A federal court in Illinois ruled recently, in Cincinnati Insurance Company v. H.D. Smith Wholesale Drug Company, that Cincinnati Insurance Company was required to indemnify H.D. Smith for a $3.5 million settlement it reached with the State of West Virginia.  The settlement resolved an action in which West Virginia alleged that H.D. Smith contributed to the state’s opioid addiction epidemic through its negligent distribution of opioid prescription drugs.

The underlying lawsuit was brought by the West Virginia Attorney General against H.D. Smith and thirteen other drug manufacturers and distributors in June 2012. The suit included counts for negligence, unjust enrichment, public nuisance, violations of the West Virginia Uniform Controlled Substances Act, and violations of the West Virginia Consumer Credit and Protection Act.

H.D. Smith tendered the suit to its general liability insurer, Cincinnati, which countersued H.D. Smith in October 2012, seeking a declaration that it was not required to provide defense or indemnification under the terms of its policy. Cincinnati argued that the underlying lawsuit did not allege an “occurrence” – an accident – as required under the terms of the policy, and that the suit, instead, sought recovery for West Virginia’s economic losses, which are not “bodily injury” or “property damage.”  In August 2015, the court agreed with Cincinnati, holding that there was no duty to defend because the suit sought damages for West Virginia’s own financial losses, not damages “because of” bodily injury as defined by the policy.

On appeal in July 2016, however, the Seventh Circuit held that Cincinnati did have a duty to defend H.D. Smith because the expenses sought by West Virginia were incurred to combat bodily injuries suffered by its citizens due to prescription drug abuse. The court found that, contrary to Cincinnati’s contention, it was irrelevant whether West Virginia was seeking damages on behalf of itself or its injured citizens, as this argument was untethered from the policy language.  The Seventh Circuit left open whether Cincinnati was required to indemnify H.D. Smith for any settlement or judgment reached in the underlying action.

In August 2016, shortly after the Seventh Circuit’s ruling and after the case was remanded back to Illinois federal court, H.D. Smith settled the lawsuit with West Virginia for $3.5 million. Subsequently, H.D. Smith moved for partial summary judgment, requesting a ruling that Cincinnati was required to cover the settlement under the terms of the policy.

The Illinois federal court granted partial summary judgment for H.D. Smith, holding that because it settled the action for a reasonable amount to avoid a potential judgment on claims covered by the liability policy, Cincinnati’s duty to indemnify was triggered. Specifically, the court noted that because the covered negligence-based claims “were a primary focus of the litigation,” H.D. Smith had established that it settled a covered loss in reasonable anticipation of liability.

Generally, the duty to defend the entire lawsuit is triggered by the presence of just one covered claim among others that may not be covered. The court’s decision in H.D. Smith illustrates a similar concept in the context of settlement and indemnity.  Under the Illinois federal court’s ruling, an insurer’s duty to indemnity can be triggered by the settlement of a lawsuit that contains mixed covered and non-covered claims as long as the covered claims are, as the court explained, the “primary focus” of the action.

The decision underscores the importance that policyholders exercise care in characterizing any settlement that may be covered by insurance. This is especially the case where the claim or lawsuit being settled contains aspects that are clearly beyond the scope of applicable insurance.