Specific Litigation Exclusion Bars Coverage for Separate Proceeding Involving Same Conduct in Allegedly Oversupplying “Pill Mills”

An Ohio federal district court has held that a specific litigation exclusion concerning a lawsuit brought by a state attorney general alleging that the insured oversupplied “pill mills” barred coverage for a show cause order the insured later received from a federal law enforcement agency concerning some of the same alleged misconduct.  Miami-Luken, Inc. v. Navigators Ins. Co., 2018 WL 3424448 (S.D. Ohio July 11, 2018).

The insured, a wholesale pharmaceutical distributor, was named as a defendant in a suit brought by the Attorney General of West Virginia alleging that it wrongfully oversupplied pharmacies in low-population cities with suspiciously large amounts of controlled substances.

While the lawsuit was ongoing, the insured purchased a D&O policy that contained a specific litigation exclusion concerning the West Virginia lawsuit, as well as any Claim “based upon, arising out of, relating to, directly or indirectly resulting from, or in consequence of, or in any way involving” that suit “or the same or substantially the same facts, circumstances or allegations which are the subject of or the basis for such proceeding.”

During the policy term, the Drug Enforcement Agency (DEA) served an order to show cause (the “DEA Show Cause Order”) as to why the DEA should not revoke the insured’s Certificate of Registration and deny pending applications filed by the insured.  The DEA Show Cause Order asserted that the insured failed to maintain effective controls over pharmaceuticals, and it identified some of the pharmacies identified in the earlier West Virginia suit.  The insured submitted the DEA Show Cause Order to its D&O insurer, which denied coverage.

In ruling on cross-motions for summary judgment in ensuing coverage litigation, the court ruled in favor of the insurer, concluding that the specific litigation exclusion barred coverage for the DEA Show Cause Order.  In so ruling, the court noted that the exclusion “contemplates a comparison of the facts, circumstances or allegations of the two actions and whether they are the same or substantially similar” (emphasis in original).  The court acknowledged that the DEA Show Cause Order concerned a broader geographic area and timeframe, but it also noted the overlap of certain pharmacies, the same controlled substances, and the same general allegation that the insured failed to maintain controls related to the diversion of controlled substances.  The court deemed these commonalities sufficient to bar coverage under the exclusion given that, “[a]t the very least, the facts or circumstances are substantially the same.”  The court also determined that the DEA Show Cause Order was sufficiently based upon or otherwise related to the West Virginia lawsuit, noting the overlapping supporting facts, circumstances and allegations.  On that basis, the court held that there was no coverage for the DEA Show Cause Order under the policy.