I’ve sometimes commented on this blog that my first boss in the business warned me: “If you assume there’s no coverage, you won’t find any.” There are plenty of risk managers and brokers who believe that general liability insurance coverage exists primarily to protect against people falling down in the parking lot. Not suprisingly, many if not most insurance claimspeople would agree with them!  In reality, though, many “offbeat” or non-traditional claims are potentially covered under standard form policies. Which is another way of saying: If you don’t ask, you won’t get.

Along these lines, here’s an interesting coverage decision that just came down from the Fourth Circuit, which is usually considered to be pretty conservative (and hence, generally bad for policyholders). The State of West Virginia sued J.M. Smith Corporation, a wholesale drug distributor.  According to the State, J.M. Smith and other defendants were contributing to a prescription drug abuse epidemic in West Virginia by failing to identify, block, and report excessive drug orders. The complaint asked for injunctive relief to prevent the defendants from “willfully and repeatedly” violating the Uniform Controlled Substances Act, and it also alleged negligence. For example, the complaint claimed that the defendants “knew or should have known” that certain prescriptions were not for “legitimate medical purposes.”

Not too many businesspeople would think that a complaint for violation of the Uniform Controlled Substances Act could implicate general liability coverage. Liberty Mutual, the carrier in this case, didn’t think so, either.  But Liberty Mutual isn’t wearing the black robes, and here, the Court held: “The distinction between intentional acts and intended consequences is instructive. The actual conduct alleged by the state of West Virginia is the drug distributors’ failure to implement sufficient controls and systems to identify and alert regulatory authorities to suspicious prescription drug orders. In Count IV for negligence, the state alleges that these failures breached duties of care in marketing, promoting, and distributing controlled substances as well as duties to guard against third-party misconduct such as that engaged in by ‘pill mills.’ This type of failure to take reasonable care and the resultant harm is the hallmark of negligence claims, and the count contains no demonstration of any intent to harm prescription drug users or, through them, the state.”  (Emphasis added.)

Now, you might wonder, if this is a general liability coverage claim, where are the allegations of “bodily injury” or “property damage”?  Liberty Mutual’s lawyers may have lost the forest for the trees on that one, because the Court noted that the “bodily inury/property damage” argument had not been raised in the Court below, and was therefore waived.  I think, though, that a strong argument could have been made by J.M. Smith for the existence of “bodily injury” as a result of the harmful effects of misused prescription narcotics.

Here’s an interesting point:  If the claim were brought here in New Jersey, there likely would have been no immediate duty to defend, despite the existence of the negligence claims.  That’s because of our Supreme Court’s (crazy) decision in Burd v. Sussex Mutual Insurance Co., 56 N.J. 383 (1970), a classic “bad facts make bad law” case.  In Burd, the policyholder kneecapped someone with a shotgun, and was convicted of atrocious assault and battery.  The policyholder submitted the subsequent civil action to his homeowners’ carrier, who denied coverage based on the fact that, well, the policyholder had kneecapped someone with a shotgun.  The Court found that because intentional acts were alleged, the insurance company faced a conflict of interest. The carrier had a financial incentive for the factfinder to determine that intentional harm had been committed, while the policyholder had an interest in a finding of negligence. The Court “solved” that problem by converting the duty to defend into a duty to reimburse defense costs in the event that coverage were to be established.

The Burd Court specifically wrote:  “The carrier should not be permitted to assume the defense if it intends to dispute its obligation to pay a plaintiff’s judgment, unless of course the insured expressly agrees to that reservation.”  (Emphasis added.)  Many insurance claims people, and some judges, forget about the “reservation” part, and blithely assume that no duty to defend is ever triggered when intentional acts are alleged against the policyholder, at least until the policyholder succeeds in proving coverage. It’s interesting that 49 other states require the carrier to defend unless and until there’s a finding of no coverage.

Do insurance companies discount their premium rates for New Jersey policyholders, since the duty to defend is limited? (That’s what we lawyers call a rhetorical question.)

By the way, you can read the Fourth Circuit decision here.