Four Loko Makers Denied Coverage
The makers of Four Loko alcoholic beverages were sued by families of individuals who died after ingesting the high-alcohol beverages in accidents or by acute alcohol poisoning.
Phusion, the manufacturer of the drinks, was insured by Selective Insurance Co. of South Carolina, whose policy had a liquor liability exclusion.
In 2013, Phusion filed a complaint against Selective in the Circuit Court of Cook County, Ill., saying the insurer had a duty to defend and indemnify it. Selective declined, citing the exclusion, and filed a motion to dismiss the complaint.
In its lawsuit, Phusion argued the underlying lawsuits were not excluded because the allegations “were not [solely] based on liquor liability, but were based on ‘stimulant liability.’ ” Four Loko beverages include caffeine, guarana and taurine, it said, arguing that the stimulants “operated to desensitize the consumers of Four Loko to the symptoms of intoxication and caused them to act recklessly.”
On Dec. 16, 2014, the circuit court granted Selective’s motion to dismiss. It ruled the “plain language of the liquor liability exclusion precluded coverage.”
That decision was upheld on Dec. 18, 2015, on appeal by Phusion to the 5th District Illinois Appellate Court. The appeals court agreed with a previous U.S. 7th Circuit Court of Appeals ruling in another case that held that Phusion’s arguments were an effort to “disguise the role that intoxication allegedly played in the underlying cases.”
Scorecard: Selective does not have to defend or indemnify Phusion.
Takeaway: For the insured to succeed, it would have had to prove that the allegations were “divorced from the serving of alcohol.”
Court: Hailstorm Damage Needs Proof
On June 21, 2011, vincent and peggy stagliano submitted a claim to the Cincinnati Insurance Co. and the Cincinnati Casualty Co. for damage from a May 24, 2011 hailstorm on one of 48 properties in Dallas that were insured.
That claim was paid, but claims later submitted by the pair claiming damage at other properties from the same hailstorm were denied. The Staglianos sued the insurers claiming breach of contract, among other allegations.
The insurance companies argued there was no evidence that the damage was caused by a hailstorm within the policy period. The insurers’ property claims manager stated the damage was from multiple storms, and could have occurred subsequent to policy expiration.
The district court concluded that the Staglianos’ expert witness, who said the damage occurred during the policy period, was not reliable. It dismissed the case.
The U.S. 5th Circuit Court of Appeals agreed on Dec. 11, 2015. Texas law, it said, requires clear proof that claimed losses occur within the policy period.
Scorecard: The insurance companies do not need to pay the claims.
Takeaway: The insured has the burden to offer proof that the claimed losses occurred during the policy period.
‘Hot Yoga’ Founder Gets Defense
In a lawsuit filed on June 13, 2013 in the U.S. District Court for the Central District of California, lawyer Minakshi Jafa-Bodden said she was forced to resign on March 1, 2013 to stop her investigations into a student’s rape allegation against Bikram Choudhury, the founder of “hot yoga.”
She also accused Choudhury of making offensive sexual gestures and leering at female staffers, among other allegations.
Choudhury sought defense and indemnification from Nationwide Insurance Company, which provided a directors and officers policy to USA Yoga, an organization run by Choudhury’s wife; and from Philadelphia Indemnity Insurance Co., which issued a commercial general liability policy to Choudhury and Bikram’s Yoga College of India.
Both insurers declined to provide defense or indemnification.
In a Dec. 9, 2015 ruling, the court decided that Philadelphia had a duty to defend. A day earlier, it ruled Nationwide did not.
The Philadelphia CGL policy covered personal and advertising injury that included “publication, in any manner, of material that slanders or libels a person or … disparages a person’s or organization’s goods, products or services.”
Jafa-Bodden’s allegations that Choudhury accused her of incompetence and engaged in improper and unethical sexual conduct fall within that coverage, the court ruled.
It ruled that an employment-related-practices exclusion did not apply because evidence indicated Jafa-Bodden was employed by the Indian law firm of Fox Mandal, which dispatched her to work for Choudhury, instructed him on her compensation, and continued to advise her on actions related to Choudhury’s legal affairs.
Since there was a dispute about her employment and thus, a potential for coverage, Philadelphia had a duty to defend, the court ruled.
Nationwide’s policy covered USA Yoga employees and volunteers for acts “in the discharge of their duties solely in [that] capacity.” The court ruled that Choudhury denied being an employee and other evidence concurred.
While Choudhury volunteered at competitions put on by USA Yoga, there is no evidence that Jafa-Bodden was ever at any of those events. In addition, his appearances were also on behalf of other organizations, so he was not acting “solely” as a volunteer for USA Yoga, and was not entitled to a defense from Nationwide.
Scorecard: Philadelphia Indemnity Insurance Co. must defend Bikram Choudhury in the lawsuit.
Takeaway: An insurer may rely on an exclusion to deny coverage only if it provides conclusive evidence that the exclusion applies.
A Call for Truth in Labeling
This past December, the California State Supreme Court overruled two lower court decisions and allowed a class action suit to move forward in state court against Herb Thyme Farms, accused of labeling a mixture of organically grown and conventionally grown fresh herbs as “fresh organic.”
While the case has yet to go before a jury, some see the court’s decision to permit the trial as opening the door to a wave of litigation in state courts for violations of what previously was perceived as a strictly federal regulatory framework.
At the heart of the court’s decision — and the dilemma facing insurers — is the question of intent. Herb Thyme Farms is arguing that the salient issue in the case is an interpretation of federal organic standards, and any deviation on their part is tantamount to misinterpretation.
Plaintiff Michelle Quesada argues that Herb Thyme Farms knowingly mislabeled their products, in violation of California’s Consumers Legal Remedies Act, unfair competition law, and false advertising law. The State Supreme Court ruled Quesada’s accusations deserve a hearing.
Herb Thyme Farms also argued that allowing suits in state courts would weaken the federal standards, but the court specifically negated that as well, stating, “State lawsuits alleging intentional organic mislabeling promote, rather than hinder, Congress’s purposes and objectives.”
“This is a consumer fraud case. The damages that plaintiffs seek are usually for alleged price differentials, or even the price of the product itself. They are not for physical harm,” said attorney Alan Lyons, a partner at Herrick, Feinstein LLP and co-chair of the firm’s Insurance and Reinsurance Group.
“The impact of the case is the court decisions. If the case is ultimately thrown out on the merits by a court decision, it could be helpful to mitigate the impact of this decision.
“The food companies have been asking the courts to pre-empt state law consumer fraud claims in favor of federal law. So, decisions that permit state law cases to move forward build a body of law that is not helpful for companies that are seeking a uniform body of federal law,” said Lyons.
Glenn Drees, managing director of food and agribusiness at Arthur J. Gallagher & Co., thinks that while individual damages may be low, the classes involved could be quite large.
“There are two routes that these things generally take. One is injunctive relief, so ‘quit using that label’ would be the relief that they seek.
“And then the other is for damages, and that’s a wide open space that could be damages to everybody that’s bought the product … and the number could be a fairly large number. … I have to believe that is their intent now that the court said, ‘Yes, you can go ahead and sue them,’ ” said Drees.
David McNeil, principal at Edgewood Partners Insurance Center, thinks the impact will be more limited, and that instances of mislabeling — or intentional mislabeling — are extremely rare.
“It’s not worth it … whatever that little marginal short-term benefit would be, the long-term effects are so negative … [The food and beverage industry is] smarter than that.”
But if suits in state courts begin to weaken the federal standard, McNeil could see that changing.
“I do think you would have increased liability, substantial liability if you do start to have different states setting different standards,” he said.
That question of intent is important to insurers as well, because it goes to the heart of insurability.
“If they did it with intent, then it’s illegal and a non-insurable event. If it was done by accident … then it is going to be a covered event,” said McNeil.
It appears that the court is allowing the case go to a jury in part to determine that intentionality. But until such a determination is made, the insurers are on the hook for legal expenses.
“So you are going to have some initial coverage, initial legal defense, but as soon as that determination is done there will be a resolution of rights straightaway, and as soon as that determination is made they will stop,” said McNeil.
But while costs in each case may be limited by exclusions, those initial legal expenses can add up quickly if there are numerous civil actions.
“The Quesada decision may prompt a significant increase in consumer class action lawsuits alleging state law fraud and misrepresentation against businesses that use the ‘organic’ label,” Lyons said.
If they did it with intent, then it’s illegal and a non-insurable event. — David McNeil, EPIC Insurance Brokers
“Although fraud claims are typically excluded from insurance policies, there is usually coverage for defense costs until a final adjudication of fraud is issued by a court, by which time hundreds of thousands, or even millions, of dollars may have been incurred in defense costs,” said Lyons.
“As a result, insurers may seek to increase premiums to address the potential increased exposure to ‘organic’ lawsuits against insureds,” Lyons added.
Insurers may also “seek to tighten up the language of their fraud exclusions so as to more clearly and expressly avoid a duty to indemnify for a finding of fraudulent mislabeling,” he said.
Seek Out Coverage Options
Drees advises insureds to explore additional policies as well.
“The General Liability policy doesn’t respond unless there’s an assertion of bodily injury or property damage. There are some other coverages that may come into play such as product recall or product withdrawal coverage, and those policies are less standard so it would behoove a policyholder to determine whether improper labeling is a covered cause or loss,” said Drees.
He sees the possibility of a much broader impact, even if a jury ultimately sides with Herb Thyme Farms.
“Everybody consumes food, and labels are important. We’re more concerned now about what we put in our bodies than we were 10 years ago. So it seems to me it’s just an area that’s rich in opportunity for legal action,” he said.
“The problem is, in my opinion, there’s just not enough inspectors,there’s not enough enforcement people to get to all the places … so the void is being filled by lawsuits.”
But despite a potential increase in liability, double-digit growth in organic sales means companies will be unlikely to move away from such labeling.
“There’s always this constant interplay between the sales and marketing guys and the corporate attorneys. The sales guys want to say, ‘This is the greatest product that there ever was,’ and the legal people want to dial it back so they don’t unnecessarily invite litigation,” said Drees.
Litigation like Quesada may actually foster growth.
“I don’t think it’ll damage the sales growth. In fact, it could have the opposite effect and actually help growth, because consumers might be more confident that what they’re buying truly is organic; and that there are consequences for people that try and pass something off as organic that isn’t,” said Drees.
Compounding: Is it Coming of Age?
The WC managed care market has generally viewed the treatment method of Rx compounding through the lens of its negative impact to cost for treating chronic pain without examining fully the opportunity to utilize “best practice” prescription compounds to help combat the opioid epidemic this nation faces. IPS stands on the front lines of this opioid battle every day making a difference for its clients.
After a shaky start cost-wise, prescription drug compounding is turning the corner in managing chronic pain without the risk of opioid addiction. A push from forward-thinking states and workers’ compensation PBMs who have the networks and resources to manage it is helping, too.
Prescription drug compounding has been around for more than a decade, but after a rocky start (primarily in terms of cost), compounding is finally coming into its own as an effective chronic pain management strategy – and a worthy alternative for costly and dangerous opioids – in workers’ compensation.
According to Greg Todd, CEO and founder of Integrated Prescription Solutions Inc. (IPS), a Costa Mesa, Calif.-based pharmacy benefit manager (PBM) for the workers’ compensation and disability market, one reason compounding is beginning to hit its stride is because some states have enacted laws to manage it more effectively. Another is PBMs like IPS have stepped up and are now managing compound drugs in a much more proactive manner from an oversight perspective.
By definition, compounding is a practice through which a licensed pharmacist or physician (or, in the case of an outsourcing facility, a person under the supervision of a licensed pharmacist) combines, mixes, or alters ingredients of a drug to create a medication tailored to the needs of an individual patient.
During that decade, Todd explains, opioids have filled the chronic pain management needs gap, bringing with them an enormous amount of problems as the ensuing addiction epidemic sweeping the nation resulted in the proliferation and over-consumption of opioids – at a staggering cost to both the bottom line and society at large.
As an alternative, compounded topical cream formulations also offer strong chronic pain management but have limited side effects and require much reduced dosage amounts to achieve effective tissue level penetration. In fact, they have a very low systemic absorption rate.
Bottom line, compounding provides prescribers with an excellent alternative treatment modality for chronic pain patients, both early and late stage, Todd says.
Time for Compounding Consideration
That scenario sets up the perfect argument for compounding, because for one thing, doctors are seeking a new solution, with all the pressure and scrutiny they’re receiving when trying to solve people’s chronic pain problems using opioids.
Todd explains the best news about neuropathic pain treatment using compounded topical analgesic creams is the results are outstanding, both in terms of patient satisfaction in VAS pain reduction but also in reduction potentially dangerous side effects of opioids.
The main issue with some of the early topical creams created via compounding was their high costs. In the early years, compounding, which does not require FDA approval, had little oversight or controls in place. But in the past few years, the workers compensation industry began to take notice of the solid science. At the same time, medical providers also were seeing the same science and began writing more prescriptions for compounding – which also offers them a revenue stream.
This is where oversight and rigor on the part of a PBM can make a difference, Todd says.
“You don’t let that compounded drug get dispensed when you’re going to pay for it without having a chance to approve it,” Todd says.
Education is Critical
At the same time, there is the growing, and genuine, need to start educating the doctors, helping them understand how they can really deliver quality pain management to a patient without gouging the system. A good compounding specialty pharmacy network offering tight, strict rules is fundamental, Todd says. And that means one that really reaches out to work with the doctors that are writing the prescriptions. The idea is to ensure that the active ingredients being chosen aren’t the most expensive sub-components because that unnecessarily will drive the cost of overall compound “through the ceiling.”
IPS has been able to mitigate costs in the last couple years just by having good common sense approach and a lot of physician outreach. Working with DermaTran Health Solutions and its national network of compounding pharmacies, IPS has been successfully impacting the cost while not reducing the effectiveness of a compounded prescription.
In Colorado, which has cracked down on compounding profiteering, Legislative change demanded no compound could be more than $350.00 period. What is notable, in an 18-month window for one client in Colorado, IPS had 38 compound prescriptions come through the door and each had between 4 and 7 active ingredients. Through its physician education efforts, IPS brought all 38 prescriptions down 3 active ingredients or less. IPS also helped patients achieve therapeutic success (and with medical community acceptance). In that case, the cost of compound prescriptions was down to an average of $350, versus the industry average of $788. Nationwide IPS has reduced the average cost of a compound prescription to $478.00.
Todd says. “We’ve still got a way to go, but we’ve made amazing progress in just the past couple of years on the cost and effective use of compound prescriptions.”
For more information on how you can better manage your costs for compound prescriptions, please call IPS at 866-846-9279.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with IPS. The editorial staff of Risk & Insurance had no role in its preparation.