(Article from Insurance Law Alert, September 2023)
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Holding
A North Carolina district court granted a policyholder’s summary judgment motion, ruling that contract and professional service exclusions in a claims-made policy did not bar coverage for underlying opioid-related claims. North Carolina Mutual Wholesale Drug Co. v. Federal Ins. Co., 2023 U.S. Dist. LEXIS 147248 (M.D.N.C. Aug. 17, 2023).
Background
Mutual Drug, a wholesale company that sold products to retail pharmacies, was sued in numerous lawsuits brought by municipalities, hospitals and individuals. The complaints alleged that Mutual Drug failed to monitor or investigate suspicious orders by pharmacies for prescription opioids, in violation of federal and state law and in breach of common law duties among other things. Chubb refused to indemnify Mutual Drug for its defense costs and liabilities on the basis of policy exclusions relating to contract and professional services. The court ruled that neither provision applied to the underlying claims.
Decision
The contract exclusion applied to any claim “based upon, arising from or in consequence of any liability in connection with any oral or written contract or agreement.” Chubb argued that this provision barred coverage because the underlying claims arose from liability in connection with Mutual Drug’s wholesale distribution contracts with independent pharmacies. Rejecting this contention, the court held that the underlying claims arose from common law or regulatory duties, rather than those contracts. The court acknowledged the breadth of the exclusion, but explained that “[t]he fact that the claims arise out of the insured’s business and that the insured uses contracts in its business is not enough.”
Likewise, the court ruled that the professional services exclusion was inapplicable. While the policy defined “professional services” as “services which are performed for others for a fee,” the court concluded that none of Mutual Drug’s services could be categorized as “professional” regardless of whether it charged fees to independent pharmacies. In particular, the court explained that Mutual Drug’s commercial distribution of tangible commodities does not constitute a professional service, “or indeed any service[ ] at all.” The court rejected Chubb’s contention that by conducting compliance reviews in connection with the sale of pharmaceutical products, it engaged in “services,” emphasizing that those reviews were undertaken in compliance with federal, state, and local regulations for the sale of pharmaceuticals and not in exchange for a separate fee from customers.
Comments
In the emerging area of opioid coverage litigation, most decisions have turned on whether the underlying claims alleged a covered “occurrence” (as opposed to knowing or intentional conduct) and/or covered “bodily injury” (as opposed to purely economic damages incurred by municipalities or other entities). The decision in this case addresses somewhat different issues of coverage in this context and illustrates the limits some courts may impose in construing certain policy exclusions.