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Liberty Mutual Fire Insurance Co. v. J M Smith Corp.

United States District Court, D. South Carolina, Spartanburg Division

September 24, 2013

Liberty Mutual Fire Insurance Company, Plaintiff/Counter Defendant,
v.
J M Smith Corporation, Smith Drug Company, Inc., Defendants/Counter Plaintiffs.

          OPINION & ORDER

          TIMOTHY M. CAIN, UNITED STATES DISTRICT JUDGE

         This matter is before the Court on cross-motions for summary judgment filed by Plaintiff/Counter Defendant Liberty Mutual Fire Insurance Company (“Liberty Mutual”) and Defendants/Counter Plaintiffs J M Smith Corporation and Smith Drug Company (collectively “J M Smith”). (ECF Nos. 27 and 37). A hearing was held on the matter on May 9, 2013, and the court took the motion under advisement. For the reasons set forth below, Liberty Mutual's Summary Judgment Motion is denied and J M Smith's Summary Motion is granted.

         I. Background/Procedural History

         J M Smith is a pharmaceutical drug distributor incorporated in South Carolina. Beginning in late 2011, J M Smith distributed medications to three pharmacies in West Virginia. In June 2012, the West Virginia Attorney General Darrell V. McGraw, Jr., (“AG”) sued J M Smith and twelve other drug distribution companies alleging that between 2000 and 2011 the companies had illegally distributed controlled substances by distributing drug quantities in excess of legitimate medical need.[1] In this complaint (“Underlying Complaint”), the AG alleges that these companies created “pill mills” in West Virginia and the drug distributors are liable for the harms caused to the state.

         In the Underlying Complaint, the AG alleges the companies were on notice of the growing epidemic of drug abuse from the drugs which they supplied, but that they inserted themselves as an integral part of a pill mill process. (ECF No. 1-14 - Underlying Compl. ¶¶ 2, 4). The Underlying Complaint alleges claims for violations of the West Virginia Uniform Controlled Substances Act, W.Va. Code § 60A-3-301; violations of the West Virginia Consumer Credit and Protection Act, W.Va. Code § 46A-5-101; public nuisance; unjust enrichment; negligence; and violations of the West Virginia Antitrust Act, W.Va. Code § 47-18-4. Id. The complaint seeks injunctive relief and damages.

         Between 2000 and 2011, J M Smith purchased commercial general liability insurance policies through Liberty Mutual (“Policies”). J M Smith sought coverage from Liberty Mutual under the Policies. In this action, Liberty Mutual seeks a declaratory judgment finding it has no duty to defend or indemnify J M Smith.[2] Liberty Mutual has filed a motion for summary judgment on its declaratory claim and on J M Smith's counterclaims for declaratory judgment and breach of contract. J M Smith has filed a cross-motion for summary judgment on the duty to defend claim.

         II. Standard of Review

         Summary judgment is appropriate only “if the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). In deciding whether a genuine issue of material fact exists, the evidence of the non-moving party is to be believed and all justifiable inferences must be drawn in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). However, “[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.” Id. at 248. A litigant “cannot create a genuine issue of material fact through mere speculation or the building of one inference upon another.” Beale v. Hardy, 769 F.2d 213, 214 (4th Cir. 1985). “Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, disposition by summary judgment is appropriate.” Monahan v. County of Chesterfield, 95 F.3d 1263, 1265 (4th Cir. 1996).

         III. Discussion

         The pivotal issue is whether the Underlying Complaint alleges a covered occurrence. Liberty Mutual contends that the Underlying Complaint alleges facts that support only knowing misconduct and, even if the Underlying Complaint could be read to allege that the distributors negligently contributed to drug abuse in West Virginia, not all negligently caused harm is accidental and considered an occurrence. J M Smith contends that the Underlying Complaint sounds in negligence and alleges a classic occurrence. J M Smith alleges it “accidentally” funneled massive quantities of controlled substances into West Virginia.

         In the Underlying Complaint, the AG alleges that “[t]hrough their acts and omissions these [d]efendants have inserted themselves as an integral part of the pill mill” with each defendant “knowingly or while acting grossly negligent prescribe, dispense or distribute prescription medicine for illegitimate medical purposes.” (Underlying Compl. ¶ 4). The AG alleges that the “[d]efendants have acted negligently, recklessly and at times illegally all in contravention of West Virginia law.” (Underlying Compl. ¶ 5).

         There are eight causes of action alleged in the Underlying Complaint. In Count One, the AG seeks injunctive relief and alleges violations of the West Virginia Uniform Controlled Substances Act, W.Va. Code § 60A-3-301. The AG alleges the defendants “failed to diligently respond to suspicious orders which the [d]efendants have filled” and failed to provide effective controls and procedures to guard against diversion of controlled substances in contravention of West Virginia law.” (Underlying Compl. ¶ 16). The AG further alleges that by failing to do so, the defendants “willfully and repeatedly violated the Uniform Controlled Substances Act and corresponding regulations. (Id. ¶ 17).

         In Count Two, the AG seeks “Damages Resulting From Negligence and Violations of the West Virginia Uniform Controlled Substances Act.” by the defendants for “their negligence and by their reckless disregard of the customs, standards and practices within Defendants' own industry.” (Underlying Compl. at 10-11). Specifically, the AG alleges: improper dispensing of prescriptions; engaging in prohibited acts; deceiving and attempting to deceive medical practitioners; disregarding the requirements of the Wholesale Drug Distribution Licensing Act of 1991; and conspiring to violate the West Virginia Controlled Substances Act. (Underlying Compl. ¶ 24). The AG alleges the “[d]efendants have willfully turned a blind eye towards the actual facts by regularly distributing large quantities of controlled substances to customers” and “negligently acted with others to violate West Virginia's drug laws. . . .” (Id. at ¶ 28).

         In Count Three, the AG alleges the defendants violated the West Virginia Consumer Credit and Protection Act and engaged in unfair or deceptive acts or practice in the conduct of trade or commerce and ...


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