$3.5M “Pill Mill” settlement fully covered as focus of underlying allegations was negligent “bodily injury”

The District Court for the Central District of Illinois Springfield Division, in an opinion by Judge Richard Mills, applying Illinois law, held that Cincinnati Insurance Company (“Cincinnati”) is obligated to indemnify a drug wholesaler for a $3.5M settlement with the State of West Virginia.  Amongst other allegations, the State of West Virginia alleged that the drug wholesaler negligently contributed to the drug epidemic of the state.

The Attorney General of West Virginia and two state agencies sued H.D. Smith Wholesale Drug Company n/k/a H.D. Smith, L.L.C. (“H.D. Smith”) alleging that H.D. Smith distributed pharmaceutical products to pharmacies in West Virginia exceeding the medical need.   According to the underlying complaint, there were “literally thousands of wrongful acts” which would be litigated in the case, including H.D. Smith’s 12,400 transactions to a pill mill pharmacy.   The underlying complaint alleged that the sheer volume of pills shipped by H.D. Smith demonstrated the suspicious nature of the distributions and represented gross violation of H.D. Smith’s legal duty to not distribute controlled substances for non-legitimate purposes.  The underlying complaint included the following six causes of action against H.D. Smith:  Count I – Injunctive Relief for Violations of Responsibilities and Duties Under the West Virginia Controlled Substances Act, Count II – Damages Resulting from Negligence and Violation of the West Virginia Uniform Controlled Substances Act, Count III – Violation of the West Virginia Consumer Credit and Protection Act Unfair Methods of Competition or Unfair or Deceptive Acts or Practices, Count IV – Public Nuisance,  Count V – Negligence, and Count VI – Unjust Enrichment.

H.D. Smith provided notice of the underlying lawsuit to its commercial general liability and umbrella insurer, Cincinnati.  Cincinnati refused to defend H.D. Smith and filed a coverage action seeking a declaration that it owed no defense or coverage obligations in connection with the underlying lawsuit.   Ultimately, the Seventh Circuit held that Cincinnati had a duty to defend H.D. Smith in connection with the underlying lawsuit.  According to the Seventh Circuit, the underlying lawsuit presented potential liability for H.D. Smith in relation to damages because of “bodily injury” incurred by the State of West Virginia in relation to hospital services and costs related to the diagnosis, treatment and cure of addiction: “West Virginia alleged that its citizens suffered bodily injuries and the state spent money caring for those injuries –money that the state seeks in damages.  On its face, West Virginia’s suit appears to be covered by Cincinnati’s policy.”  The District Court entered an order granting partial summary judgment and ruling that Cincinnati had a duty to defend H.D. Smith in connection with the underlying lawsuit.  H.D. Smith then settled the underlying lawsuit for $3.5M.  Cincinnati refused to indemnify H.D. Smith for the settlement arguing that much of the relief sought by the state of West Virginia did not qualify as damages because of “bodily injury” caused by an “occurrence,” as required under its policies.  The parties filed joint motions for summary judgment regarding Cincinnati’s obligation to indemnify H.D. Smith.  H.D. Smith also moved for summary judgment on its claim for bad faith under Section 155 of the Illinois Insurance Code.

H.D. Smith contended that it settled the underlying lawsuit in reasonable anticipation of an adverse jury verdict on claims covered by the Cincinnati policy and that the settlement was for an “otherwise covered loss” alleged in the underlying lawsuit.  Cincinnati argued that it owed no obligation to cover the settlement because it was not made in reasonable anticipation of liability for covered claims and because H.D. Smith could not show that the covered claims were a primary focus of the litigation.

The District Court relied on the fact that the Seventh Circuit had already held that the underlying lawsuit involved potentially covered claims because of the broad policy language covering suits seeking damages “because of bodily injury.”  The District Court found that based on the filings in the underlying case, it appeared that H.D. Smith’s primary risk of liability was due to negligence allegations.  The District Court also noted that the fact that H.D. Smith raised defenses and contested liability throughout the underlying lawsuit was not significant in determining whether the settlement was made in reasonable anticipation of liability for covered claims.

Under Illinois law, in determining the reasonableness of a settlement amount, “the test is what a reasonably prudent person in the position of the insured would have settled for on the merits of plaintiff’s claim.”  The District Court determined that the settlement amount was reasonable when compared to the other settlements in the case and to the projected cost of litigation.

Accordingly, the District Court found that Cincinnati has a duty to indemnify H.D. Smith for the entire amount of the settlement which “plainly resolved potentially covered claims that the Court concludes were the primary focus of the litigation.”  Despite its holding on the duty to indemnify, the District Court found that factual disputes precluded summary judgment on H.D. Smith’s claim under Section 155.  Cincinnati Ins. Co. v. H.D. Smith Wholesale Drug Company, n/k/a H.D. Smith, L.L.C., Case No. 12-3289 (C. D. Ill. Sept. 23, 2019).