A version of this article was originally published in Law360.
Fortuity is the hallmark of liability insurance, incorporated into insurance policies through the definition of “occurrence.” California law adds an additional layer of complexity to the typical occurrence requirement in Section 533 of the California Insurance Code, which prohibits coverage for an insured’s wilful acts. Recently, California courts had the opportunity to revisit these concepts in AIU Ins. Co. v. McKesson Corp. (discussing occurrence)1 and Certain Underwriters at Lloyd’s of London v. ConAgra Grocery Products Co. (discussing Section 533). As these two decisions illustrate, these deceptively simple concepts can be exceedingly difficult to apply to underlying lawsuits alleging novel legal theories.
Occurrence: AIU Ins. Co. v. McKesson Corp.
California’s approach to the occurrence requirement is unique. While most courts find a covered occurrence if an insured did not expect or intend the resulting injury caused by a deliberate act, four years ago in Ledesma, California cemented its outlier status with its narrow interpretation of occurrence, which does not factor in the insured’s expectation of harm arising from its conduct.2 In Ledesma, the California Supreme Court ruled that no occurrence can exist when the insured performs a deliberate act “unless some additional, unexpected, independent, and unforeseen happening occurs that produces the damage.” There, the court held that an employer’s conduct in “hiring, supervising, and retaining” an employee was a deliberate act, but the sexual abuse of the victim was an unexpected happening from the insured employer’s perspective, which triggered coverage.
On April 5, 2022, the Northern District of California in AIU Ins. Co. v. McKesson Corp. applied Ledesma’s occurrence analysis to a lawsuits brought by governmental entities against McKesson, an opioid distributor.3 The lawsuits allege that McKesson failed to maintain effective controls to prevent diversion of opioids into illegitimate channels, including by allegedly failing to investigate, report, and halt opioid orders by pharmacies when it “knew or should have known” that opioids were being diverted for illegitimate uses. The lawsuits also assert that McKesson intentionally and unreasonably distributed opioids while knowing that they would be diverted. In addition to fraud-based causes of action, the lawsuits include negligence and public nuisance claims against McKesson.
Despite the inclusion of negligence-based allegations, the court concluded that the lawsuits did not involve an “occurrence” to trigger a duty to defend. Citing Ledesma, the court reasoned that California’s occurrence inquiry asks whether an additional, unexpected happening other than the insured’s deliberate act produced the injuries. Based on that analysis, the court held that the negligence and non-negligence claims rested on an intentional act—shipping and distributing opioids—and did not involve an additional, independent, or unforeseen happening because the complaints also alleged that diversion from McKesson’s distribution was expected and foreseeable due to the excessive quantities of opioids that McKesson shipped.4 Distinguishing the facts from Ledesma, which involved a singular victim of abuse, the court likened McKesson’s continued distribution of opioids to an employer’s continuous renewal of an employee’s contract despite credible rumors of repeated assaults.
To support its holding, the court also relied on Travelers v. Actavis, a 2017 California court of appeals case finding no occurrence arising from allegations that opioid manufacturers intentionally marketed opioids as safe through a highly deceptive marketing campaign.5 In finding no unexpected or unforeseen happening arising from the manufacturers’ conduct, the court rejected the manufacturers’ argument that they did not expect doctors to misprescribe opioids, reasoning that the defendants’ marketing efforts “tainted virtually every source doctors could rely on for information and prevented them from making informed treatment decisions.” Ultimately, the court pointed out that the complaints alleged liability based only on intentional conduct, but even if the complaints did create a potential for liability based on unintentional conduct, the policies’ products exclusions applied.
The McKesson decision casts doubt on when an unexpected happening occurs to create a covered accident, despite an insured’s intentional act. From the standpoint of McKesson, the complaints plausibly allege negligent conduct, including whether McKesson knew or should have known that opioids were being diverted. Whether McKesson expected diversion to occur is a fact issue to be decided in the underlying cases.6 Put differently, it is not utterly implausible that the complaint could be construed, and a jury or court could ultimately find, that the distributor was negligent in failing to identify “red flags” suggesting diversion. This differentiates the case from Actavis, which involved solely intentional conduct arising from deceptive marketing.
Cases prior to McKesson, which find coverage for unexpected happenings arising from an insured’s intentional distribution of products, do not square with the court’s narrow analysis of occurrence.7 For example, in Anthem Electronics, the court found an occurrence when the ensured intentionally shipped defective circuit boards, finding that the boards “unexpectedly failed,” raising the possibility that the failure may have happened without intent.
The McKesson court’s refusal to credit the negligence-based allegations in the complaint appears to raise the same concern the Ledesma concurrence advanced regarding a prior decision finding no occurrence in Merced. The concurrence reasoned that the Merced case appeared to hinge on the court’s “implicit rejection” of the insured’s version of facts, rather than whether an unintentional happening occurred.8 There, according to the concurrence, an insured’s alleged sexual assault could have been a covered occurrence if the insured had an honest belief that the victim had consented, but the Merced court appeared to reject that notion. The same is true here, where the McKesson case raises a fact question—was diversion an unexpected or unforeseen happening from McKesson’s perspective?—which the court answered in the negative, perhaps like Merced, based on the court’s implicit rejection of allegations suggesting that McKesson should have, but did not conclusively know, that diversion was occurring.
The takeaway from McKesson is that in cases involving an occurrence question, California insurance coverage practitioners will need to pay close scrutiny not only the underlying facts, but also to the plausibility of the allegations, to identify whether an insured’s intentional act also involves an unexpected happening to trigger an occurrence.
Section 533: Certain Underwriters at Lloyd’s of London v. ConAgra Grocery Products Co.
Not long after the McKesson decision was announced, the court in ConAgra addressed a similar fortuity question: whether coverage extends to an insured’s settlement of public nuisance liability arising from the sale of lead paint by a predecessor company, Fuller.9 Rather than addressing the occurrence issue head on, as in McKesson, the court found it unnecessary to decide the issue because the insurers also relied on Section 533 of the California Insurance Code to preclude coverage. Section 533 prohibits indemnity for liability arising from an insured’s wilful10 act, which is defined to include an act “intentionally performed with knowledge that damage is highly probable or substantially certain to result,” but does not extend to gross negligence and recklessness.
In ConAgra, the court’s decision focused on the underlying court’s novel finding that ConAgra was liable for public nuisance based on a predecessor corporation’s promotion of residential lead paint with knowledge that it was dangerous.11 Relying on a federal case, the court summarily rejected ConAgra’s argument that Section 533 should not be applied to it, as the successor of the company that engaged in allegedly wilful conduct, even though doing so would not serve the deterrent purpose of the statute and ConAgra had no knowledge of Fuller’s potential wrongdoing at the time of its acquisition.
The court also considered whether Fuller (as the predecessor to ConAgra) engaged in wilful conduct that caused all of the loss for which ConAgra was found liable. On that point, ConAgra pointed out that the insurers had failed to present evidence that Fuller’s management was “substantially certain” that the promotion of lead paint would create a public nuisance. The court found this prong satisfied, relying on the findings in the underlying litigation that Fuller had actual knowledge of the harms associated with lead paint when it promoted the paint for interior residential use. Thus, according to the court, Fuller necessarily acted with knowledge that lead paint was “substantially certain” or “highly likely” to result in harm, which established a wilful act under Section 533.12
Reading the statute broadly, the court also rejected ConAgra’s causation argument that the insurers had to provide evidence of harm to specified homes that required lead paint abatement to deny coverage. Focusing on the basis for liability—public nuisance—the court held that Section 533 did not require proof of harm to particular homes because ConAgra was found liable for a public nuisance, not for harm to individual homes. In ruling on this issue of first impression, the court expanded the applicability of Section 533 beyond its boundaries, which previously limited the statute’s applicability to cases with a direct nexus between an insured’s conduct and specified harm. In the absence of a public nuisance claim, however, the court appeared to agree that direct proof of a causal connection would have been required.
ConAgra’s application of Section 533 also sets the state apart from other jurisdictions that have addressed fortuity issues.13 For example, a New York appellate court in NL Industries recently found coverage for another paint manufacturer in the same underlying California lead paint lawsuit against ConAgra. Even accepting the insured’s actual knowledge of the hazards caused by lead paint, that court found coverage because there was no finding that the insured expected or intended to harm any people or property, as required under New York law.
ConAgra is an important reminder that novel public nuisance lawsuits also spawn novel insurance coverage arguments. And the causation analysis in ConAgra goes hand-in-hand with similar arguments in opioid coverage cases, which also question whether proof of individualized harm is required to trigger coverage. Given the burgeoning pervasiveness of public nuisance lawsuits, which have exploded in recent years to target sellers of other lawful products, including guns and vaping devices, the coverage dispute in ConAgra may provide an opportunity for the California Supreme Court to weigh in on significant coverage issues of first impression, which impact insurers and policyholders across the state.
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1 AIU Ins. Co. v. McKesson Corp., 20-CV-07469-JSC, 2022 WL 1016575, at *1 (N.D. Cal. Apr. 5, 2022).
2 Liberty Surplus Ins. Corp. v. Ledesma & Meyer Constr. Co., 418 P.3d 400 (Cal. 2018).
3 McKesson, 2022 WL 1016575, at *10–12, 15.
4 McKesson, 2022 WL 1016575, at *15.
5 The Travelers Prop. Cas. Co. of Am. v. Actavis, Inc., 225 Cal. Rptr. 3d 5, 16 (Cal. App. 4th Dist. 2017). The California Supreme Court dismissed its review of Actavis after issuing Ledesma. Actavis, 427 P.3d 744 (Cal. 2018) (“Review in the above-captioned matter, which was granted and held for Liberty Surplus Insurance Corp. v. Ledesma ... is dismissed”).
6 The Federal Rules require courts to accept plausible factual allegations as true. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007); see also In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1057 (9th Cir. 2008) (citing the same standard).
7 Anthem Electronics, Inc. v. Pacific Employers Insurance Co., 302 F.3d 1049 (9th Cir. 2002) (finding coverage where insured intentionally sold/supplied defective parts because the failure may have happened without intent).
8 Ledesma, 418 P.3d at 412 (Liu, J. concurring) (“[I]nsofar as Merced is understood to hold that a mistake in apprehending another's consent (or lack thereof) can categorically never give rise to an accident, that is inconsistent with our law on the meaning of “accident.”) (citing Merced Mutual Ins. Co. v. Mendez, 213 Cal. App. 3d 41 (1989).
9 ConAgra, 2022 WL 1164981, at *12.
10 The Statute uses the atypical spelling “wilful,” rather than the more colloquial “willful.”
11 Other courts have refused to impose liability on lead paint manufacturers under a theory of public nuisance. See, e.g., In re Lead Paint Litig., 924 A.2d 484 (N.J. 2007); State v. Lead Industries, Ass’n, Inc., 951 A.2d 428 (R.I. 2008).
12 ConAgra, 2022 WL 1164981, at *12.
13 See, e.g., Certain Underwriters at Lloyd’s, London v. NL Industries, Inc., 203 A.D.3d 595 (N.Y. App. Div. 1st Dept. 2022).
