Why it matters

A Kentucky federal court held that the claimed impact in a suit brought by the West Virginia Attorney General – alleging that the insured pharmaceutical drug distributor was a “pill mill” and played a role in creating widespread drug addiction in the state – was outside of the policyholder’s control and therefore the actions of the insured were accidental, not intentional. The AG’s complaint included causes of action for both negligent and intentional conduct, which required a defense under the insured’s policy. The court declined to rule on the issue of indemnification, however, finding that if the policyholder’s conduct was determined to be intentional or illegal then the insurer would have no duty to indemnify. The Kentucky court’s decision puts another clear stamp on the rule that the duty to defend is broader than the duty to indemnify and attaches regardless of the ultimate outcome of the dispute.

Detailed Discussion

In 2012, the West Virginia Attorney General sued 13 pharmaceutical drug distributors, claiming they were an integral part of the “pill mills” in the state by supplying physicians and drugstores with drug quantities in excess of legitimate need, leading to high rates of drug addiction.

The complaint alleged eight causes of action, including a negligence claim for breach of the duty to exercise reasonable care in the marketing, promotion, and distribution of controlled substances, as well as a claim that the defendants “willfully turned a blind eye” toward the rising drug abuse by regularly distributing large quantities of controlled substances to customers.

Defendant Richie Enterprises sought coverage from insurer Cincinnati Insurance Company, which refused to provide a defense. According to the insurer, the AG’s complaint did not allege an “occurrence” or “bodily injury” pursuant to the policy; Cincinnati alternatively relied upon a policy exclusion for intentional and criminal acts.

U.S. District Court Judge Joseph H. McKinley, Jr., sided with Richie. The prescription drug abuse alleged by the AG could be deemed “accidental” and therefore an “occurrence” under the policy “since Richie did not intend for the alleged drug addiction to occur,” he wrote.

“While Cincinnati correctly points out that the underlying complaint also contains allegations of intentional conduct, Cincinnati seems to overlook that the complaint also contains allegations of negligent conduct,” the court said, listing multiple allegations of negligence from the complaint. “Moreover, the court agrees with Richie that the allegations of negligence in the AG’s complaint are, in essence, allegations that Richie did not intentionally cause the alleged harm.”

The creation of widespread drug abuse was beyond Richie’s control, Judge McKinley said. “The pharmacies in West Virginia dispensed the prescription drugs to people who presented seemingly valid prescriptions. There is no allegation that Richie ‘controlled’ the pharmacies – let alone to whom the pharmacies dispensed the drugs,” he wrote. “Likewise, physicians wrote the prescriptions for the end-users of the drugs.”

Bodily injury was alleged in the underlying complaint, the court added, because in addition to damages for economic harm, the AG included a claim for the costs of a medical monitoring program. Such a program constitutes the recovery of damages on behalf of its citizens for bodily injury, the court said.

Cincinnati then tried to hang its hat on a policy exclusion for intentional and criminal acts. But Judge McKinley, while recognizing that allegations of such behavior appeared in the complaint, said the argument was without merit.

“[T]he conduct of distributing prescription drugs based upon orders placed by pharmacies is not, in and of itself, illegal and the violation of laws cannot be reasonably anticipated,” he wrote, again characterizing the insured’s acts as accidental.

On the issue of indemnification, the court denied summary judgment for both parties, finding the issue premature. The judgment in the underlying action – whether or not it is based on intentional or illegal behavior on the part of Richie – will determine the issue of indemnification, the court said.

To read the decision in Cincinnati Insurance Co. v. Richie Enterprises LLC, click here.