$3.5 Million Opioid Insurance Settlement is Covered by CGL Insurance, Says Federal Court

Plus 5% Interest and Maybe More Damages for Insurer’s Bad Faith

A federal district judge in Illinois has issued an important ruling in the opioid insurance coverage wars, finding coverage for a $3.5 million settlement between an opioid distributor and the State of West Virginia.

Insurance carrier’s lead argument? — there was no bodily injury. Not surprisingly, they lost.

The insurer raised the usual reflexive, rubbish coverage defenses, seeking first to deny coverage altogether by vilifying its insured as a willful drug pusher, and then, as a fallback, to chisel the insured out of full coverage by challenging the reasonableness of the total settlement amount and deducting amounts for allegedly “uncovered claims.” The court emphatically rejected each of these defenses and held that the entire settlement was for a covered loss in reasonable anticipation of liability based on the underlying negligence and public nuisance claims. The court found that these claims alleged damages “because of bodily injury.” The court also tacked on 5% per year interest from the date of the settlement payment, with the prospect that more damages for bad faith may be added later. The 5% interest and potential bad faith awards should remind insurers that continued recalcitrance may cost them much more than just the costs of defending and settling opioid claims. Moving forward, the decision should also benefit whichever industry – legal, respected and productive today – that tomorrow needs insurance protection when it finds itself the “villain” in the crosshairs of the next “public nuisance” shakedown by the plaintiffs’ bar.

The opinion in Cincinnati Ins. Co. v. H.D. Smith, L.L.C., Case No. 12-3289 (C.D. Ill. Sept. 26, 2019) is here.

Background of the Case

In 2012, West Virginia sued H.D. Smith, a distributor of controlled substances to pharmacies in West Virginia, on various theories arising from Smith’s alleged failure to put effective controls and procedures in place to guard against the theft and diversion of opioids. Smith’s insurer, Cincinnati Insurance, denied coverage of the claims. After years of coverage litigation, the Seventh Circuit ruled that Cincinnati had a duty to defend Smith. Cincinnati Ins. Co. v. H.D. Smith, L.L.C., 829 F.3d 771 (7th Cir. 2016).

In December 2016, shortly before a trial set for January 2017, Smith agreed to settle the West Virginia claims for $3.5 million. The court had denied all of Smith’s dispositive pretrial motions, and all but one of the other defendants had settled. Smith continued to deny that it had any actual liability to West Virginia, but it faced significant exposure as a non-resident defendant in front of a West Virginia jury.

Smith and Cincinnati cross-moved for summary judgment regarding coverage for the settlement. The court ruled entirely in favor of the insured on five major points of coverage.

1. The Settlement was in Reasonable Anticipation of Liability

The court held that an insured may have a reasonable anticipation of liability when it faces a jury trial against a sympathetic plaintiff with significant damages even if the facts against the insured are weak. Smith did not have to establish actual liability in order to have insurance coverage. An insured does not have “to refute liability in the underlying lawsuit and then, after obtaining a settlement, turn around and prove its own liability in order to succeed in a subsequent insurance coverage action.” Such a requirement would chill settlements.

The court found that Smith reasonably anticipated liability. Smith did not admit liability but faced significant exposure. Its pretrial motions had been denied and it faced an immediate trial in an unfavorable jurisdiction, with a popular sitting United States Senator and former governor slated to testify against it. The fact that all but one other defendant had settled was further evidence that Smith reasonably anticipated liability.

2. The Settlement Resolved Covered Claims Alleging an “Occurrence”

The insurer further contended that the settled claims did not allege a covered “occurrence” because they were premised on alleged willful and intentional misconduct by the distributor. The insurer argued that the settled claims were all based on allegations that the distributor:

“knew what was happening, but continued to intentionally and willfully send unwarranted amounts of controlled substances into West Virginia that could only lead to one result – illicit use and a compounding of the State’s prescription drug abuse epidemic . . . [and that] each and every cause of action [alleged], even those using the word “negligence,” incorporates and relies upon allegations of willful misconduct, a persistent course of conduct in violation of West Virginia law, and conscious disregard of the prescription drug abuse epidemic.”

The court had previously rejected this argument, holding that the claims either specifically alleged negligence, or alleged a mixture of negligent and intentional conduct, which is also covered. Cincinnati Ins. Co. v. H. D. Smith Wholesale Drug Co., 2015 WL 4624734 at *5 (C.D. Ill. Aug. 3, 2015), rev’d on other grounds, 829 F.3d 771 (7th Cir. 2016). The court reiterated its previous holding, rejecting insurer’s “intentional conduct” defense a second time. (Opinion at 31 n.2). The court held that Smith had alleged a covered “occurrence.”

3. The Settlement Resolved Claims Seeking Damages “Because of Bodily Injury”

The court next rejected the insurer’s argument that the distributor’s settlement was not covered because the settled claims did not seek “damages because of bodily injury.” First, the court quoted the Seventh Circuit’s earlier opinion on the duty to defend, which reasoned that if an insured under an automobile policy caused an accident in which a claimant became paralyzed, and the claimant sued the insured only for the cost of making his house wheelchair accessible (not for his physical injuries), those damages might not be covered if the auto policy only covered damages “for bodily injury.” However, if the auto policy covered damages “because of bodily injury,” [as Smith’s policy did,] then the insurer would have a duty to defend and indemnify. (Emphasis added).

The court went on to hold that, with respect to the settlement, both the negligence claims and the public nuisance claims asserted against Smith would likely include “damages because of bodily injury.” Damages in the form of “increased costs for, inter alia, public services relating to law enforcement and health care might be covered in the same manner that the paralyzed individual who makes his home wheelchair accessible would be.”

4. The Settlement Was for A Reasonable Amount

Next, the court rejected the insurer’s challenge to the reasonableness of the settlement amount. In determining reasonableness, 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 court found that the $3.5 million amount was reasonable even though it was higher than what most co-defendants paid. Disparities in opioid sales and Smith’s late position in the settlement queue made the higher amount reasonable in comparison. An additional factor that the court weighed in assessing reasonableness was that settlement avoided substantial defense costs. The complaining insurer faced the prospect of ongoing defense costs as high as the settlement amount.

5. The Covered Settlement Amount Would Not Be Chiseled Lower Because of “Allegedly Uncovered Claims”

The insurer’s last argument for shaving its payment obligation was that covered claims were not the primary focus of the litigation, and the settlement should be apportioned between covered claims and allegedly uncovered claims. The court entirely rejected this argument, and found that Smith:

“was not required to apportion its liability for different claims because that would either require the coverage trial to be a retrial of the merits of the insured’s underlying suit [or trial in the case of a settlement] and/or would discourage settlement because the insured would essentially have to prove its own liability for the underlying conduct even if it had not made that concession in arriving at a settlement.”

The court had already found that the settlement included covered negligence and public nuisance claims (see point 2 above). The litigation was primarily focused on claims that Smith wrongfully failed to recognize from its distribution pattern that West Virginians were obtaining improper prescriptions. The settlement agreement also noted that the government had never taken any administrative enforcement action against Smith and that Smith had never been found to be in violation of any state or federal regulations or guidelines concerning the distribution of controlled substances in West Virginia. And the settlement did not impose any penalties. Rather the focus of the settled claims was that Smith distributed more pharmaceuticals in the state than were medically necessary.

Accordingly, the court held that the insurer must pay the entire settlement “which plainly resolved potentially covered claims that the court concludes were the primary focus of the litigation. Moreover, the court has no basis to allocate the settlement between covered and any allegedly uncovered claims.”

Finally, the court awarded 5% interest from the date of settlement payment, and denied cross-motions for summary judgment on bad faith on the basis that there were unresolved genuine issues of material fact.

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