An American court has ruled that Directors and Officers (D&O) liability insurance can protect against claims arising from the manufacture, distribution and sale of opioids.

In The North Carolina Mutual Whole Company v. Federal Insurance Company, the North Carolina federal court determined a drug wholesaler’s D&O policy provides coverage for more than one hundred underlying lawsuits, rejecting the insurer’s argument that two exclusions, the contract and professional services exclusions, barred coverage.

In the case, Mutual Drug, a wholesale distributer of pharmaceutical drugs, sought coverage under its D&O policy for underlying suits alleging that it violated state and federal laws and regulations, and breached common law duties, by failing to properly monitor, identify and stop suspicious orders of prescription opioids.

 However, Chubb refused to provide coverage, relying on two exclusions in the policy—the “Contract” exclusion and the “Professional Services” exclusion. Chubb argued the “Contract” exclusion should apply because the underlying liability lawsuits arise from contracts Mutual Drug has with its customers.

Addressing Chubb’s argument the court stated: “None of the claims against Mutual Drug are based on any contract, and Chubb has pointed to no language in any of the complaints that relies on or even mentions any contract to which Mutual Drug is a party.”

Chubb argued that Mutual Drug’s compliance reviews for customers were “services” for a fee, but Judge Eagles noted that Chubb “points to nothing to indicate that Mutual Drug charged a specific fee to undertake compliance duties on behalf of any customer.” It was also stated that Chubb failed to point to any claim in the underlying suits involving an allegation that Mutual Drug provided any professional services to the plaintiffs.

 The compliance reviews fell outside the policy’s definition of “professional services” with the court noting that to conclude otherwise “would transform every simple commercial transaction into a professional service if the sale involved commodities subject to a distributor’s compliance with any one of a multitude of regulatory or licensing requirements. It is hard to think of anything the policy would cover if Chubb’s sweeping interpretation were adopted.”

The Court’s  decision underlines the premise that an insurer cannot expansively apply an exclusion to effectively eviscerate coverage as highlighted by Chubb’s view of the professional services exclusion.

W Denis have a dedicated team who can offer bespoke D&O solutions for all industries. To discuss this further with a broker at W Denis, please make arrangements with Daniel Moss at daniel.moss@wdenis.co.uk or on 0044 (0)113 2439812.