Neither Contract Exclusion nor Professional Services Exclusion Bar Coverage for Lawsuits Against Insured Alleging Breach of Common Law Duties in Connection With its Fulfillment of Orders for Prescription Opioids

The United States District Court for the Middle District of North Carolina, applying North Carolina law, ruled that neither a contract exclusion nor a professional services exclusion contained in a D&O policy barred coverage for several lawsuits against an insured alleging breach of common law duties in connection with fulfillment of suspicious orders by pharmacies for prescription opioids. North Carolina Mut. Wholesale Drug Co. v. Fed. Ins. Co., 2023 WL 5312234 (M.D.N.C. Aug. 17, 2023).

The insured is a wholesale distributor of pharmaceutical drugs and was named as a defendant in “several dozen lawsuits concerning opioid prescriptions in which various municipalities, hospitals, and individuals assert[ed] tort and statutory claims against it.” It was undisputed that the opioid lawsuits fell within the general coverage provisions of the insured’s claims-made liability policy. However, the insurer declined to indemnify the insured for its defense costs and liabilities because it contended that both a contract exclusion and a professional services exclusion applied. Coverage litigation ensued, and the parties filed cross-motions for summary judgment. The court held that neither exclusion applied.

Turning first to the contract exclusion, the court ruled that “[n]one of the claims against [the insured] are based on any contract, and [the insurer] has pointed to no language in any of the complaints that relies on or even mentions any contract to which [the insured] is a party.” In so holding, the court rejected the insurer’s argument that the opioid cases “arise from” the contracts between the insured and its customers, such as membership agreements with independent pharmacies, customer agreements, and member applications. The court held 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.” Instead, the court observed, the claims arose “from duties imposed under the common law” and other “regulatory duties.”

The court further held that the professional services exclusion did not bar coverage for the opioid litigation. The policy defined “professional services” as “services which are performed for others for a fee.” The insurer unsuccessfully argued that the opioid lawsuits related to professional services because the insured “conducted compliance reviews for customers.” The court rejected the insurer’s argument because it did not provide any information to indicate that the insured charged a fee to undertake compliance duties. Moreover, the court determined that the compliance reviews are conducted by the insured “to comply with its own obligations under federal, state, and local laws and regulations for the sale of pharmaceuticals and not in exchange for a separate fee from its customers.”