In what it described as a case of first impression, the Northern District of California ruled that a professional liability policy that excluded the insured’s “assumption of liability obligations in a contract or agreement” did not extend to breach of warranty or false advertising claims arising out of a genetic data testing company’s marketing and sale of a personal genome service. See Ironshore Specialty Ins. Co. v. 23andMe, Inc. (July 22, 2016) N.D. Cal. No. 14-cv-03286-BLF. What is noteworthy about this case is not so much the decision, but the fact that the insurer challenged coverage on this ground. While this issue apparently has never been decided in the context of a professional liability policy, both case law and custom and practice recognize that the same phrase used in a general liability policy applies only to liabilities “assumed,” i.e. created by, a contractual indemnity agreement.
The insured, 23andMe, was sued in multiple class actions after the FDA issued a warning letter stating that 23andMe was selling DNA test kits and advising customers not only regarding their ancestry, but also genetic health risks identified in the tests, without FDA approval. The claims against 23andMe included violations of the California Business & Profession Code, violations of the California Consumer Legal Remedies Act, breach of warranty and negligent misrepresentation. 23andMe noticed these claims under a policy issued by Ironshore that included coverage for liability “in rendering or failing to render Professional Service.”
Ironshore accepted the defense under a reservation of rights but brought an action for declaratory relief on a number of grounds, including that the claims fell within the policy exclusion for “contractual liability”, and moved for summary judgment.
That exclusion provided that there was no coverage for “your assumption of liability or obligations in a contract or agreement.” Ironshore contended that the contractual liability exclusions precluded coverage for all claims because the claims arose out of 23andMe’s contracts with its consumers. 23andMe contended that the exclusion did not apply to its own contracts, but only to liabilities and obligations that were originally those of another entity and subsequently assumed by 23andMe.
The District Court stated in its July 22, 2016 Order:
Despite thorough research, neither the Court nor the parties have discovered any California Supreme Court cases, or even appellate court cases, addressing the precise language at issue here. Accordingly, this Court must endeavor to predict how the California Supreme Court would interpret the Contractual Liability Exclusion.
Applying the California rule that exclusions must be construed narrowly, looking at dictionary definitions of “assumption” and reviewing treatises and out-of-state authority, the Court determined that “assumption” of liability referred to an agreement that “assumed” the liability of others (e.g. an indemnity or hold harmless agreement), and not obligations by a contract created between the insured and the injured party. The Court also noted that the broad reading of the exclusion proposed by Ironshore would render the professional liability coverage in the policy virtually meaningless, as nearly all of 23andMe’s professional liability risks arose out of the sales contracts between 23andMe and its customers.
The court’s decision is consistent with how the insurance industry interprets a “contractual liability exclusion” in the context of a general liability policy. General liability policies have included similar exclusions for decades, and the insurance industry has recognized that such exclusions are designed to limit coverage to injury caused by the insured, rather than the liability of a third party which the insured has contractually assumed. See California Practice Guide, Insurance Litigation, Sec. 7:1469 (2015).
Some professional liability or private company directors and officers liability policies exclude liabilities arising out of a “breach” of contract (although the exclusion typically does not apply to liability that would arise in the absence of the contract). But the use of the term “assume” as opposed to “breach” reflects the intent to exclude a narrower field of contract exposures, i.e. those in which the insured “assumes” liability for the tortious conduct of another. As the Court noted here, nothing suggests a different outcome when the phrase is used in a professional liability, as opposed to general liability, policy.
It is useful to have case authority which construes the contractual liability exclusion in the context of a professional liability policy, but regrettable that the court’s and insured’s resources were spent to confirm what should have been obvious to the insurer.