The Opioids Reckoning
Liability insurers seek legal clarity as “unprecedented” opioid litigation draws in drug manufacturers, distributors and retailers.
- Jeff Roberts
- September 2019
- Litigation Wave: Nearly every state and 2,000 cities, towns and counties have filed lawsuits against the manufacturers and distributors of opioids.
- Legal Clarity: Liability carriers eagerly await legal clarity as the first landmark opioid cases come to trial and could determine their exposure and potential losses.
- Epidemic: More than 2 million Americans are addicted to opioids.
The crisis started with a wonder drug.
OxyContin was hailed as a breakthrough, the answer to the prayers of chronic pain sufferers.
The time-release painkiller was introduced in 1996, the same year a revolutionary shift occurred in American medicine. Pain was emerging as a “fifth vital sign,” along with blood pressure, heart rate, breathing and body temperature, and treating it had become the next medical crusade.
OxyContin and other potent opioids soon flooded communities across America. The unprecedented epidemic of addiction that followed may finally be cresting more than two decades later, but only after unleashing a historic wave of overdose deaths and the meteoric rise of the deadly synthetic fentanyl.
“The opioid epidemic is the worst public health crisis in American history,” said Nick Brindley, head of international property and casualty claims for Aspen Insurance.
Now the reckoning has come.
Nearly every state and 2,000 cities, towns, counties and Native American tribes have filed lawsuits against the manufacturers and distributors of opioids such as oxycodone and hydrocodone. They claim those companies fueled the crisis by strategically inundating communities with billions of pills, using deceptive marketing that concealed their highly addictive qualities and failing to control the flow of the powerful narcotics.
Those communities are suing companies throughout the opioid supply chain to recover the costs society has shouldered as a result of addiction. In turn, many of those manufacturers, distributors, pharmacy benefit managers and pharmacies have or will submit claims under their liability insurance.
Carriers eagerly await legal clarity as the first landmark cases come to trial that could determine their exposure and potential losses. Billions of dollars are potentially at stake for liability insurers, whether drugmakers and distributors go to trial or settle. The White House Council of Economic Advisers estimated the cost of the opioid crisis just for 2015 was $504 billion.
“What we're seeing here is somewhat unprecedented, where you have communities seeking economic recoverables for addiction,” said Nancy Bewlay, global chief underwriting officer, long tail lines, Axa XL. “It's very hard to know what that industry loss would be because we're seeing each community is affected differently.
“What's unique here is you don't have, in general, individuals bringing forth claims for their bodily injury. You have communities coming forward as a group for financial recovery for the damages caused by addiction. It's unique territory. It's new ground.”
The state of Oklahoma won a $572 million judgment against health care giant Johnson & Johnson on Aug. 26 in the first ruling holding a drug manufacturer accountable for its role in the opioids epidemic.
District Judge Thad Balkman found Johnson & Johnson intentionally misled the public with “false… and dangerous marketing campaigns” creating “a nuisance” under the law. The ruling could reverberate in lawsuits across the nation.
However, Balkman awarded the state far less than the $17 billion over 30 years it had asked for, instead ordering the drugmaker to pay the equivalent of one year of funding that Oklahoma plans to spend to fight the crisis. Johnson & Johnson said it intends to appeal.
A potentially more influential trial is scheduled for October when two Ohio counties argue the first bellwether case among the consolidated lawsuits brought by those 2,000 cities, counties, Native American tribes and other communities. They are seeking billions to address the epidemic.
Barring a settlement, lawyers for the counties will argue that a range of defendants from manufacturers Purdue Pharma—the maker of OxyContin—and Mallinckrodt, distributors McKesson, Cardinal Health and AmerisourceBergen, and even retailers Walgreens and Walmart created a “public nuisance” by saturating the region with opioids. Like Oklahoma, they seek funds for treatment, emergency aid and prevention.
“Whatever they determine in that case will be used as case law for future cases,” said Greg Spore, managing director for Marsh JLT Specialty. “It's certainly not going to end these ongoing litigation concerns, but it could be instructive and used as a guide for future litigation, depending on liability. Stakeholders are looking at that as a case that could be impactful.
“How much are the distributors liable? How much are the PBMs liable? How much are pharmacies?”
Many carriers have raised coverage defenses against these claims, submitted primarily under commercial general liability policies. They argue that these lawsuits claim damages for economic harm, not for the bodily injury, property damage and product liability they cover.
Such defenses have resulted in coverage litigation in a few states. Thus far, the courts have largely ruled against insurers, but they have won in a few select cases.
Other opioid-related claims have been filed under directors and officers liability, professional errors and omissions policies, health care liability and medical malpractice—with opioid prescriptions having become the leading cause of medication malpractice claims for medical professional liability writers, according to AM Best.
“There's growing litigation concerns and a lot of uncertainty regarding the outcomes here, certainly with respect to timing and size,” Spore said.
Meanwhile, the industry has largely changed the way it writes new liability coverage for businesses in the opioid supply chain, including adding exclusions, reducing coverage limits and raising rates. (See sidebar.)
Although insurers declined to discuss their specific situations, opioid-related litigation cuts across the industry landscape, touching insureds of all sizes and geographies. And those companies are submitting claims across multiple lines.
“Historically, many drug manufacturers have anchored their coverage in the Bermuda market with those active Bermudian insurers,” Brindley said. “However, the opioid epidemic and litigation has reached beyond the stalwart drug companies, and ensnared even larger, retail stores that have a pharmacy department, as well as small, individual-owned pharmacies.
“Therefore, just as the geographical location and economic size of the defendants present the broadest mixture of exposures, so too do the insurers of these entities present a wide, geographical mixture, as well as a broad range from the small, regional insurer to the expected multinational companies.”
The situation becomes even more complex as some companies settle lawsuits and others elect for a trial despite facing the same allegations.
Earlier this year, Purdue and Teva Pharmaceuticals reached settlements with Oklahoma for $270 million and $85 million respectively.
“When you have settlements and you have companies going to trial, it sends an inconsistent message to the market and to the legal system,” Bewlay said. “This is a reflection of how complicated the opioid litigation is, whereby you have major companies taking different positions. There's a lot of gray area. I would even say it's messy.
“Who is responsible for this? That's what society is asking right now. That's why you're going to continue to see these lawsuits.”
What we’re seeing here is somewhat unprecedented, where you have communities seeking economic recoverables for addiction. It’s very hard to know what that industry loss would be because we’re seeing each community is affected differently.
More than 2 million Americans are caught in the web of opioid addiction.
Fatal overdoses involving opioids claimed nearly 400,000 lives between 1999 and 2017, according to the Centers for Disease Control and Prevention—including a record 47,600 just in 2017. Many became hooked after taking painkillers prescribed for chronic conditions or even following car accidents, gym injuries and dental procedures.
When access was tightened, users shifted to the pills' chemical cousins—heroin and fentanyl.
Manufacturers argue that their industry is highly regulated and the FDA approved the manufacture and sale of these painkillers. Distributors contend they supply prescriptions written by doctors and have consistently shared sales data with the Drug Enforcement Agency.
“Everybody in the supply chain is susceptible to these lawsuits that we're seeing,” Bewlay said. “And since these are unprecedented lawsuits, it's hard for us to know which one of the industry groups within the supply chain are actually exposed to some type of third-party recoverable.
“So from our perspective, it's unclear. You can really see somewhat of an aggregation potential should there be liability found.”
The bellwether cases could establish precedent—and encourage others to litigate.
“It's concerning in that we're seeing the intention of our coverage really be challenged from a liability perspective,” Bewlay said. “The coverage we provide the industry is not looking at the unintended utilization of a drug or criminal activity.
“The lawsuits being put forward really seek coverage for unintended utilization of a drug. From an underwriting perspective, it's very difficult to underwrite that exposure. And then in some cases you're also seeing punitive-type damages awards, which are very difficult to predict.”
For liability insurers, the central issue in commercial general liability policies is language obligating coverage for bodily injury or property damage caused by an “occurrence.”
Policies can differ, but they are generally consistent in defining an occurrence as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” Insurers contend manufacturers and distributors intended to sell opioids, so they engaged in intentional, not accidental, conduct.
They also argue that the states and communities are suing for economic loss sustained due to addiction and overdoses, not individual compensation for bodily injury.
“Whether such governmental, social expenses are covered under liability policies will be a key topic of dispute,” Brindley said, “as well as the ability of certain companies to obtain insurance for business processes that many knew were under government scrutiny for years prior to the litigation unfolding.”
Furthermore, industry observers say any intentional misrepresentation of the risk opioids pose does not qualify as an accidental event that CGL and product liability policies are held to cover.
For instance, three Purdue executives pleaded guilty to misconduct in 2007 in federal court, admitting they misled doctors and consumers regarding the addiction risks of OxyContin. “Many of the opioid claims are not rooted in unexpected or accidental causes, but in allegations that the business scheme of the defendants went exactly as planned,” Brindley said, “and that the defendants wrongfully profited from misleading the public.
“To the extent any liability becomes attached to such allegations of intentional business conduct, this is the type of liability that would typically fall outside of the 'occurrence' coverage of many liability policies.”
And some insurers view the abuse of legally dispensed, regulated drugs as misuse of the product—and not covered.
“The key phrase for us is what was the intended use of that product?” Bewlay said. “We only underwrite the intended use of the product.”
However, courts have sided against insurers in most cases. They have rejected carriers' occurrence defense, citing the plaintiffs' allegations that negligent conduct is involved, therefore it is damage caused by an “occurrence.”
And legal precedent has found bodily injury encompasses economic harm incurred by caring for those who overdosed or suffered other adverse effects due to addiction.
The few exceptions in which courts have ruled for insurers involved specific allegations at issue or state statutes.
“It's developing,” Bewlay said. “It will be determined through the courts and through the trial system because it is so unusual. It's not something that as an insurance company, you can easily settle.”
D&O, E&O Claims
Whatever they determine in that case will be used as case law for future cases. It’s certainly not going to end these ongoing litigation concerns, but it could be instructive and used as a guide for future litigation, depending on liability. Stakeholders are looking at that as a case that could be impactful.
Marsh JLT Specialty
Opioid-related claims have also been triggered under directors and officers policies and errors and omissions coverage.
Each generally covers losses stemming from a wrongful act, such as neglect, breach of duty, omission or misstatement or misleading statement that occurs in running a company or performing professional services. However, D&O carriers dispute claims alleging bodily injury.
A range of defendants with differing proportional shares of liability complicates the already complex litigation.
“It could take a long time for things to settle out. It's a very long-tail business,” Marsh JLT Specialty's Spore said. “In most cases, all of the big distributors have already been sued and many have reported claims under the D&O policy.
“Now whether they will ultimately pay out or not is unknown.”
There are two general types of lawsuits involving D&O insurance and public companies, according to Spore.
The traditional securities class-action suit involves shareholders suing a company for negligence after its stock loses value due to alleged poor management. And derivative lawsuits involve shareholders suing on behalf of the company against directors and officers, seeking damages for their alleged wrongdoing.
Derivative suits increasingly concern those in the D&O space as settlements and judgments rise. McKesson is an example of a defendant in an opioids-related derivative suit, according to Spore.
“It is concerning underwriters,” he said, emphasizing that McKesson is not a Marsh client. “The basic allegations are that they maximized short-term profits over safety and failed to implement a controlled substance monitoring program. Discussion among underwriters is that it could be a $100 million-plus derivative settlement, which is definitely scaring the D&O underwriting community.”
The Next Tobacco?
The crisis may finally be abating.
Drug overdoses declined about 5% nationally in 2018 from record highs, according to provisional data released in July by the CDC. A drop in prescription opioid deaths is largely responsible for the first significant decline since the 1990s.
But an unknown remains for insurers as litigation continues to move forward against companies in the opioid supply chain.
Many observers compare the lawsuits to the Big Tobacco litigation of the 1990s. There are parallels.
The largest tobacco companies agreed to pay 46 states $206 billion over 25 years in the landmark 1998 settlement.
But there are major differences as well. There were only four Big Tobacco companies involved in that settlement, unlike the spectrum of opioid defendants. And tobacco was a much bigger industry in terms of annual sales, selling products that provide no health benefits.
“Everybody always thinks about what's the next latent mass-action suit? What's the next asbestos?” Axa XL's Bewlay said. “What can go through a portfolio horizontally because some type of causation was found?”
Much remains unclear for liability insurers. But most agree that any opioids-related resolution is a long way off.
“We're going to have to watch trial by trial,” Bewlay said. “Opioid litigation is going to go on for quite some time.”
Insurers Demand Exclusions Along Opioids Supply Chain
The manufacturer of two branded opioid products saw its insurance coverage slashed in half.
The company—a client of Marsh JLT Specialty—once carried $600 million in directors and officers liability limits—$300 million for indemnifiable claims and $300 million for non-indemnifiable claims.
At the July 1 renewal, the manufacturer's limits were cut to $150 million and $190 million respectively, said Greg Spore, managing director, Marsh JLT Specialty.
Its deductible rose from $10 million to $20 million.
Its premiums essentially doubled despite significantly less coverage. And an absolute opioids exclusion was added.
The manufacturer's policy is just one example of the change in liability coverage wrought by opioids litigation.
“What we're seeing is carriers want to add a specific circumstance exclusion, or a specific litigation exclusion or even an absolute exclusion in addition to policy language,” Spore said.
“Many manufacturers are seeing the addition of an absolute opioid exclusion.”
To protect themselves amid a wave of opioids-related litigation from states and communities, many carriers have modified their underwriting and policy language over the past three years.
They are raising premiums, reducing limits and imposing exclusions on drugmakers, distributors and others in the supply chain.
Insurers are reducing their risks in new policies and renewed coverage, despite professing confidence that they are not responsible for damages stemming from the unintended use of opioids or criminal activity.
Axa XL for one has insisted on exclusions for the unintended use of opioids for the past two-plus years.
“You start to rewrite coverages when you can't predict how the legal system will respond,” said Nancy Bewlay, global chief underwriting officer, long tail lines, Axa XL. “Especially when the legal system starts to respond differently than we would have anticipated or differently than where we see liability.
“What we are trying to do is craft language that is very clear and says we cover the intended use of opioids, not the unintended use. We don't cover addiction. At times our clients accept that, and at times they do not.”
Bewlay says not all insurers have added exclusions.
Clients that decline to renew coverage with Axa XL due to those exclusions have found coverage with other carriers that have yet to refine their policy language, she said.
But observers have witnessed price hardening in certain sectors due in part to opioid-related litigation.
Insurers will remain mindful of their policyholders and will assist in cases of individual injury caused by an insured's verifiable wrongful conduct.
But the industry is not designed to fund the costs of generalized, social harm, said Nick Brindley, head of international property and casualty claims for Aspen Insurance.
“If insurers are forced to fund the cost of societal change, without proof of individual harm or individual culpability of particular defendants, then this could have two devastating results,” Brindley said.
The first would be creating precedent for using insurance policies as a mechanism to fund societal solutions for social problems “far beyond the pricing or purpose of insurance,” he said.
The second is if that does occur, insurance proceeds would be “not available later to help either defend against or compensate the true individual harms and injuries that the policies were intended to address,” Brindley added.
Editor's Note: This feature has been updated to reflect an Oklahoma judge's ruling in late August ordering Johnson & Johnson to pay $572 million for its role in the opioid epidemic.
Jeff Roberts is a senior associate editor. He can be reached at email@example.com.