Widespread Drug Addiction a Fortuitous Event
May 27, 2014
On cross-motions for Summary Judgment, the United States District Court in South Carolina held that the Attorney General's allegations against a pharmaceutical drug distributor of knowingly dispensing prescription medicine for illegitimate medical purposes, in a grossly negligent manner, constitutes an occurrence under the distributor's CGL; therefore, triggering the insurance company's duty to defend. This case is Liberty Mut. Fire Ins. Co. v. J M Smith Corp., CA 7:12-2824-TMC, 2013 WL 5372768 (D.S.C. Sept. 24, 2013).
J M Smith is a pharmaceutical drug distributor which, prior to the alleged occurrences, had obtained a Commercial General Liability policy from Liberty Mutual Fire Insurance. From late 2011 through June 2012, J M Smith distributed medications to three pharmacies in West Virginia. In June 2012, the West Virginia Attorney General Darrell V. McGraw, Jr., sued J M Smith and twelve other drug distribution companies alleging that the companies had illegally distributed controlled substances in excess of legitimate medical need. The complaint further asserted that these companies created “pill mills” that were liable for harm caused within West Virginia and contributed to a growing epidemic of drug use within the state.
The Underlying Complaint alleged claims for violations of the West Virginia Uniform Controlled Substances Act, W.Va.Code §60A–3–301', violations of the West Virginia Consumer Credit and Protection Act, W.Va.Code §46A–5–101; public nuisance, unjust enrichment, negligence, and violations of the West Virginia Antitrust Act, W.Va.Code §47–18–4. The complaint sought injunctive relief and damages. In the Underlying Complaint, the Attorney General alleged that “through their acts and omissions these defendants have inserted themselves as an integral part of the pill mill” with each defendant “knowingly or while acting grossly negligent prescribe, dispense or distribute prescription medicine for illegitimate medical purposes.”
The primary issue was whether the Attorney General's allegations implicated a covered occurrence under J M Smith's CGL policy. Liberty Mutual argued that the underlying complaint alleges only knowing misconduct; and even if the allegations were interpreted to encompass negligent acts, that not all negligently caused harm should be considered an occurrence. On the contrary, J M Smith contended that the general nature of the allegations was a classic occurrence and that it had “accidently” funneled massive amount of controlled substances into West Virginia.
The court noted that under South Carolina law, questions of coverage and the duty to defend under an insurance policy generally “are determined by the allegations of the complaint. If the underlying complaint creates a possibility of coverage under an insurance policy, the insurer is obligated to defend.” However, the court added, that even though the determination of an insurer's duty to defend is dependent on complaint allegations, an analysis of the duty involves the actual allegations and not solely the specifically identified causes of action.
In reviewing whether the allegations found in the complaint constitute an accident, or occurrence, the court said that the results in this case, creating a pill mill with widespread addiction, cannot be said to be a normal consequence of distributing prescription drugs to three pharmacies in a state over a limited time. Accordingly, the court found that the Attorney General's complaint contained a covered occurrence, and therefore, Liberty Mutual had the duty to defend.
Editor's Note: This case set precedent for future decisions, such as Cincinnati Insurance Co., v. Richie Enterprises LLC, 2014 WL 838768, Civ. No. 1:12-00186 (JHM/HBB), Mar. 4, 2014. “Occurrence” is a defined term in the policy, meaning “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” This textbook analysis of the term “occurrence” led the court to weigh elements of intent and control. While properly interpreted and decided in light of the facts, this case sets a dangerous precedent of which insurers and underwriters need to be aware when writing policies to pharmaceutical companies and the like. Does this decision stand for the proposition that the pharmaceutical industry's hand in widespread prescription drug addiction is fortuitous by nature, and thus coverable? Some will argue so.