                             UNPUBLISHED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Affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.
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.



                                              2
      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.



                                    3
      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

                                         4
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

                                                 5
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.


                                         6
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.

                                              7
                                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

                                 8
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

                                                9
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

                                              10
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

                                              11
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

                                                   12
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

                                          13
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.

                                           14
     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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