The Supreme Court of Delaware has issued a groundbreaking insurance ruling destined to help define the fundamental bargain at the heart of commercial insurance coverage, and demonstrate why such coverage does not extend to public nuisance claims.

In ACE v. Rite Aid, Case No. 339, 2020 (Del.)(Jan. 10, 2022), the court examined whether governmental lawsuits against an opioid retailer to obtain reimbursement for the government’s economic expenditures might fall within insurance coverage for claims “because of” bodily injury. In taking a deeper dive into this issue than any preceding court, the ruling explained that, because there were no injured claimants and no specific bodily injuries that were actually part of the governmental claims for which insurance payment was demanded, the claims simply could not qualify in the insurance construct as either claims “for” or “because of” bodily injury. The steps which led to this ruling, as well as the explanation of how the ruling illuminates the benefit of the insurance bargain between insured and insurer, are discussed below.

The “Non-Derivative” Nature of the Opioid MDL

For five years, a federal multidistrict litigation in Cleveland, MDL 2804 or “the National Prescription Opiate Litigation,” has been home to over 3,000 lawsuits filed mostly by cities, counties and state governments seeking to recoup the administrative costs incurred for the country’s opioid epidemic. These government entities have sued opioid manufacturers, distributors and retailers, arguing that because those entities did not properly monitor their distribution of opioids, the drugs were diverted for improper use, thereby resulting in billions of dollars of increased governmental costs for policing, emergency medical services, social services, and more.  

An early realization of the government plaintiffs was that no court was likely to allow a government suit to usurp the rights of individual citizens who may have their own claims for their individual overdoses or addiction. Therefore, the governmental pleadings and the MDL court rulings have made very clear that the MDL litigation does not involve any claims whatsoever to compensate the individual bodily injuries that may have been suffered by individual citizens. In fact, two bellwether suits filed by Cuyahoga County, Ohio and Summit County, Ohio specifically pled that their damages “are of a different kind and degree than Ohio citizens at large” and “can only be suffered by [the Counties]” and “are not based upon or derivative of the rights of others.”

As had been noted by the court in the MDL, the Counties “do not seek recovery based on injuries to individual residents” but instead “seek recovery for direct injuries suffered by the Plaintiffs themselves,” and even if a recovery might “also tend to collaterally benefit their residents” that benefit “does not mean that Plaintiffs seek to litigate on behalf of those residents.” 

The Delaware Supreme Court noted that the governmental claims in the MDL were really not seeking “derivative” damages that were incurred from any particular bodily injuries, but instead were claims for the governmental entities’ own administrative costs, and were therefore deemed “non-derivative” of any specific bodily injury claims.  

Armed with this understanding of the core nature of the public nuisance claims in the MDL, the Delaware Supreme Court set about determining whether the claims brought by Cuyahoga and Summit County against Rite Aid might trigger a duty to defend or indemnify under the commercial general liability insurance issued to Rite Aid by Ace American Insurance Company and its affiliates.

Holding: “Non-derivative” Claims Do Not Trigger Coverage as if They Were Bodily Injury Claims

Rite Aid was insured by a 2015 primary general liability policy which covers “those sums that the insured becomes legally obligated to pay as damages because of personal injury.” The damages insured include damages “claimed by any person or organization for care . . . resulting at any time from the personal injury.” The “personal injury” insured is defined in part to include “bodily injury, sickness or disease sustained by a person.” Ace denied coverage for the governmental suits against Rite Aid, arguing, in part, that the damages at issue were not “because of bodily injury.”

The trial court, the Delaware Superior Court, disagreed with ACE and found coverage. The Superior Court ruled on September 22, 2020 that the economic reimbursement sought by the government entities was related to injuries that had been suffered by individuals, and therefore  was “arguably because of bodily injury.” The lower court found that the medical expenditures incurred by the governmental entities were precisely the type of damages for “care” resulting from “the personal injury” that triggered insurance coverage under the policy. The Delaware Supreme Court accepted certification of an interlocutory appeal.

Examining the full context of the policy language and its intent, the Delaware Supreme Court explained that coverage depends on whether the bodily injury that is said to trigger coverage was suffered by the party making the claim against the policyholder, or at least by someone asserting liability for that injury “derivatively for the harmed party.” The court found that the policy was intended to apply when the damages the insurance company was being asked to pay were being asserted by a party seeking to demonstrate “the existence and cause of the injuries.”

Applying this insight, the Delaware Supreme Court noted that the governmental plaintiffs in the MDL had specifically pled that they were not seeking damages for any injury to any person, and that their public nuisance claims were for public harm, and “are not based upon or derivative of the rights of others.” Therefore, there were no bodily injury claims giving rise to a duty to defend.

The court went on to find that the insurance that covered the expenses of an organization in providing “care” to an injured person only applies when that “care” is actually for “the personal injury” that triggered coverage.  When there are no claims for personal injury liability, and no claims for personal injury compensation, being made against the policyholder, then there of course can be no organizational claims for reimbursement for “the” personal injury that can trigger coverage.

The Delaware Supreme Court conducted the proper analysis and reached the proper conclusion that, for a complaint to trigger an insurer’s duty to defend, “the complaint must do more than relate to a personal injury—it must seek to recover for the personal injury or seek damages derivative of the personal injury.”

However, the court stopped short of exploring and explaining exactly why its ruling is so fundamental to the very nature of commercial liability coverage and the duty to defend. The core principle at the heart of the court’s ruling, as explained below, is that the ruling demonstrates the very “benefit of the insurance bargain,” which would have entirely dissolved had the trial court’s ruling not been reversed.

Why it Matters? The Benefit of the Insurance Bargain

The unwritten truth of commercial liability insurance is that when a bodily injury claim is made against a commercial policyholder, there arises a certain quid pro quo at the heart of the insurance contract. On the one hand, the insurer may accept a duty to defend against the bodily injury claim if it is deemed to fall within the insurance contract. In return for this contractual undertaking, the insurer obtains two very important rights relative to the bodily injury claim that is being defended against.

First, the insurer has the right to challenge liability for the bodily injury. The insurer may engage counsel to take depositions, review medical records, examine causation, pre-existing injuries, and all of the things that arise from the bodily injury that is presented to the defending insurer.

Second, the defending insurer has the contractual right to evaluate the compensation for the bodily injury that triggered its coverage. The insurer maintains the contractual right to attend mediations or settlement conferences, and actively evaluate the proper cost of compensating the bodily injury for which liability was alleged against the policyholder. 

Without expressly explaining it, the Delaware Supreme Court recognized that allowing a “non-derivative injury” to trigger liability insurance would destroy the commercial insurance bargain because the insurer would then be asked to accept millions of dollars in insurance coverage, while obtaining no right whatsoever to defend or challenge the liability of the bodily injury that triggered coverage, or to engage in any economic valuation of the bodily injury that triggered its coverage. 

In the context of the opioid MDL, it would be contrary to the commercial foundation of liability insurance to find that bodily injuries suffered by general citizenry give rise to an insurer’s duty to defend, when there is actually no bodily injury liability being litigated to defend against, nor is there any compensation sought for bodily injuries that the insurer must evaluate and potentially pay.  Instead, the insurer is being asked to fund an entirely different commercial risk that is “non-derivative” of the allegedly triggering bodily injuries. Finding coverage for such “non-derivative” risks would impossibly expand the underwriting of liability coverage, which could not account for every conceivable claim to arise “down the line” from a bodily injury, without the ability to contest, litigate or evaluate the bodily injury claim itself that creates coverage.

The public nuisance claims alleged in the opioid MDL are, by their very definition, not the type of bodily injury claims that trigger commercial liability insurance, and they do not present any bodily injuries to defend against. Instead, the public nuisance claims alleged in the opioid MDL are in every way claims rooted in business torts and market share liability. Such claims do not fit within the insurance contract of bodily injury coverage, as the Delaware Supreme Court has recognized and introduced for the continued exploration of the expected opioid coverage cases to follow.

(This analysis was published in Law360's Insurance Authority on January 11, 2022)