Rochester Drug Co-Operative, Inc. v. Hiscox Ins. Co., 6:20-CV-06025 EAW

Decision Date11 June 2020
Docket Number6:20-CV-06025 EAW
Citation466 F.Supp.3d 337
CourtU.S. District Court — Western District of New York

Brian Marc Feldman, Harter Secrest & Emery LLP, Rochester, NY, Lauren Renee Mendolera, Patrick Tomovic, Harter, Secrest and Emery LLP, Buffalo, NY, for Plaintiff.

David S. Sheiffer, Patrick J. Lawless, Wilson Elser Moskowitz Edelman & Dicker LLP, New York, NY, for Defendant.


ELIZABETH A. WOLFORD, United States District Judge


Plaintiff Rochester Drug Co-Operative ("Plaintiff") brings an action against Hiscox Insurance Company, Inc. ("Defendant") for breach of an insurance policy due to Defendant's refusal to advance reasonable defense costs for a trial. (Dkt. 1).

On January 24, 2020, Plaintiff filed a motion for preliminary injunction seeking an order pursuant to Federal Rule of Civil Procedure 65(a) enjoining and restraining defendant Hiscox Insurance Company, Inc. ("Defendant") from "[d]ishonoring [Plaintiff's] ... right to the advancement of current and future defense costs, inclusive of attorneys’ fees, discovery expenses, and expert fees; and ... [r]efusing to advance reasonable defense costs" in connection with three lawsuits scheduled to go to trial on March 20, 2020, in New York State Supreme Court, Suffolk County. (Dkt. 11). The Court issued an Order on February 25, 2020, granting Plaintiff's motion subject to it posting a bond in the amount of five hundred thousand dollars ($500,000), and noting that a Decision and Order would subsequently be issued memorializing the Court's reasoning in further detail. (Dkt. 44).

Also presently before the Court is Defendant's motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6). (Dkt. 21)

The Court now issues this Decision and Order setting forth in further detail its reasons for previously granting Plaintiff's motion for preliminary injunction, and for those same reasons, it now denies Defendant's motion to dismiss.


Plaintiff is a drug distribution cooperative owned by and run for the benefit of independent pharmacies. (Dkt. 11-3 at ¶ 3). Plaintiff purchases pharmaceuticals directly from manufacturers and distributes them to licensed pharmacies throughout the northeast. (Id. ). Headquartered in Rochester, Plaintiff employed a total of 183 employees, including 97 in Rochester. (Id. ).

Over the past two years, Plaintiff has been sued, alongside other drug distributors, in more than thirty-one actions throughout the state of New York, both state and federal, for its alleged involvement in the unlawful distribution of opioids ("NY Opioid Lawsuits"). (Dkt. 11-1 at ¶ 6). These cases include three actions brought by Nassau County, Suffolk County, and the State of New York (the "Trial Litigation"). (Dkt. 11-3 at ¶¶ 6, 10).

In July 2015, the U.S. Attorney's Office for the Southern District of New York filed a civil action against Plaintiff based on Plaintiff's failure to file required reports with the U.S. Drug Enforcement Agency ("DEA"). (Dkt. 11-1 at 234). On July 8, 2015, a consent order was entered where Plaintiff admitted to violations of the Controlled Substances Act regarding its failure to report and agreed to pay a $360,000 penalty. (Id. ). In February 2017, the Government served a civil document request on Plaintiff seeking documents related to its distribution of controlled substances. (Id. at 242).

On February 1, 2017, Plaintiff submitted a completed AIG Portfolio Select Application for an insurance policy to Defendant (the "Application"). (Dkt. 20). In March 2017, Plaintiff purchased Private Company Management Liability Insurance Policy No. UVA 1901769.17 from Defendant, effective from March 8, 2017, to March 8, 2018 (the "Policy"). (Dkt. 1-1 at 22-147). Defendant agreed under the Policy to pay up to $5,000,000 for defense costs incurred to defend Plaintiff against covered claims and an additional executive limit of liability of $1,000,000, subject to a $25,000 retention. (Id. at 2, 74). The Policy includes "wrongful acts" coverage, defining a "wrongful act" to include "any breach of duty, neglect, error, misstatement, misleading statement, omission, or act." (Id. at 19). The Policy also contains an exclusion for "any Claim ... arising out of, based upon or attributable to the ... committing of any deliberate criminal or deliberate fraudulent act ... if any final adjudication establishes that such deliberate criminal or deliberate fraudulent act ... was committed." (Id. at 20).

In November 2017, Plaintiff retained the law firm Allegaert Berger & Vogel LLP ("ABV") to represent it in the NY Opioid Litigation brought by the New York Attorney General and various New York counties and municipalities ("State Actions").1 (Dkt. 11-2 at ¶ 6). Also in November 2017, the U.S. Attorney served a criminal subpoena on Plaintiff. (Dkt. 11-1 at 242).

Plaintiff notified Defendant of two of the state court lawsuits, and on March 22, 2018, Defendant acknowledged potential coverage for those lawsuits "subject to the Policy's terms and conditions, currently known information and a full reservation of rights." (Dkt. 11-3 at 8-15). Thereafter, Plaintiff provided Defendant notice of at least 25 other actions, and on August 24, 2018, Defendant once again acknowledged potential coverage for those matters. (Id. at 17-22). On October 2018, ABV submitted an estimated litigation plan and budget to Defendant. (Id. at ¶ 7). Before this submission, Defendant had attempted repeatedly to get copies of ABV's invoices and to discuss allocation between covered and uncovered claims. (Dkt. 17 at 18). On January 18, 2019, Plaintiff's broker informed Defendant that Plaintiff's general counsel would address allocation, but Defendant was never contacted by the general counsel. (Dkt. 17-6). On February 19, 2019, Defendant issued a letter acknowledging potential coverage for two additional actions. (Dkt. 11-1 at 338-44).

On April 22, 2019, Plaintiff entered into a deferred prosecution agreement ("DPA") with the U.S. Attorney for the Southern District of New York. (Dkt. 11-1 at 171-299). The DPA included admissions of wrongdoing by Plaintiff, and provided for the dismissal of the information with prejudice after five years’ compliance with the terms of the agreement. (Id. ). On April 23, 2019, Plaintiff stipulated to a civil settlement with the U.S. Attorney for the Southern District of New York (the "Stipulation"), which also contained admissions of wrongdoing and provided that Plaintiff will obtain a release of liability if it complied with the Stipulation's terms, and that a judgment would be filed only "[i]n the event of an Uncured Default" of the Company's settlement payments. (Id. at 306-25). The Stipulation was "So Ordered" by the United States District Judge on April 25, 2019. (Id. at 325). On May 3, 2019, William Pietruszewski, Plaintiff's former Chief of Compliance, pleaded guilty in the United States District Court for the Southern District of New York to violations of 21 U.S.C. § 841(a)(1) for conspiracy to distribute narcotics, 18 U.S.C. § 371 for conspiracy to defraud the United States, and 21 U.S.C. §§ 842(a)(5) and (c)(2)(A) for knowingly failing to report narcotic sales. United States v. Pietruszewski , No. 1:19-cr-00282-WHP-1, Dkt. 9 (S.D.N.Y. May 3, 2019). Similar charges also remain pending against Defendant's former Chief Executive Officer, Laurence Doud. See United States v. Doud III , No. 1:19-cr-00285, Dkt. 1, 2019 WL 1799263 (S.D.N.Y. Apr. 22, 2019). Plaintiff did not contact Defendant further about the defense costs until July 26, 2019, when Plaintiff attempted to set up a meeting to discuss the allocation issues. (Dkt. 17-8). Also around that time, Defendant learned of the DPA and the Stipulation with the federal government. (Dkt. 17 at 18).

On August 5, 2019, Defendant issued a draft letter to Plaintiff advising that the admissions contained in the DPA and Stipulation precluded coverage for the totality of the State Actions based on the Illegal Conduct Exclusion in the Policy. (Dkt. 15 at ¶ 31). Plaintiff responded on August 29, 2019, disputing Defendant's position regarding the applicability of the Illegal Conduct Exclusion, asserting that there had been no "final adjudication" necessary to trigger the Exclusion. (Dkt. 1-3). Defendant issued its final letter denying coverage on September 13, 2019. (Dkt. 1-4).

On November 13, 2019, Justice Jerry Garguilo in the Supreme Court of the State of New York, Suffolk County bifurcated the claims in the Trial Litigation and ordered a March 20, 2020 trial date for the public nuisance claims. (Dkt. 15-1 at ¶ 10). The plaintiffs in the Trial Litigation produced seven expert reports, the majority of which were served on Plaintiff on or about December 19, 2019. (Dkt. 15-1 at ¶ 15). Plaintiff filed its rebuttal to those expert reports on February 3, 2020. (Id. ).

Plaintiff filed the instant action on January 10, 2020. (Dkt. 1). On January 21, 2020, Plaintiff hand-delivered to the undersigned's Chambers papers in support of a motion for preliminary injunction, motion to expedite, and motion to seal. On January 22, 2020, the Court granted in part and denied in part the motion to expedite, denied the motion to seal (Dkt. 4), and instructed Plaintiff to file the motion for preliminary injunction, motion to expedite, and motion to seal with proposed redactions by January 24, 2020. (Dkt. 5). Plaintiff timely resubmitted the motion to seal (Dkt. 9), motion to expedite (Dkt. 10), and motion for a preliminary injunction (Dkt. 11) according to the Court's instructions. The Court granted Plaintiff's motion to seal on January 27, 2020. (Dkt. 12). Defendant filed its response to the motion for preliminary injunction on February 3, 2020 (Dkt. 17), and Plaintiff submitted its reply on February 7, 2020 (Dkt. 24). Oral argument was held on February 14, 2020, before the undersigned, who reserved...

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