1. Ninth Circuit Poised To Deny Defense to Opioid Distributor

AIU Insurance Co. v. McKesson Corp., Case No. 22-16158, U.S. Court of Appeals Ninth Circuit

Takeaway: Federal Courts in California provide a favorable venue to insurers, especially against

corporate policyholders accused of egregious wrongdoing. Here, the Ninth Circuit appears

likely to affirm the District Court’s summary judgment ruling that McKesson’s alleged failure to

control its over-distribution of opioids was intentional and not an “occurrence,” defeating even

the duty to defend. The panel seemed overwhelmed by the severity of McKesson’s role in the

opioid epidemic, which may limit the precedential value involving less remarkable conduct.

Insurers sued McKesson in California federal court, arguing they had no duty to defend the drug

wholesaler because the conduct alleged against McKesson was not accidental, and therefore not

an “occurrence.” Insurers prevailed on summary judgment: the District Court ruled that the

distribution was intentional without an unexpected subsequent happening, since McKesson was

sued for permitting widespread distribution beyond legitimate uses. McKesson appealed.

Oral argument on McKesson’s appeal was heard on January 10, 2024. The Ninth Circuit panel’s

questioning suggested the Court is poised to affirm, in favor of insurers, noting the overdistribution of opioids alleged against Mckesson was intentional. McKesson argued a duty to

defend requires only a bare potential of negligent liability, such that any allegation in the

underlying complaint would suffice even if the core alleged intentional conduct. McKesson

argued, for example, that the alleged failure to notice the over distribution could be negligent.

The Ninth Circuit panel was skeptical of McKesson’s argument, emphasizing the gravamen of the

underlying compliant rather than searching for isolated allegations. Given precedent that a “bare

potential” of coverage is generally sufficient to trigger a duty to defend, the panel’s focus on the

core of plaintiff’s theory over alternatives was remarkable. A ruling is expected in three months.

2. Lack of Underwriting Record Results in $25 Million Higher Limits

The Pep Boys Manny Moe & Jack v. Old Republic., No. A166574, California Court of Appeal

Takeaway: Courts will not shy from dramatically increasing available coverage – in this case

doubling the coverage from $25 to $50 million – on account of ambiguous policy terms. The

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Serving up your favorite coverage litigation updates from the California bar, best enjoyed with coffee or tea.

Court looked to the underwriting record to resolve the ambiguity but found no evidence to

justify a cap on limits. Underwriters should clarify intent around limits in the underwriting

process to show an insured’s reasonable expectations. In a third policy at issue, clear language

defining the annual aggregate was enforced to avoid the doubling of limits.

Pep Boys, a national manufacturer of auto parts, argued that three of its excess insurers for a

1981-1982 tower owed double aggregate liability limits for underlying asbestos claims. Two of

Pep Boys’ insurers, Old Republic and Fireman’s Fund,set aggregate liability limits for each “annual

period” even though the policies’ terms were for 17 and 15 months, respectively. The appellate

court found that this restriction could not be applied literally because an “annual period” means

precisely 12 months. The Court significantly relied the circumstances of the underwriting.

Pep Boys wanted their policies to expire with the close of their fiscal year, so they bought policies

with extended terms. The coverage remained the same and the extra months of coverage were

paid at a rate prorated from the 12-month premium. The Court took this to mean that Pep Boys

reasonably expected the aggregate limits to reset after the first 12 months of the effective period.

The Court emphasized that the policies lacked guidance on how to apply the “annual period” and

thus left the door open to Pep Boys’ interpretation.

In contrast, the third insurer’s policy (American Excess) provided that the aggregate limit applied

“with respect to loss excess of the Underlying Insurance which occurs during the term of this

Certificate.” This language unambiguously set the aggregate limit for the entire term, regardless

of the policy period’s length. Thus, the Court upheld American Excess’ position that it owed a

single aggregate limit for the policy period.

3. Ninth Circuit To Decide if Poaching Is an Uncovered Willful Act

United Talent Agency, LLC v. Markel American Insurance Company, No. 23-3359,

U.S. Court of Appeals for the Ninth Circuit

Takeaway: The “willful act” exclusion under California Insurance Code section 533 continues to

generate significant coverage litigation, and develop in favor of insurers. Here, the Ninth Circuit

is asked to deny defense even for acts that are not inherently harmful, as the poaching claims

against the talent agency require a showing of knowledge. This ruling would give carriers

increased rights to deny even the defense of claims that require a showing of knowledge.

A talent agency filed its appellate brief on January 10, 2024, seeking defense for claims that it

poached a competitor’s agents and clients. This coverage dispute is heading back to the Ninth

Circuit a second time to address whether such claims necessarily require proof of an uncovered

willful act within the meaning of section 533. In March 2023, a panel of the Ninth Circuit disagreed

with the district court’s conclusion that section 533 did not apply, ordering the court to examine

upon remand the allegations in the underlying complaint to determine whether they necessarily

involve a willful act. In October, Judge Marc Scarsi did exactly that, ruling there was no coverage

for the talent agency’s poaching claims because, even if those claims did not involve inherently

harmful acts, they nevertheless required proof of acts performed with knowledge that damage

was highly probable. Judge Scarsi also ruled that, although section 533 only applies to indemnity,

Markel’s promise to advance covered claim expenses was part of its indemnity obligation and

therefore Markel had no obligation to defend such claims. A decision is expected in one year.

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