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The business of mass tort claims: criminal investigations and D&O liability

Posted on 27 November 2019

In the latest update on the opioid crisis, it is being reported today that US Federal Prosecutors have now opened a criminal investigation into at least six well-known pharmaceutical companies, with others potentially still to be added. You can read our previous note on the insurance coverage difficulties already facing large corporate policyholders in this sector as a result of the rise of US mass tort product liability claims here, and the opioid crisis is the latest example.

The launch of this criminal investigation broadens the potential exposure for insured/policyholder companies who have previously resolved mass civil claims against them (not only in this sector, but in any sector where mass civil claims are brought).  It opens up further insurance coverage concerns, this time in relation to corporate liability. It remains to be seen whether the investigations will result in charges being brought. However, as we have seen in recent examples such as Rochester Drug, the settlement amounts involved in avoiding prosecution through deferred prosecution agreements are likely to be substantial.

As well as compounding problems faced by policyholders connected to mass civil actions, the development and rise of criminal investigations will engage a wide range of insurance policies, such as fidelity, corporate crime and D&O. Policyholders involved in these investigations are likely to face close scrutiny from their insurers in respect of the underlying allegations, which can include those under the Controlled Substances Act (the same Act used to prosecute illegal drug dealers). Charges will involve prosecutors providing evidence that the company and/or its senior executives wilfully and intentionally disregarded or avoided their legal obligations to report suspicions that the drugs they were supplying were being used for non-medical purposes. Clearly these are serious charges which add an additional dimension of personal liability for senior executives and, potentially, give rise to coverage disputes. It remains too soon to pre-empt what the outcome of this investigation will be but opioid addiction remains high on the US political agenda.

Policyholders will no doubt be scrutinising the coverage they have in place for dealing with the costs of such investigations and the subsequent defence costs that they will be forced to incur in the event that charges are brought. Insurers, concerned with the potential scale of losses, will be analysing their policies to see whether the claims fall outside the scope of the insurance cover provided.

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