Drug Distributors May Find Themselves Without a Defense


By: Michael Bruyere and Kristian Smith

Rising prescription drug abuse has put drug distributors under scrutiny in the last few years. Now, pharmaceutical companies are being sued for the economic costs associated with the epidemic, but they may not be able to rely on their insurance companies for a defense. Pending a decision by the 11th Circuit, insurers may not have to provide a defense to pharmaceutical companies in “pill mill” lawsuits.

The state of West Virginia brought suit against Anda, Inc. (which, along with its parent company Watson Pharmaceuticals Inc. is now known as Actavis Inc.) and nearly a dozen other pharmaceutical companies in June 2012, claiming these companies supplied their drugs to “pill mills” or pharmacies that did not monitor the distribution of their drugs. The suit also claims Anda and the other companies did not report “suspicious” pill orders to the authorities. West Virginia alleges that the companies’ distribution of controlled substances without effective monitoring or controls cost its hospitals, courts, jails and other facilities $430 million in 2010 and projected a cost of $695 million by 2017.

Anda had insurance coverage under Travelers Property Casualty Co. of America and St. Paul Fire & Marine Insurance Co. for various policies it had purchased from 2001-2013. Travelers and St. Paul sued Anda in 2012, seeking declaratory judgment that their policies did not require them to defend against the claims against Anda. The insurers claimed that they had no duty to defend Anda because the state of West Virginia didn’t allege damages “for” or “because of” bodily injury,” a requirement to trigger coverage under Anda’s policies.

In March, a Florida district court judge agreed with Travelers and St. Paul and granted them summary judgment, ruling that West Virginia’s suit didn’t assert claims on behalf of individuals for bodily injury they suffered but instead sought relief from the “massive costs suffered by the state due to Anda’s distribution of drugs allegedly in excess of legitimate medical need.”

Anda appealed to the 11th Circuit, arguing in its opening appellate brief that prescription drug abuse necessarily causes bodily injury and the resulting damages are not excluded from coverage just because they are brought by the state and not an individual. Travelers and St. Paul disagreed, and in their December 16th brief argued that alleging that a class of nonparties has suffered narcotics addiction to support a claim for economic loss does not convert the claim into one for “bodily injury.” In addition, the insurers argued that Anda’s insurance policies contain an exclusion for claims “arising out of” or “resulting from” products sold, handled or distributed by Anda. As stated in Travelers’ brief, “There is no plausible way for Anda to argue that narcotics addiction does not ‘arise out of’ or ‘result from’ the very same narcotics that cause the addiction. In short, Anda’s response to the ‘no bodily injury’ argument walks itself directly into the scope of the products exclusions.”

The 11th Circuit’s pending decision is complicated by two opposite federal decisions on this issue handed down in March 2014– one by the 4th Circuit and one by a federal court in Kentucky – that held insurers of other pharmaceutical companies implicated in West Virginia’s suit must defend their insureds against West Virginia’s claims, thereby broadening the scope of the insurers’ various policies.

The West Virginia trial is scheduled for October 2016.