The U.S. Fourth Circuit Court of Appeals recently affirmed a lower court decision finding that an insurer had a duty to defend a drug distribution company against allegations that it illegally distributed controlled substances because the underlying complaint contained sufficient allegations of negligence to plausibly constitute an “occurrence” under South Carolina law. Liberty Mutual Fire Ins. Co. v. JM Smith Corp., 2015 WL 1089321 (4th Cir. March 13, 2015) (unpublished).

After the West Virginia attorney general sued a drug distribution company alleging that it illegally distributed controlled substances in excess of legitimate medical need across the state, its insurer sought declaratory relief that it had no duty to defend because the allegations of the underlying lawsuit could only be read as alleging knowing misconduct which could not constitute an “occurrence” as a matter of law. The trial court granted the insured’s motion for summary judgment, holding that there were sufficient allegations of negligence in the underlying complaint so as to plausibly constitute an “occurrence” under South Carolina law. The insurer appealed.

Affirming, the Fourth Circuit held that the underlying complaint contained sufficient allegations of negligence to trigger the duty to defend. The Fourth Circuit found that the underlying complaint alleged that the insured failed to implement sufficient controls and systems to identify suspicious drug orders, and that this type of failure to take reasonable care (and the resultant harm) was “the hallmark of negligence claims.” The Fourth Circuit found it was at least possible that the insured did not take sufficient care to catch suspicious activity (and therefore accidentally caused harm to prescription drug abusers), and therefore held that the insurer had a duty to defend.

A federal court in Florida, addressing the same kind of claim, held that another drug distributor’s liability insurers did not have a duty to defend or indemnify against the complaint by the State of West Virginia for injunctive relief and damages for costs incurred by the state as a result of a prescription drug abuse in West Virginia. Travelers Prop. Cas. Co. of Am. v. Anda, Inc., 2015 WL 1020873 (S.D. Fla. March 9, 2015).

The State of West Virginia sought injunctive relief and damages alleging that the distributor violated West Virginia statutes and regulations that govern controlled substances and consumer protection by distributing controlled substances without sufficient monitoring and controls. The State claimed that it incurred additional costs to hospitals, schools, courts, social service agencies, jails and prisons due to widespread drug abuse. The distributor sought defense and indemnity from its insurers, which sought a declaration that they had no duty to defend or indemnify because the claims in the underlying complaint are not claims for “bodily injury.” The distributor argued that the insurers had a duty to defend and indemnify because West Virginia’s claim was for damages on account of “bodily injury” given that its claims stem from addictions, diseases, and sickness related to West Virginia citizens’ abuse of prescription drugs.

The district court granted summary judgment to the insurers, finding that the underlying complaint makes clear that the claims asserted are for costs incurred by the State of West Virginia, which were its own economic losses and not damages for “bodily injury” because the State did not purport to assert claims on behalf of individual citizens for the physical harm sustained personally by those citizens.