In Liberty Mutual Fire Insurance Co. v. J.M. Smith Corp., 2015 U.S. App. LEXIS 3989 (4th Cir. Mar. 13, 2015), the U.S. Court of Appeals for the Fourth Circuit affirmed that Liberty Mutual was required to defend J.M. Smith Corporation, a wholesale pharmaceutical distributor sued for failing to implement sufficient controls over the distribution of prescription drugs, contributing to a well-publicized prescription drug abuse epidemic in West Virginia caused by excessive prescription drug orders.
The Attorney General of West Virginia sued J.M Smith and twelve other wholesale drug distributors for, among other things, failing to implement sufficient controls and systems to identify suspicious prescription drug orders and alert authorities, causing some patients to become prescription drug abusers. The complaint alleged several causes of action, including willful and/or negligent violations of the West Virginia Uniform Controlled Substances Act, unjust enrichment, and medical monitoring. Liberty filed a separate action seeking a declaration that it had no duty to defend or indemnify J.M. Smith in the West Virginia action, arguing that the allegations of the complaint were not an “occurrence” under the subject CGL policy. The district court disagreed, holding that Liberty Mutual had a duty to defend J.M. Smith. Liberty Mutual appealed.
Liberty Mutual argued on appeal that the complaint did not allege an “occurrence” under the CGL policy because it alleged willful and intentional misconduct on the part of J.M Smith – i.e., non-accidental behavior. The Fourth Circuit affirmed, holding that the allegations of the West Virginia complaint did constitute an “occurrence” under the policy because they fell under the definition of an “accident” under South Carolina law – i.e., “an effect which does not ordinarily follow and cannot be reasonably anticipated from the use of those means, an effect which the actor did not intend to produce and cannot be charged with the design of producing.” In analyzing the underlying complaint, the court noted the allegations against J.M. Smith, particularly those accusing J.M. Smith of failing to take reasonable care to identify and report suspicious drug orders and the resultant harm, were “the hallmark of negligence claims.” Accordingly, the complaint alleged damage as a result of J.M. Smith’s unintentional acts, thereby triggering Liberty’s duty to defend.
The Fourth Circuit also rejected Liberty’s contention that J.M. Smith’s alleged repeatedly negligent actions “had effectively become intentional.” The court noted that in this case, even if J.M. Smith’s negligent behavior was in fact repeated, there was no evidence that J.M. Smith had knowledge that its actions were harming drug consumers since the chain of causation was too “attenuated.”