(Article from Insurance Law Alert, June 2020)
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A New York federal court ruled that an insurer must continue to pay defense costs for a bankrupt opioid distributor, finding that the insurer had not conclusively demonstrated that policy exclusions barred coverage. Rochester Drug Co-Operative, Inc. v. Hiscox Ins. Co., Inc., 2020 WL 3100848 (W.D.N.Y. June 11, 2020).
Rochester Drug, a drug distribution cooperative, was sued in numerous state and federal actions for its alleged involvement in the unlawful distribution of opioids. Hiscox initially acknowledged potential coverage for the lawsuits, but after Rochester Drug entered into a delayed prosecution agreement (“DPA”) and stipulation with the government, Hiscox notified Rochester Drug that admissions in the DPA precluded coverage based on an Illegal Conduct Exclusion.
The court granted Rochester Drug’s motion for a preliminary injunction regarding Hiscox’s duty to advance defense costs, finding that Rochester Drug demonstrated the likelihood of irreparable harm absent preliminary relief and of success on the merits regarding Hiscox’s duty to pay defense costs. More specifically, the court concluded that Rochester Drug raised “sufficiently serious questions” as to whether the Illegal Conduct Exclusion, among others, would bar coverage for the underlying claims. The Illegal Conduct Exclusion precludes coverage for loss arising out 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 [conduct] . . . was committed.”
The court ruled that the DPA is not a final adjudication, noting that it was not substantively reviewed by a court. As to the stipulation, which the court deemed a “closer question,” the court ruled that even if the stipulation is deemed a final adjudication, it does not establish that Rochester Drug committed a deliberate criminal or fraudulent act, or willfully violated the law. Although Rochester Drug admitted in the stipulation that it “knowingly failed to implement an adequate system to detect, investigate and report suspicious orders of controlled substances,” the court concluded that this statement did not establish that the company deliberately committed a crime or violation of law.
Finally, the court ruled that coverage was not necessarily barred by a Prior Knowledge Exclusion. Although Rochester Drug had knowledge of a civil investigation by the Drug Enforcement Agency before the policy was issued, the court noted that the underlying claims against Rochester Drug extended beyond that civil claim and encompassed numerous other causes of action about which Rochester Drug had no previous knowledge.