by Robert Fountain
As the world looks forward to the end of the COVID-19 pandemic in 2021, the legal system is just beginning to grapple with the fallout of another ongoing epidemic: the nationwide opioid crisis. A pair of recent insurance coverage disputes involving pharmaceutical distributors sued for their roles in the opioid epidemic illustrate how millions of dollars in coverage often depends on a single policy provision or even just a handful of words.
A. Rochester Drug Co-Operative, Inc. v. Hiscox Insurance Co., Inc.
In the first case, Rochester Drug Co-Operative, Inc., v. Hiscox Insurance Co., Inc., a New York federal district court affirmed granting policyholder RDCI’s motion for preliminary injunction requiring Hiscox to advance defense costs for an upcoming trial over RDCI’s alleged unlawful opioid distribution.
RDCI’s coverage through Hiscox began in March 2017, one month after the federal government initiated a civil investigation of RDCI for alleged failure to investigate and report suspicious opiate orders from its pharmacy customers. The feds later launched a separate criminal investigation, which RDCI disclosed to Hiscox in November 2017; however, RDCI never disclosed the civil investigation. Over the course of the next two years, over thirty government entities filed suits against RDCI over its alleged role in the nationwide opioid crisis. Hiscox initially issued reservation of rights letters indicating it would cover defense costs of these suits.
RDCI sought to resolve the federal government’s criminal and civil investigations by entering into a deferred prosecution agreement (“DPA”) and stipulating to a civil settlement (the “Stipulation”) with the U.S. Attorney for the Southern District of New York in April 2019. After learning of the DPA and Stipulation in the summer of 2019, Hiscox denied coverage for all pending suits against RDCI based on an illegal conduct policy exclusion. In January 2020, RDCI sued Hiscox for coverage and sought a preliminary injunction to force Hiscox to pay defense costs in three underlying suits set for trial.
The illegal conduct exclusion in the Hiscox policies barred coverage “for Loss in connection with any Claim made against any Insured . . . arising out of, based upon or attributable to the . . . committing of any deliberate criminal or deliberate fraudulent act, or any willful violation of any statute, rule or law, if any final adjudication establishes that such deliberate criminal or deliberate fraudulent act, or willful violation of statute, rule or law was committed.” Hiscox argued that the DPA and Stipulation were “final adjudications” of the insured’s “deliberate” or “willful” conduct.
Citing to Black’s Law Dictionary, the Court found that the DPA did not comport with the definitions of “final” or “adjudication”: the DPA was not “final” because a court must either dismiss charges once all conditions of the DPA are fulfilled or preside over prosecution if the defendant breaches the agreement, and the DPA was not an “adjudication” because a court neither reviews nor decides its substantive content.
Turning to the Stipulation, the Court found that regardless of whether the Stipulation constituted a “final adjudication,” its contents did not clearly establish RDCI committed a “deliberate criminal” or “willful” act. Drawing a distinction between “knowing” and “willful” conduct, the court noted that the Stipulation merely asserted the insured “‘knowingly failed to implement an adequate system’ for reporting suspicious orders, not that Plaintiff willfully failed to do so.” The court ultimately concluded that the meaning of “willful” in the policy was unclear, leaving the issue of whether the Stipulation established the policyholder’s “deliberate criminal” or “willful” conduct to be litigated at a later stage of the dispute.
The Hiscox court’s parsing of the illegal conduct exclusion exemplifies how policy text is the ultimate foundation of coverage. The court’s decision on whether the illegal conduct exclusion applied to bar coverage came down to the plain meaning of just a few words, including “final,” “adjudication,” and “willful.” Since the particular wording of a policy is so crucial, commercial policyholders should always carefully review the terms of their policies to make sure there are no unintended gaps in their coverage. As the Hiscox court noted, a more broadly-worded intentional conduct exclusion applicable to “final adjudications and admissions” might have completely barred coverage for the suits against RDCI.
B. Acuity v. Masters Pharmaceutical, Inc.
In the second case, Acuity v. Masters Pharmaceutical, Inc., Acuity sued its insured Masters Pharmaceutical, Inc. (“MPI”)—an Ohio-based pharmaceutical distributor—in Ohio state court, requesting a declaration that Acuity had no duty to defend or indemnify MPI in suits filed by governmental entities alleging MPI’s negligence contributed to the opioid epidemic and resulted in higher costs spent on services such as substance-abuse treatment and police patrols. The trial court had granted Acuity’s motion for summary judgment, prompting MPI’s appeal to the First District Court of Appeals in Hamilton County.
The appeal primarily concerned the meaning of the phrase “because of bodily injury” in the policy’s insuring agreement, which provided:
“[Acuity] will pay those sums that the insured becomes legally obligated to pay as damages because of bodily injury . . . to which this insurance applies. [Acuity] will have the right and duty to defend the insured against any suit seeking those damages.”
The policy did not define “damages” but stated that damages because of bodily injury include damages “claimed by any person or organization for care, loss of services or death resulting at any time from the bodily injury.”
The lower court had determined that the underlying government entities’ alleged economic damages resulting from MPI’s failure to prevent the diversion of opioids were not “damages because of bodily injury” because the underlying plaintiffs were seeking their own economic damages instead of damages on behalf of their injured citizens. The appeals court disagreed, reasoning that because “damages” under the policy “includes damages ‘claimed by any person or organization for care, loss of services or death resulting at any time from bodily injury’ . . . the policies expressly provide for a defense where organizations claim economic damages, as long as the damage occurred because of bodily injury.” Accordingly, the court held that the “because of bodily injury” provision did not preclude Acuity’s duty to defend MPI.
As in Hiscox, the Acuity court carefully scrutinized the policy language in determining that coverage applied not only to claimants who personally suffered bodily injury, but also to governmental organizations who paid the economic costs of bodily injury sustained by third parties. The key to the court’s decision was the provision stating damages claimed by an “organization” are covered if the damages resulted from bodily injury. Since the underlying plaintiff government entities fell within the plain meaning of “organizations,” and since some of these organizations’ alleged damages, “such as medical expenses and treatment costs,” were the result of bodily injury sustained by their citizens, Acuity had a duty to defend against the underlying suits.
Acuity also attempted to avoid its duty to defend by invoking a loss-in-progress provision, which stated that coverage would apply only if “[p]rior to the policy period, no insured . . . knew that bodily injury or property damage had occurred, in whole or in part. If insured . . . knew, prior to the policy period, that the bodily injury or property damage occurred, then any continuation, change or resumption of such bodily injury or property damage during or after the policy period will be deemed to have been known prior to the policy period.”
Acuity argued that a show-cause order issued to MPI by the DEA in 2008 put MPI on notice that it was violating the law by filling and failing to report suspicious opioid orders and thus contributing to the opioid epidemic prior to its coverage with Acuity incepting in 2010. MPI countered there was no evidence that “any particular suspicious orders resulted in diversion of opioids that caused bodily injury, much less the same bodily injuries that formed the basis of the underlying suits.”
The court sided with MPI. Explaining that a “loss-in-progress provision is included in an insurance contract because insurance policies are only meant to cover fortuitous events,” the court noted that the “awareness that there is a risk that an insured’s conduct might someday result in damages is not equivalent to knowledge of the damages.” The court found that the DEA show-cause order demonstrated only that MPI may have been aware of the risk that filling suspicious orders could contribute to the opioid epidemic and cause damage to government entities, holding that “mere knowledge of this risk is not enough to bar coverage under the loss-in-progress provision.”
Again, the Acuity court’s decision hinged on the text of the policy: the loss-in-progress provision did not bar coverage if the insured knew of a risk of future damages, but rather, precluded coverage if the insured “knew, prior to the policy period, that the bodily injury or property damage occurred.” While Acuity attempted to conflate knowledge of a risk of damages with knowledge of actual damages, the court distinguished these two concepts and found that the loss-in-progress provision by its terms only precluded coverage if the policyholder knew of actual damages prior to the inception of coverage. Having produced no evidence demonstrating MPI’s knowledge of actual bodily injuries resulting from its alleged negligence, Acuity could not rely on the loss-in-progress provision to escape coverage.
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With millions of dollars at stake in hundreds of suits just beginning to wind their way through courts nationwide, the opioid crisis litigation will be fertile grounds for precedent-setting cases for years to come. Nonetheless, many of these high stakes disputes will turn on fundamental, tried and true insurance law principles, including the cardinal principle applied in both Hiscox and Acuity: coverage ultimately depends on the policy language at issue.
 466 F. Supp. 3d 337, 343 (W.D.N.Y. 2020), appeal filed, No. 20-2230 (2d Cir. July 10, 2020).
 See id. at 344, 358.
 Id. at 343-44.
 Id. at 359.
 Id. at 344.
 Id. at 344-45.
 Id. at 345.
 Id. at 352.
 See id. at 352-56.
 Id. at 353-54.
 Id. at 354-55.
 Id. at 356 (citation omitted).
 See id.
 See id. at 354 & n.10.
 No. C-190176, 2020 WL 3446652, at *1 (Ohio Ct. App. June 24, 2020), appeal allowed by 160 Ohio St. 3d 1495 (Ohio Dec. 15, 2020).
 Id. at *2 (emphasis added).
 Id. at *4.
 Id. at *6.
 See id. at *4, *6.
 Id. at *7.
 Id. at *9.
 Id. at *10.
 Id. at *7.
Robert Fountain is an associate at Amy Stewart PC.