Courts nationwide have issued a wide range of decisions on insurance coverage for lawsuits arising out of the opioid epidemic under commercial general liability policies. On August 17, 2023, a North Carolina federal court illustrated why coverage is also available under Directors and Officers (D&O) liability insurance policies. In The North Carolina Mutual Whole Company v. Federal Insurance Company, No. 1:22-CV-553, 2023 WL 5312234 (M.D.N.C.), the court determined a drug wholesaler’s D&O policy provides coverage for more than one hundred underlying lawsuits, rejecting the insurer’s argument that two exclusions, the contract and professional services exclusions, barred coverage.
Mutual Drug, a wholesale distributer of pharmaceutical drugs, sought coverage under its D&O policy for underlying suits alleging that it violated state and federal laws and regulations, and breached common law duties, by failing to properly monitor, identify and stop suspicious orders of prescription opioids. However, Chubb (a unit of Federal Insurance Company) refused to provide coverage, relying on two exclusions in the policy—the “Contract” exclusion and the “Professional Services” exclusion.
Chubb argued the “Contract” exclusion should apply because the underlying liability lawsuits arise from contracts Mutual Drug has with its customers. The court quickly disposed of Chubb’s argument: “None of the claims against Mutual Drug are based on any contract, and Chubb has pointed to no language in any of the complaints that relies on or even mentions any contract to which Mutual Drug is a party.” Most of the underlying claims against Mutual Drug involve duties imposed by common law or from regulations. Simply because Mutual Drug uses contracts as part of its business is too attenuated of a connection to conclude that the claims must arise from a contract.
The court was similarly unimpressed by Chubb’s argument in support of the policy’s professional services exclusion. The exclusion defined “professional services” as “services which are performed for others for a fee.” Chubb argued that Mutual Drug’s compliance reviews for customers were “services” for a fee. But Judge Eagles succinctly noted that Chubb “points to nothing to indicate that Mutual Drug charged a specific fee to undertake compliance duties on behalf of any customer.” Further, Chubb failed to point to any claim in the underlying suits involving an allegation that Mutual Drug provided any professional services to the plaintiffs.
Taking its analysis a step further, the court looked to the common understanding of the term “services” by citing to Merriam-Webster for its definition (as the term “services” was undefined in the policy), which is an act of labor that does not involve a tangible commodity. But Mutual Drug’s business is a commercial distributor of tangible pharmaceutical commodities. Additionally, the exclusion’s definition of “professional service” includes services “for a fee.” But Mutual Drug’s compliance reviews were done to comply with federal, state, and local laws and regulations (and not for a separate fee). As such, the compliance reviews fell outside the policy’s definition of “professional services.” To be sure, the court noted that to conclude otherwise “would transform every simple commercial transaction into a professional service if the sale involved commodities subject to a distributor’s compliance with any one of a multitude of regulatory or licensing requirements. It is hard to think of anything the policy would cover if Chubb’s sweeping interpretation were adopted.”
For a policyholder, the decision offers some positive takeaways:
First, the decision underscores the premise that an insurer cannot expansively apply an exclusion to effectively eviscerate coverage, as would occur here under Chubb’s view of the professional services exclusion.
Second, the decision confirms the availability of coverage for claims arising from the manufacture, distribution and sale of opioids. As with any decision, however, the outcome here is a consequence of the facts and circumstances before the court, illustrating the critical importance to assess each case on its own merits. Experienced coverage counsel can make that assessment and guide policyholders under their specific facts and coverages, points that Hunton partner Geoffrey Fehling emphasized in comments to Law360 earlier this year.