A federal trial court, applying California law, has held that coverage for three underlying lawsuits is not barred by a contract exclusion in a professional liability policy because applying the exclusion to any claim involving a contract would render the coverage illusory. Ironshore Specialty Ins. Co. v. 23andMe, Inc., 2016 WL 3951660 (N.D. Cal. July 22, 2016). According to the court, the exclusion applies only where an insured specifically contracted to assume liability for a third party’s negligence. The court also found that a civil investigative demand did not constitute a “claim” under the policy at issue.

The case arose when the United States Food and Drug Administration sent the insured, a “personal genome service,” a warning letter regarding certain aspects of the insured’s service. Several lawsuits were then filed against the insured alleging that the insured made false representations in its advertising, provided inaccurate and incomplete results in connection with the genetic testing offered, misled its customers into believing that the government had approved its service, and did not disclose that it would use the genetic information gathered from its customers to create a database that it would then market to doctors and pharmaceutical companies. The state of Washington also issued a Civil Investigative Demand.

The insured tendered the lawsuits and the investigative demand to the insurer for coverage under a professional liability policy. The insurer accepted the defense of the lawsuits subject to a reservation of rights and filed a coverage action seeking a declaration that it had no duty to defend or indemnify the insured because the policy’s contract exclusion, which barred coverage for claims arising out of the insured’s “assumption of liability or obligations in a contract or agreement,” applied. The insurer also asserted that the investigative demand did not constitute a “claim” under the policy, which defined the term as “a written demand for damages, services or other non-monetary relief,” as well as a “suit.” The policy defined “suit” as “a civil proceeding seeking recovery of damages,” and “a civil legal proceeding as well as an arbitration proceeding or alternative dispute resolution proceeding.”

The court first addressed the contract exclusion, explaining that it did not preclude coverage for claims involving any contract entered into by the insured, as the insurer argued. Rather, the court predicted that a California court would apply a “plain meaning” approach to interpreting the policy, and focused on the term “assumption” in concluding that the exclusion did not bar coverage for the underlying lawsuits because its terms applied only where an insured specifically contracted to assume liability for a third party’s negligence. Although a cause of action for breach of contract had been asserted in the underlying lawsuits, the court pointed to the fact that the “vast majority” of the underlying claims were for false advertising, unfair competition, and fraud, in support of its conclusion. Additionally, the court explained that if it adopted the insurer’s interpretation of the contract exclusion, then “virtually all” claims relating to the insured’s professional services would be excluded from coverage, which would “defeat the professional liability coverage for which [the insured] bargained.”

The court also determined that the investigative demand did not constitute a “claim” based on the language of the policy. The court noted that, despite the fact that the state had sought answers to interrogatories and document production from the insured, it had not yet filed suit. As a result, the insurer did not have a duty to defend because, according to the court, no such duty arose prior to the filing of a “claim” or “suit.”