(Article from Insurance Law Alert, October 2019)
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An Illinois federal district court ruled that a liability insurer was required to indemnify a $3.5 million settlement payment made by a pharmaceutical company in an underlying suit arising out of opioid distribution. Cincinnati Ins. Co. v. H.D. Smith Wholesale Drug Co., 2019 WL 4727039 (C.D. Ill. Sept. 26, 2019).
The Attorney General of West Virginia sued H.D. Smith, a pharmaceutical distributor, alleging negligence, public nuisance and violations of various state statutes based on the company’s allegedly improper sales of opioids to pill mills and other entities. The complaint sought damages and injunctive relief. Cincinnati denied coverage under general liability and umbrella policies issued to Smith. In a prior ruling in this matter, the Seventh Circuit ruled that Cincinnati had a duty to defend Smith, finding that the underlying suit alleged damages because of bodily injury. Smith filed two motions to dismiss the underlying suit, which were both denied. Thereafter, Smith settled the case for $3.5 million.
Cincinnati refused to indemnify the settlement, arguing that the settlement payment was (1) not made “in reasonable anticipation of liability for covered claims,” and (2) unreasonable. The court rejected both assertions. First, the court held that Smith faced a potential for significant liability in the underlying suit, noting that all other defendants had settled, that many of Smith’s defenses had been rejected by West Virginia courts, and that it faced “a lengthy and costly trial in an unfavorable jurisdiction.” Second, the court held that the settlement encompassed covered claims. Although some of the underlying relief sought (injunctive relief, fines and statutory penalties) was outside the scope of coverage, the court emphasized that the suit also alleged covered negligence claims and sought monetary relief “because of bodily injury.”
Finally, the court ruled that the settlement amount was reasonable based on a “commonsense consideration of the totality of facts bearing on the liability and damage aspect of plaintiff’s claim, as well as the risks of going to trial.” Although Smith’s settlement payment was higher that most of its co-defendants’ payments, Smith was allegedly responsible for more aggregate sales of opioids during the relevant time period.
The court declined to allocate the settlement between covered and non-covered claims, finding no basis to do so, and noting that the “primary focus” of the underlying litigation was potentially covered claims. The court also declined to rule as a matter of law on Smith’s claim for attorneys’ fees based on Cincinnati’s allegedly “vexatious and unreasonable” delay in payment, finding the factual record insufficiently developed on this issue.