Algona insurer faces big liability in drug scheme
By S.P. DINNEN
Register Business Writer
11/16/2003
A Missouri pharmacist's deliberate scheme to dilute the drugs sold to thousands of cancer patients has embroiled an Iowa insurance company in the fight of its life.
Pharmacists Mutual Insurance Co. of Algona has been ordered to pay $2.7 million in interest in just one lawsuit. A Kansas City jury will decide soon whether the company is liable for an additional $27 million in compensatory damages that have been awarded to that patient, Georgia Hayes of Harrisonville, Mo., who suffers from ovarian cancer.
About 500 other lawsuits filed by customers of druggist Robert Courtney are making their way through the courts, and each one represents a potential liability claim for the Algona company.
Courtney pleaded guilty in February 2002 to 20 counts of diluting intravenous cancer drugs that he sold from his Research Medical Tower Pharmacy. He admitted to federal investigators that he had fattened his profits by diluting cancer medications for 10 years - affecting as many as 4,200 patients.
Courtney was sentenced to 30 years in prison.
Pharmacists Mutual sold Courtney his business liability insurance coverage. The Algona company was founded in 1909 and is the only insurance company in the United States that specializes in insuring druggists and their businesses. The company is owned by its policyholders and has about 200 employees in Algona.
Pharmacists Mutual contends that it is not liable for the harm caused to Courtney's customers because his actions were deliberate.
"Our position has always been that illegal acts are not insured," said Kenneth Baker, general counsel for Pharmacists Mutual.
That argument did not work last month when the $330 million verdict on behalf of Georgia Hayes was upheld in Jackson County (Mo.) Circuit Court.
Senior Judge Lee Wells ruled that Pharmacists Mutual was not responsible for $300 million in punitive damages again Courtney. But the judge said the company would at least have to pay interest on a $30.1 million compensatory damage award against Courtney - now about $2.7 million.
The amount Pharmacists Mutual has to pay could be even higher because the judge said it is up to a jury to decide whether Courtney intended to harm his victims when he watered down their chemotherapy drugs.
The judge ruled that each of 27 times Courtney provided diluted drugs for Hayes was a separate occurrence under his Pharmacists Mutual liability policy. The policy provides liability coverage for up to $1 million per occurrence - meaning the Iowa company could be found responsible for $27 million of the damage award to the Missouri woman.
Pharmacists Mutual is preparing an appeal of Judge Wells' ruling to the Missouri Supreme Court.
The company also has asked a federal judge in Kansas City to declare that Pharmacists Mutual is free of any obligation to pay damages awarded to Courtney's customers.
"The injuries and damages . . . resulting from those intentional, purposeful and malicious acts are not covered," the company has contended in court documents.
The 500 lawsuits filed against Courtney by cancer patients or their families have been on hold while the parties awaited a ruling in the Hayes case. So the outcome of the Missouri Supreme Court appeal and Pharmacists Mutual's federal court case could have monumental consequences for the Iowa company.
Richard Mintzer, a Boulder, Colo., consultant who specializes in insurance cases, said Pharmacists Mutual would appear to have the law on its side when it argues that it is not liable for a pharmacist's intentional actions. He said Courtney's guilty plea would seem to buttress that argument.
However, Courtney's contention that he did not intend to cause harm to his victims makes Pharmacists Mutual's legal position more challenging, Mintzer said. The insurer also faces a potentially huge battle in trying to persuade judges or juries that Courtney's actions were one large, single occurrence and not a collection of individual acts, Mintzer added.
"I would guess it's separate occurrences," he said - referring to each time Courtney diluted a drug.
If that's the case, Mintzer said, Pharmacists Mutual could be liable for damages each time a prescription was filled. Courtney admitted in his guilty plea that he diluted drugs that were used in approximately 98,000 prescriptions.
"This insurance company is fighting for its life," Mintzer said.
Pharmacists Mutual has financial reserves, as well as reinsurance. Reinsurance is a practice in which an insurance company buys coverage from another insurer to cover portions of its claims risk.
The Algona company's legal and financial position is strong enough that A.M. Best & Co., which rates the soundness of U.S. insurance companies, still gives its second-highest rating to Pharmacists Mutual.
"I expect this will play out over time," said David Blades, a property and casualty insurance specialist at A.M. Best who has been in touch with Pharmacists Mutual officials over the Courtney lawsuits.
"I expect some sort of mediation to come out of this."
The court rulings in Missouri could affect another Iowa insurer, EMC Insurance Cos. The Des Moines company sold some of the reinsurance coverage for Pharmacists Mutual.
A spokeswoman for EMC said her company does not yet know the extent of any exposure it has to Courtney-related reinsurance claims. And Baker, the Pharmacists Mutual lawyer, would not say how much of its coverage for Courtney was reinsured.
Copyright © 2003, The Des Moines Register.
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