(Article from Insurance Law Alert, June 2020)
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Reversing a trial court decision, an Ohio appellate court ruled that an insurer must defend a pharmaceutical distributor against certain suits filed by government agencies seeking to cover costs for addressing the opioid problem, finding that the suits sought damages “because of” bodily injury and that coverage was not precluded by a loss-in-progress provision. Acuity v. Masters Pharmaceutical, Inc., 2020 WL 3446652 (Ohio Ct. App. June 24, 2020).
Acuity sought a declaration that it owed no defense or indemnity to Masters Pharmaceutical in national prescription opioid suits filed by government entities. The underlying suits alleged that opioid manufacturers and distributors failed to monitor and report suspicious opiate orders, which contributed to an epidemic that caused financial harm to the government entities. More specifically, the government entities alleged that they incurred increased expenses relating to law enforcement, judicial resources and medical costs.
As discussed in our February 2019 Alert, an Ohio trial court granted Acuity’s summary judgment motion, ruling that the damages sought in the underlying litigation were not “because of” bodily injury and instead were economic loss claims. Additionally, the trial court held that there was no coverage because the policy excluded claims that were previously known to Masters. According to the underlying suits, Masters filled suspicious orders and knew of the opioid addiction crisis prior to obtaining insurance from Acuity.
The appellate court reversed, ruling that “the policies expressly provide for a defense where organizations claim economic damages, so long as the damages occurred because of bodily injury.” In so ruling, the court relied on Cincinnati Ins. Co. v. H.D. Smith, L.L.C., 829 F.3d 771 (7th Cir. 2016) (discussed in our July/August 2016 Alert), in which the Seventh Circuit ruled that general liability policies triggered an insurer’s duty to defend claims against a pharmaceutical company in opioid litigation. The court deemed it irrelevant that the government entities themselves did not sustain bodily injury, noting that their economic losses were “because of” bodily injury. The court distinguished Medmarc Casualty Insurance Co. v. Avent America, Inc., 612. F.3d 607 (7th Cir. 2010), in which the Seventh Circuit ruled that an insurer had no duty to defend a suit against a manufacturer based on the presence of harmful components in baby bottle products, finding that the suit did not allege bodily injury.
Finally, addressing a matter of first impression under Ohio law, the appellate court ruled that a loss-in-progress provision did not bar coverage. The provision states that coverage is unavailable if the insured “knew, prior to the policy period, that the bodily injury or property damage occurred,” and that the “continuation, change or resumption of such bodily injury or property damage during or after the policy period will be deemed to have been known prior to the policy period.” The court concluded that the insurer did not establish Master’s knowledge of bodily injury prior to the 2010 policy inception, notwithstanding that in 2008, the Drug Enforcement Agency issued a show-cause order alleging that Masters had failed to maintain effective controls against the diversion of opioids and that in 2009, Masters was required to pay $500,000 and implement a monitoring and compliance system. The court stated:
We agree that [Masters] may have been aware there was a risk that if it filled suspicious orders, diversion of its products could contribute to the opioid epidemic, thus causing damage to the government entities. But, we hold that mere knowledge of this risk is not enough to bar coverage under the loss-in-progress provision.