Liberty Mutual Fire Insurance Company v. Jm Smith Corporation; Smith Drug Company, Inc.

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 13-2451
LIBERTY MUTUAL FIRE INSURANCE COMPANY,
Plaintiff - Appellant,
v.
JM SMITH CORPORATION; SMITH DRUG COMPANY, INC.,
Defendants - Appellees.
Appeal from the United States District Court for the District of
South Carolina, at Spartanburg. Timothy M. Cain, District
Judge. (7:12-cv-02824-TMC)
Argued: January 28, 2015 Decided: March 13, 2015
Before WILKINSON, AGEE, and HARRIS, Circuit Judges.
Affirmed by unpublished per curiam opinion.
ARGUED: Laura Anne Foggan, WILEY REIN LLP, Washington, D.C., for
Appellant. George Antonios Tsougarakis, HUGHES, HUBBARD & REED
LLP, New York, New York, for Appellees. ON BRIEF: Vollie
Cleveland Bailey, IV, Robert Mason Barrett, Perry D. Boulier,
HOLCOMBE BOMAR, PA, Spartanburg, South Carolina; Amera Z.
Chowhan, Taylor K. Herman, HUGHES, HUBBARD & REED LLP, New York,
New York, for Appellees.
Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:
Liberty Mutual appeals a district court ruling that it had
a duty to defend its insured, the J M Smith Corporation, in a
lawsuit brought by the state of West Virginia. Because the
claims alleged in the West Virginia complaint create a
possibility of coverage under the commercial general liability
insurance policy that Liberty Mutual issued to J M Smith, we
hold that Liberty Mutual has a duty to defend in the West
Virginia case. We therefore affirm the judgment of the district
court.
I.
J M Smith Corporation, along with its division Smith Drug
Company, Inc. (collectively “J M Smith”), is a South Carolina
wholesale pharmaceutical distributor. Since at least 2000, J M
Smith has been insured by Liberty Mutual, a Wisconsin
corporation, under annual commercial general liability (CGL)
insurance policies. Among other things, these policies require
Liberty Mutual to defend J M Smith against any suit seeking
damages for bodily injury or property damage resulting from an
“occurrence.” J.A. 117. Under the policy, an “occurrence” is
defined as “an accident, including continuous or repeated
exposure to substantially the same general harmful conditions.”
J.A. 130. “Accident,” however, is left undefined.

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On June 26, 2012, while J M Smith was insured by Liberty
Mutual, the Attorney General of West Virginia sued J M Smith and
twelve other wholesale drug distributors operating in the state.
The complaint (“West Virginia Complaint”) alleged that the drug
distributors were contributing to a well-publicized prescription
drug abuse epidemic in West Virginia by failing to identify,
block, and report excessive drug orders. It identified “pill
mills” -- physicians, pharmacists, and distributors of
controlled substances who write and fill excessive prescriptions
-- as responsible for increased abuses. The complaint also
charged the drug distributors with “substantially contributing
to” the epidemic by failing to maintain sufficient controls that
would flag suspicious orders as required by West Virginia law,
all while the distributors were on notice that the epidemic was
a current and growing problem. West Virginia requested damages
and equitable relief for the harms caused to the state by the
companies’ alleged contributions to the epidemic.
A.
Given that the duty to defend depends on the possibility of
insurance coverage arising from the specific allegations in the
West Virginia complaint, we touch briefly on the details of the
often overlapping eight counts West Virginia alleged against the
thirteen defendants.

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West Virginia first requested injunctive relief to prevent
the defendants from “willfully and repeatedly” violating the
Uniform Controlled Substances Act by failing, among other
things, “to provide effective controls and procedures to guard
against diversion of controlled substances in contravention of
West Virginia law.” J.A. 147 (W. Va. Complaint). West Virginia
contended that failing to enjoin these violations would result
in further losses “as the proximate result of the failure by the
Defendants to monitor and to disclose suspicious orders of
controlled substances.” J.A. 147 (W. Va. Complaint).
Second, West Virginia requested damages for “Negligence and
Violations of the West Virginia Uniform Controlled Substances
Act.” J.A. 148 (W. Va. Complaint). West Virginia alleged that
the defendants were required to know their customer base and
that, instead, they “willfully turned a blind eye towards the
actual facts” of the drug abuse epidemic by “negligently
act[ing] with others to violate West Virginia’s drug laws” and
“creat[e] conditions which contribute[d] to the violations of
[these] laws.” J.A. 149 (W. Va. Complaint).
Third, the state alleged that the defendants had repeatedly
and willfully violated regulations promulgated under the Uniform
West Virginia Controlled Substances Act requiring companies to
obtain a controlled substance permit, maintain “effective
controls and procedures to guard against theft and diversion of

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controlled substances,” and “operate a system to disclose []
suspicious orders of controlled substances” that deviate from
normal patterns in size or frequency. J.A. 150-151 (W. Va.
Complaint). West Virginia alleged that these violations
constituted unfair or deceptive acts or practices in violation
of the West Virginia Consumer Credit and Protection Act. J.A.
150-151 (W. Va. Complaint).
Count IV alleged that the defendants had “negligently,
recklessly, and/or intentionally” distributed controlled
substances known to be abused, “in such quantities and with such
frequency” that the defendants “knew or should have known” that
the prescriptions were not for “legitimate medical purposes.”
J.A. 152 (W. Va. Complaint). By doing so with a “blind
indifference to the facts” of the prescription drug abuse
epidemic, the state charged the defendants with creating a
public nuisance.
The fifth count alleged that the defendants had been
unjustly enriched by earning money distributing drugs that were
not for legitimate medical purposes and by not having to pay the
costs incurred by the state as a result of prescription drug
abuses. J.A. 154 (W. Va. Complaint).
Count VI, entitled “Negligence,” alleged a breach of the
“duty to exercise reasonable care in the marketing, promotion
and distribution of controlled substances,” as well as

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negligence in “failing to guard against third-party misconduct”
in the form of “pill mills.” J.A. 155 (W. Va. Complaint). The
state claimed that the defendants breached their duty of “care,
prudence, watchfulness, and vigilance commensurate to the
dangers involved in the transaction of its business,” a business
which posed “distinctive and significant dangers” that the
defendants failed to acquire “special knowledge and special
skills” to prevent or ameliorate. J.A. 156 (W. Va. Complaint).
The complaint incorporated earlier allegations to demonstrate
conduct that breached proper care. J.A. 155 (W. Va. Complaint).
Count VII requested a fund for medical monitoring to treat
patients who had become prescription drug abusers as a result of
the defendant’s negligent and unlawful conduct.*
Finally, the eighth count alleged the defendants violated
antitrust laws by conspiring with “pill mill” physicians and
pharmacies to engage in “unfair and deceptive business practices
to obtain [a] dominant market share” in West Virginia. J.A. 158-
159. It alleged that by prescribing, filling and distributing
controlled substances for illegitimate, non-medical uses, the
* After the district court decision, the West Virginia
Attorney General filed an amended complaint which omitted this
count. Amended Complaint, West Virginia v. Amerisourcebergen
Drug Corp., No. 12-C-141 (W. Va. Cir. Ct. Jan. 2, 2014).
However, as the presence or absence of this claim does not
change our decision, this revision to the complaint is
immaterial for the purposes of this appeal.

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pill mills -- including defendants -- gained an unfair advantage
over drug distributors that complied with regulations and
established sufficient controls. J.A. 159 (W. Va. Complaint).
B.
On September 28, 2012, Liberty Mutual filed a complaint in
South Carolina district court seeking a declaratory judgment
that it had no duty to defend or indemnify J M Smith in the
underlying West Virginia suit. Liberty Mutual moved for summary
judgment on the ground that the West Virginia Complaint had not
alleged an “occurrence” under the policy, and J M Smith likewise
moved for summary judgment on the ground that the West Virginia
complaint created the possibility of coverage under the policy
to such an extent that Liberty Mutual had a duty to defend it.
On September 24, 2013, the district court granted J M Smith’s
motion and denied that of Liberty Mutual.
In its opinion, the district court found that the West
Virginia Complaint alleged acts of negligence on the part of J M
Smith, not solely intentional violations. It further determined
that the complaint alleged accidental violations because even
though the claims were “arguably based upon intentional acts
which resulted in violations of West Virginia law,” the
violations that resulted from those actions were not natural and
probable consequences that would be reasonably anticipated. From
this ruling Liberty Mutual now appeals.

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II.
Liberty Mutual contends on appeal that the West Virginia
Complaint does not charge an “occurrence” within the meaning of
J M Smith’s CGL policy because the complaint alleges willful and
intentional misconduct on the part of the insured that does not
constitute an “accident.” This seems to us to mischaracterize
the complaint. One count (VI) sounds wholly in negligence, and
the others generally describe a mix of negligence and
intentionality. Liberty Mutual also contends on appeal that even
if the West Virginia Complaint describes an “occurrence,” it has
not alleged bodily injury or property damage as required for
coverage under the policy. However, as Liberty Mutual failed to
raise this last argument properly below, we hold this contention
waived.
As this case comes to us on diversity jurisdiction, the
state law to be applied is determined by the choice-of-law rules
of the state in which the federal district court sits -- in this
case South Carolina. See Atl. Marine Constr. Co., Inc. v. U.S.
Dist. Ct. for the W. Dist. of Tex., 134 S. Ct. 568, 582 (2013)
(citing Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487,
494-96 (1941)). In South Carolina, insurance contracts that are
considered to be made within the state are subject to the laws
of South Carolina. S.C. Code Ann. § 38-61-10. As the contract in
this case was made by a South Carolina company, J M Smith, with

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the South Carolina office of Liberty Mutual, we look to the laws
of South Carolina to determine whether Liberty Mutual has a duty
to defend the underlying action brought by West Virginia.
South Carolina law, like most states, imposes a broad duty
to defend on insurers. Unlike the duty to indemnify that stems
from actual liability, the duty to defend arises from the
defendant’s initial potential liability under the claims as
alleged by the plaintiff. USAA Prop. & Cas. Ins. Co. v. Clegg,
661 S.E.2d 791, 796-97 (S.C. 2008). An insurer must defend its
insured if there is a “possibility of coverage” under the
policy, City of Hartsville v. S.C. Mun. Ins. & Risk Fin. Fund,
677 S.E.2d 574, 578 (S.C. 2009), for even just one claim in the
complaint. See Town of Duncan v. State Budget & Control Bd.,
Div. of Ins. Servs., 482 S.E.2d 768, 773-74 (S.C. 1997); Isle of
Palms Pest Control Co. v. Monticello Ins. Co., 459 S.E.2d 318,
319 (S.C. Ct. App. 1994). We determine the likelihood of
coverage by comparing the policy provisions with the facts
alleged in the complaint, Clegg, 661 S.E.2d at 797, and any
other relevant facts that are outside the complaint but known to
the insurer, City of Hartsville, 677 S.E.2d at 578. Any
ambiguities in the policy must be resolved in favor of finding
coverage for the insured. Cook v. State Farm Auto. Ins. Co., 656
S.E.2d 784, 786 (S.C. Ct. App. 2008). In the above exercise, we
look to the actual facts alleged in the complaint rather than

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the labels affixed to the causes of action. See City of
Hartsville, 677 S.E.2d at 578-79; State Farm Fire & Cas. Co. v.
Barrett, 530 S.E.2d 132, 137 (S.C. Ct. App. 2000).
The instant policy, like many CGL policies, covers property
damage or bodily injury caused by an “occurrence,” defined as
“an accident, including continuous or repeated exposure to
substantially the same general harmful conditions.” “Accident”
is not a defined term in the policy, but it has been well-
defined in South Carolina law to mean “‘[a]n effect which does
not ordinarily follow and cannot be reasonably anticipated from
the use of those means, an effect which the actor did not intend
to produce and cannot be charged with the design of producing.’”
Barrett, 530 S.E.2d at 136 (quoting Goethe v. New York Life Ins.
Co., 190 S.E. 451, 458 (S.C. 1937)). In other words, accidents
require that either the act or the injury resulting from the act
be unintentional.
Turning to the counts alleged in the West Virginia
Complaint, the distinction between intentional acts and intended
consequences is instructive. The actual conduct alleged by the
state of West Virginia is the drug distributors’ failure to
implement sufficient controls and systems to identify and alert
regulatory authorities to suspicious prescription drug orders.
In Count VI for negligence, the state alleges that these
failures breached duties of care in marketing, promoting, and

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distributing controlled substances as well as duties to guard
against third-party misconduct such as that engaged in by “pill
mills.” This type of failure to take reasonable care and the
resultant harm is the hallmark of negligence claims, and the
count contains no demonstration of any intent to harm
prescription drug users or, through them, the state.
Likewise in Count II, West Virginia discusses the standards
of conduct in the industry and then claims that the defendants
“wilfully [sic] turned a blind eye” to the facts and dangers of
the drug epidemic in continuing to distribute their products
negligently. Though paragraph 24 identifies “repeated violation
of various provisions of the West Virginia Uniform Controlled
Substances Act” that have “attended and promoted” the
prescription drug epidemic, it does not tie these violations to
the defendants. Rather, it effectively claims that such
violations are part of the epidemic and the drug distributors,
as part of the system, have not done enough to detect them.
These claims do not amount to allegations of intentional harm.
Even in those counts that do not explicitly allege
negligence, such as Count I for injunctive relief, the
violations complained of by the West Virginia Attorney General
are of laws and regulations that require controls and systems
“to guard against theft and diversion” and “to disclose []
suspicious orders of controlled substances.” J.A. 146. Even if

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intentional acts, the violations described still amount to a
failure to take reasonable care to prevent harm. The public
nuisance claim effectively alleges that the defendants knew
certain drugs were ones that were abused, and then continued to
distribute them without effective controls -- once again,
preventable but unintentional harm.
The cases pointed to by Liberty Mutual are helpful in
drawing this line. The defendants in C.Y. Thomason Co. v.
Lumbermens Mutual Casualty Co. began, as here, with legal but
potentially negligent behavior: digging a ditch and piling a
large amount of construction dirt next to a garage. 183 F.2d
729, 731 (4th Cir. 1950). Over the next year, however, the
construction company watched as the dirt pile and ditch caused
the garage to flood with mud and water -- and did nothing. Our
court determined that this negligent behavior had, over time,
effectively become intentional as the company witnessed direct
harms from its “persistent[] and continuous[]” actions and
failed to correct the situation to prevent further harm that
resulted from “the normal consequences of the acts.” C.Y.
Thomason Co., 183 F.3d at 733.
However much Liberty Mutual might want to compare this case
to that one, that is not what happened here. The West Virginia
Complaint presses allegations against thirteen different
defendants who may have been causing harm, but the chain of

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causation is hardly direct. The complaint claims the defendants
distributed drugs to pharmacies, which then filled physicians’
prescriptions for patients, some of whom were or became abusers,
resulting in harm to the abusers and, as a result, to the state.
This is hardly the same as visible damage being openly visited
as a direct result of the defendant’s negligence. The number of
defendants, all of which were distributing drugs and any one of
which could have caused the alleged injuries, further blurs the
connection between any intentional actions by the defendants and
the alleged harm to the state. No defendant, and certainly not
the insured, has been accused of providing prescription drugs to
any person or entity knowing it was enabling an abuser. At most,
there was a risk that some of the drugs might end up in an
abuser’s hands. C.Y. Thomason Co. and this case aptly
demonstrate the subtle but clear line between intentional and
accidental harm.
The simple fact that the alleged injurious action was
repeated cannot on its own render the harm outside the policy’s
coverage. If that were the case, the CGL policy provision that
allows an accident to include “continuous or repeated exposure
to substantially the same general harmful conditions” would be
meaningless. The possibility must be there, then, that an
insured might engage in behavior repeatedly over a period of
time that results in harm unbeknownst to it. Though the

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defendants here may have known generally that prescription drug
abuse was a problem in West Virginia, the complaint does not
allege knowledge of harm directly attributable to any one
distributor such that further violations must necessarily be
done with intent to harm. Surely the attenuated chain of
causation here creates at least a possibility of coverage in
this case.
The other two cases relied on by Liberty Mutual are equally
unavailing. One involved intentional sexual abuse of children,
which South Carolina courts have held as a matter of law to be
intentional harm. Mfrs. & Merchs. Mut. Ins. Co. v. Harvey, 498
S.E.2d 222, 226 (S.C. Ct. App. 1998). The other case involved an
owner, operator, and distributor of gambling machines accused of
violating laws intended to fight the gambling addiction problem
in the state. Collins Holding Corp. v. Wausau Underwriters Ins.
Co., 666 S.E.2d 897, 898-99 (S.C. 2008). Though the laws alleged
to be violated by J M Smith and the other drug distributors
likewise were enacted to prevent addiction, in this case to
prescription drugs, the similarities end there. The complaint in
Collins alleged that the defendant had been exceeding the
maximum payout permitted by law and fraudulently inducing
gamblers through advertising schemes. Collins, 666 S.E.2d at
899. The whole complaint charged the defendant with the purpose
and intent to get gamblers hooked and, as a result, harmed.

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By contrast, the defendants here were engaged in the lawful
activity of providing prescription drugs to pharmacies. They may
not have been sufficiently careful about whose hands the drugs
eventually reached, but that does not preclude finding
accidental injury. We cannot forecast how the case will
conclude, but it is at least possible that the state court will
find that the defendants did not take sufficient care to catch
suspicious activity and therefore accidentally caused harm to
prescription drug abusers and the state of West Virginia.
Therefore we hold that there is at least a possibility of
coverage under the Liberty Mutual CGL policy, and Liberty Mutual
thus has a duty to defend J M Smith in the underlying action.
AFFIRMED

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