McKesson “fail[ed] to: (a) control the supply chain; (b) prevent diversion; (c) report suspicious orders; and (d) halt shipments of opioids in quantities [it] knew or should have known could not be justified and were indicative of serious overuse of opioids.” 

While the duty to defend is broad, it is not unlimited. McKesson contends that the exemplar suits are at least potentially covered by the NU and ACE policies because they seek damages for “bodily injury” caused by an “occurrence” and because McKesson has exhausted the retention limit for a single occurrence.

Because all the claims in the exemplar suits rest on allegations of deliberate conduct, there is no insurable accident under the policies. The complaints allege that opioids from McKesson’s distribution were diverted, that is, routed from legitimate to illegitimate uses. But they specify that the quantities of McKesson’s distribution so vastly exceeded legitimate use that the opioids must have been diverted.

The Insurers established conclusively that the exemplar suits do not meet the “occurrence” requirement for coverage, and there is no potential for coverage of the three exemplar suits under the two policies at issue.

ZALMA OPINION

Liability insurance, by definition, can only respond to a fortuitous event, an accident. Liability insurance should never respond with defense or indemnity if the conduct that is the subject of the suits filed against the insured were the result of the insured’s intentional conduct. McKesson must pay its own defense and indemnity.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, is available at http://www.zalma.com and [email protected].

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