A customer’s “mislabeling” lawsuit against a prescription drug retailer was not potentially covered under an additional insured endorsement issued by the drug supplier’s general liability insurer. (Target Corp. v. Golden State Ins. Co. Ltd. (2019) — Cal.App.5th —)
Facts
McKesson Corporation distributes bulk prescription drugs to retailers. McKesson does not manufacture drugs.
McKesson entered into a pharmaceutical supply agreement with Target Corporation pursuant to which McKesson agreed to supply bulk drugs to Target. Among other things, the agreement required McKesson to obtain a commercial general liability policy covering product liability claims and naming Target as an additional insured.
Golden State Insurance Company Limited issued a general liability policy listing McKesson as the named insured and Target as an additional insured. The additional insured endorsement provided that coverage applied “only with respect to ‘bodily injury’ … arising out of ‘your [McKesson’s] products’ which are distributed or sold in the regular course of the vendor’s [Target’s] business.” The additional insured endorsement excluded coverage for “repackaging” of products or “products which, after distribution or sale by you [McKesson], have been labeled or relabeled.”
McKesson sold a bulk quantity of a prescription drug to Target. Target, in turn, repackaged the drug and dispensed a small quantity of it to a customer. When Target dispensed the drug to the customer, Target placed on the bottle a label that (1) instructed the customer to “finish all of this medicine unless otherwise directed by your doctor” and (2) failed to warn the customer that the customer should stop using the medicine if any skin rash appeared. After ingesting the prescription drug pursuant to the instructions on the label, the customer suffered a very serious skin injury.
The customer subsequently sued Target. In the customer’s lawsuit, the customer alleged not that Target had dispensed a defectively designed drug, but rather that Target had failed to provide adequate warnings about possible adverse reactions to the drug and information about when to discontinue using the drug.
Target tendered defense of the customer’s lawsuit to Golden State, claiming that Target was entitled to coverage as an additional insured on McKesson’s general liability policy through Golden State. Golden State initially provided Target with a defense, but later withdrew from Target’s defense.
Thereafter, Target sued Golden State, claiming that Golden State had breached a duty to defend Target against the customer’s lawsuit. The trial court entered summary judgment in favor of Golden State. Target appealed.
Holding
The Court of Appeal affirmed the summary judgment in favor of Golden State.
The appellate court began by focusing on the additional insured endorsement’s basic insuring language, which limited Golden State’s duty to defend Target to claims “arising out of” McKesson’s products. According to the appellate court, the customer’s claim against Target did not “arise out of” a drug supplied by McKesson. Rather, the customer’s claim against Target arose out of Target’s failure to warn of the risks and possible side effects of the drug. Thus, according to the appellate court, there was no “minimal causal connection or incidental relationship” between McKesson’s product and the customer’s injury.
In addition, the appellate court held that the additional insured endorsement excluded coverage for “repackaging” of products or “products which, after distribution or sale by you [McKesson], have been labeled or relabeled.” Here, Target had repackaged the drug and labeled it before selling it to the customer. Thus, Target’s acts fell squarely within the endorsement’s exclusions for repackaging and labeling / relabeling.
Because there was no potential for coverage, Golden State had no duty to defend Target against the customer’s lawsuit.
Comment
One can perhaps question the appellate court’s conclusion that the customer’s claim against Target did not “arise out of” McKesson’s product. Admittedly, the customer’s claim was based not on some defect in McKesson’s product itself, but rather on Target’s alleged failure to provide warnings about use of the product. Nevertheless, it would seem that there was a “minimal causal connection” between McKesson’s product and the customer’s injury because, without McKesson’s product, the customer never would have suffered injury.
In any event, the appellate court correctly determined that the customer’s claim against Target fell within the additional insured endorsement’s exclusion for “repackaging” of products or “products which, after distribution or sale by [McKesson], have been labeled or relabeled.” Simply put, the customer’s claim was based on Target’s alleged mislabeling of a non-defective product supplied by McKesson. The purpose of this type of “vendor’s endorsement” is to provide the additional insured with coverage for vicarious liability arising from a defective product distributed by the named insured. The endorsement is not intended to cover the additional insured for direct liability arising from mislabeling a non-defective product distributed by the name insured.