The State of New Jersey and the City of Newark have joined thelong and growing list of states, counties, municipalities andIndian Nations that are suing pharmaceutical manufacturers anddistributors as a result of the opioid epidemic.

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New liabilities quickly give rise to new insurance coverageissues.

So far, the suit brought by the State of West Virginia hasproduced the country's only opioid insurance cases. That suitessentially alleges, in eight separate statutory and common lawcauses of action, that “drug distributors illegally distributedcontrolled substances by supplying physicians and drugstores withdrug quantities in excess of legitimate medicalneed.” Cincinnati Insurance Company v. RichieEnterprises, No.1:12-CV-00186 (W.D. KY. 2014)(“Richie 1”).

The West Virginia case has now led to four insurance decisionsin three states. All of the cases involve drug distributors. Thecases illustrate the dispositive differences in the ways in whichcourts have addressed these insurance claims, and provide guidancefor pharmaceutical companies seeking insurance coverage.

For insurance purposes, the New Jersey complaint variestremendously from that brought by West Virginia. While the WestVirginia complaint contains eight diverse statutory and common lawcauses of action, including several sounding in negligence, the NewJersey complaint only has four causes of action, three under theConsumer Fraud Act and one under the False Claims Act.

As discussed below, the difference between the two complaintscould be dispositive on the issue of coverage.

Liberty Mutual argument

With respect to the West Virginia complaint, the first issuethat the courts addressed was the existence of an “occurrence,” oraccident. In Liberty Mutual Fire Insurance Company v. J.M.Smith Corporation, C/A No. 7:12-2824 –TMC (D.S.C. 2013),Liberty Mutual argued that it had no duty to either defend orindemnify because “the Underlying Complaint alleges facts whichsupport only knowing misconduct.” Liberty Mutual's argumentwas that by pumping massive quantities of pills into West Virginia,J.M. Smith had to know that it was contributing to opioidaddiction.

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The court rejected this argument, because the West Virginiacomplaint contained counts sounding in both negligent andintentional causes of action. Under South Carolina law, aninsurance company must defend if the complaint contains even onecovered cause of action. As a result, the court held that LibertyMutual had to defend its policyholder. See also, Richie1.

Damages “because of” bodily injury

Pharma companies principally seek coverage for opioid liabilityunder general liability policies. Those policies typicallyprovide coverage for damages because of bodilyinjury, and not simply for bodily injury. This“because of” formulation provides very broad coverage and, as setforth below, can be dispositive in coverage litigation.

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The West Virginia complaint contained one cause of action formedical monitoring. In Richie, Richie's lawyersmistakenly argued that there should be coverage because thecomplaint's allegations were for bodily injury,when in fact the insurance policy used the “because of” language.The court agreed that the insurance company should defend Richie,but only because of the count for medical monitoring, which thecourt reasoned was “for” bodily injury. The court found that theother causes of action sought only economic damages. Unfortunately,the West Virginia attorney general then deleted the medicalmonitoring count from the complaint.

The insurance company moved for a rehearing. CincinnatiInsurance Co. v. Richie, No. 1:12-CV-00186 v (D. Ky. 2014)(“Richie 2”). Richie argued for the first time that the“because of” language was broader than the “for” language. Thecourt held that this argument was untimely, but even if the courtwere to consider it, the court would reject it. “In this case, inthe absence of the medical monitoring claim, West Virginia issolely seeking damages for the money it has been required to spendbecause of the prescription drug abuse epidemic in West Virginia,”and not because of bodily injury. As a result, the court reverseditself and denied coverage.

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In Cincinnati Insurance Co. v. H.D. Smith, 829 F.3d 773 (7th Cir. 2016), which also involved the West Virginiaaction, the Seventh Circuit reached the opposite conclusion, andordered the insurance company to defend. The district court hadruled against coverage, and the Seventh Circuit reversed. The courtemphasized that the insurance policy provided coverage for damages“because of bodily injury.”

The court found that “West Virginia alleged that its citizenssuffered bodily injury and the state spent money caring for thoseinjuries.” The insurance company argued that West Virginia soughtits own damages, and not damages on behalf of its citizens. TheSeventh Circuit replied, “But so what?”

The court analogized West Virginia's situation to that of amother who spends her own money to pay for the care of her son. Ineither case, the court reasoned that the costs were because ofbodily injury.

The court noted that, “To be sure, West Virginia assertsnumerous legal theories and seeks a variety of remedies ….”However, under applicable Illinois law, the court held that if evenone theory of recovery fell within coverage, the insurance companyhad to defend.

Intentional wrongdoing

Unlike the West Virginia complaint, the New Jersey complaintseeks coverage under only two statutes, and in both cases arguablyonly for intentional wrongdoing. Insurance coverage exists fornegligent and reckless wrongdoing. It does not exist forintentional wrongdoing. Insurance coverage may not exist for theNew Jersey complaint against Insys. SL Industries v.American Motorists Ins. Co., 128 N.J. 188 (1992).

Even if an issue as to intent should arise, New Jersey hasstructured its complaint in such a way that a court could apply anobjective instead of a subjective test for intent. Morton,Int'l v. General Accident Ins. Co., 134 N.J. 1(1993), concerned the intentional dumping of mercury waste into ariver.

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The state Supreme Court found that Morton's actions were soegregious that the court would objectively findthat Morton was an intentional polluter. The NewJersey complaint against Insys is so phrased that it could lead toa similar result, despite the normal rule in New Jersey thatrequires subjective intent.

It's noteworthy that in Liberty Mutual v. J.M.Smith, the court states that “J.M. Smith alleges it'accidentally' funneled massive quantities of controlled substancesinto West Virginia.” A New Jersey court,following Morton, could well apply an objectivestandard for insurance purposes to such a defense.

Even if the Insys litigation did contain a negligence count, NewJersey insurance law treats complaints with mixed allegations ofnegligent and intentional conduct very differently than do thedecisions discussed above. Under the controlling law of SouthCarolina and Illinois, the insurance company had to defend theentire suit if there was even one covered cause ofaction.

New Jersey law is different, and requires allocation wherepossible between defense costs incurred with respect to covered andnon-covered causes of action. The New Jersey Supreme Court hasexpressed its clear preference for allocation. SLIndustries.

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For insurance purposes, the opioid complaint brought by the Cityof Newark is very different. The second count of the complaint isentitled “Public Nuisance,” and specifically alleges that thedefendants acted “intentionally, recklessly or negligently.” Thethird count is entitled “Fraudulent and NegligentMisrepresentation.” Thus, in an insurance coverage action governedby New Jersey law, a defendant may have a better chance of arguingsuccessfully that its insurance company must defend it.

Negligence allegation

A single rule for insurance coverage for opioid litigation willnever exist. State law on key issues will always divergedramatically. The facts surrounding each company's distribution andsale of opioids will be different. Perhaps most importantly, asdemonstrated by the differences between the West Virginia and NewJersey complaints, drafting by the plaintiffs could have adispositive impact on coverage.

The inclusion of a negligence count can be the difference as towhether a drug company receives a defense from its insurancecompany, and to that extent preserve its resources for settlingclaims. That is the result that the opioid plaintiffs seek: anequitable contribution by the drug companies to the current crisis.Without insurance coverage, that result becomes difficult toachieve.

Robert D. Chesler ([email protected])is a shareholder in the Newark office of Anderson Kill, and amember of the firm's Insurance Recovery Group.