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Cincinnati Insurance Co. v. H.D. Smith Wholesale Drug Co.

United States District Court, C.D. Illinois, Springfield Division

September 23, 2019

CINCINNATI INSURANCE COMPANY, Plaintiff and Counterclaim Defendant,
v.
H.D. SMITH WHOLESALE DRUG COMPANY, n/k/a H.D. SMITH, L.L.C., Defendant and Counterclaim Plaintiff.

          OPINION

          RICHARD MILLS, UNITED STATES DISTRICT JUDGE

         This is an insurance coverage dispute which at this stage concerns whether Cincinnati Insurance Company has an obligation to indemnify H.D. Smith for a $3.5 million settlement it entered into in an underlying lawsuit.

         Both parties have filed motions for summary judgment.

         I. INTRODUCTION

         Plaintiff and Counterclaim Defendant Cincinnati Insurance Company (“Cincinnati”) filed this action, seeking a declaration regarding insurance coverage sought by Defendant and Counterclaim Plaintiff H.D. Smith Wholesale Drug Company n/k/a H.D. Smith, L.L.C., in connection with an underlying lawsuit brought against it by the State of West Virginia ex rel. Darrell V. McGraw, Attorney General (“the underlying lawsuit” or “West Virginia lawsuit”). The underlying lawsuit, styled as State of West Virginia v. Amerisourcebergen Drug Corporation et al., Civil Action No. 12-C-141, was originally filed in June 2012 in the Circuit Court of Boone County, West Virginia.

         The current phase of the litigation involves what H.D. Smith claims is Cincinnati’s obligation to indemnify H.D. Smith for a $3.5 million settlement it entered into in the underlying lawsuit. Cincinnati denies that it owes coverage to H.D. Smith for its settlement of the underlying lawsuit, denies that it breached any obligations to H.D. Smith in connection with the underlying lawsuit, and denies that it acted unreasonably at any time or that it is liable in any way for damages under 215 ILCS 5/155.

         II. FACTUAL BACKGROUND

         A. Cincinnati policies

         Cincinnati issued to H.D. Smith one-year insurance policies each year with effective dates of January 15, 2001 through January 15, 2018, providing commercial general liability coverage and commercial umbrella coverage. H.D. Smith’s motion concerns the policies effective from 2005-2013.

         The primary policies provide in part: “We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage’ to which this insurance applies.” Pursuant to the primary policies, “[d]amages because of ‘bodily injury’ include damages claimed by any person or organization for care, loss of services or death resulting at any time from the ‘bodily injury.’” Cincinnati may investigate any “occurrence.” The Cincinnati umbrella policies also require Cincinnati to pay on behalf of H.D. Smith the “‘ultimate net loss’ which the insured is legally obligated to pay as damages for ‘bodily injury’” that exceeds the limits of the underlying Cincinnati Primary Policies.

         The Cincinnati Primary Policies define “bodily injury” as follows: “‘Bodily injury’ means bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.” “Damages because of ‘bodily injury’ include damages claimed by any person or organization for care, loss of services or death resulting at any time from the ‘bodily injury.’”

         The Cincinnati Umbrella Policies define “bodily injury” as follows: “‘Bodily injury’ means bodily harm or injury, sickness, disease, disability, humiliation, shock, fright, mental anguish or mental injury, including care, loss of services or death resulting from any of these at any time.”

         “Occurrence” is defined in the Cincinnati Primary Policies as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” “Occurrence” is defined in the Cincinnati Umbrella Policies in pertinent part as: “an accident including continuous or repeated exposure to substantially the same general harmful conditions, that results in ‘bodily injury’ or ‘property damage.’”

         The Cincinnati Primary Policies and Cincinnati Umbrella Policies contain the following, or substantively similar, exclusion regarding “Expected and Intended injury”:

Expected or Intended Injury
“Bodily injury” or property damage” which may reasonably be expected to result from the intentional or criminal acts of the insured or which is in fact expected or intended by the insured, even if the injury or damage is of a different degree or type than actually expected or intended. This exclusion does not apply to “bodily injury” resulting from the use of reasonable force to protect persons or property.

         B. Underlying lawsuit and Cincinnati’s refusal to defend

         On June 26, 2012, the Attorney General of West Virginia and two state agencies commenced the underlying lawsuit. On January 2, 2014, an amended complaint was filed wherein twelve defendants were named, including H.D. Smith. On January 13, 2015, the underlying plaintiffs served a second amended complaint. The second amended complaint remained under seal until May 2016.

         The underlying lawsuit alleged that H.D. Smith distributed pharmaceutical products to pharmacies in West Virginia. The time period of the sales that were the focus of the underlying lawsuit was 2007 through 2012.

         In the second amended complaint, the State of West Virginia alleged there were “literally thousands of wrongful acts” which would be litigated in that case, citing as an example H.D. Smith’s “12, 400 transactions” to a pill mill pharmacy in Mingo County, West Virginia. The second amended complaint included specific allegations regarding H.D. Smith’s distribution of controlled substances to the State of West Virginia. According to Cincinnati, West Virginia alleged that the sheer volume of tablets or pills shipped by H.D. Smith demonstrated the suspicious nature of the distributions and represented a gross violation of H.D. Smith’s legal duty to not distribute controlled substances for non-legitimate purposes.

         The second amended complaint listed the following six causes of action against each of the defendants, including H.D. Smith:

• Count I-Injunctive Relief for Violations of Responsibilities and Duties Under the West Virginia Uniform Controlled Substances Act
• Count II-Damages Resulting from Negligence and Violations of the West Virginia Uniform Controlled Substances Act
• Count III-Violation of the West Virginia Consumer Credit and Protection Act (WVCCPA) Unfair Methods of Competition or Unfair Or. Deceptive Acts or Practices
• Count IV-Public Nuisance
• Count V-Negligence
• Count VI-Unjust Enrichment

         In Count I, H.D. Smith’s alleged liability is based on allegations that “[d]efendants have willfully and repeatedly violated the Uniform Controlled Substances Act and corresponding regulations.” The only relief sought was injunctive relief restraining H.D. Smith from continuing to violate the West Virginia Uniform Controlled Substances Act.

         In Count II, the State of West Virginia sought damages from H.D. Smith based on “repeated violations.” It alleges conspiratorial conduct of the West Virginia Uniform Controlled Substances Act through:

a. Improper dispensing of prescriptions contrary to W.Va. Code § 60A-3-308
b. Engaging in prohibited acts contrary to W.Va. Code §§ 60A-4-401 through 403
c. Deceiving and attempting to deceive medical practitioners in contravention of W.Va. Code § 60A-4-410
d. Disregarding the requirements of the Wholesale Drug Distribution Licensing Act of 1991, W.Va. Code § 60A-8-1 et seq.
e. Conspiring to violate the West Virginia Uniform Controlled Substances Act

         West Virginia alleged H.D. Smith “willfully turned a blind eye” by regularly distributing large quantities of commonly-abused controlled substances to clients serving customers who could reasonably be expected to become addicted to drugs or to engage in illicit drug transactions.

         In Count III, the State of West Virginia sought damages from H.D. Smith based on violation of the West Virginia Consumer Credit and Protection Act, unfair methods of competition or unfair or deceptive acts or practices. It was alleged that H.D. Smith violated West Virginia regulations guarding against theft and diversion.

         The State of West Virginia alleged H.D. Smith’s “repeated violations were and are willful, and the State seeks civil penalties under W.Va. Code § 46A-7-111(2) for each violation.” In Count IV, the State of West Virginia sought damages from H.D. Smith based on the alleged creation of a public nuisance by failing to put effective controls and procedures in place to guard against theft and diversion of controlled substances; failure to design and operate a system to disclose suspicious orders of controlled substances; failure to inform the State of suspicious orders when discovered. The State of West Virginia alleged that defendants, including H.D. Smith, “knew or should have known their conduct would cause hurt or inconvenience to the State of West Virginia.” The defendants, including H.D. Smith, “negligently, intentionally and/or unreasonably interfered with the right of West Virginians to be free from unwarranted injuries, addictions, diseases, and sicknesses.” The State of West Virginia alleged that defendants, including H.D. Smith, “were on notice that an epidemic from prescription drug abuse existed.” The defendants, including H.D. Smith, “knew or should have known that these substances were not being prescribed and consumed for legitimate medical purposes.” The State of West Virginia listed a number of public nuisances due to the problem, which resulted in economic harm due to the “expenditure of massive sums of monies.” In Count V, the State of West Virginia sought damages from H.D. Smith based on its alleged conduct in the distribution of controlled substances and the failure to monitor and guard against third-party misconduct, causing West Virginia to incur costs related to diagnosis, treatment and cure of addiction or the risk of addiction.

         In Count VI, the State of West Virginia sought damages from H.D. Smith based on allegations that it has been unjustly enriched because the State of West Virginia has incurred costs for law enforcement, legal and judicial resources and services, correctional resources and services, public welfare and service agencies, healthcare and medical services, drug abuse education, and lost revenue and costs from workplace accidents and employee absenteeism.

         After Cincinnati received notice of the underlying lawsuit, Cincinnati initiated this lawsuit and disclaimed any coverage obligations. Cincinnati refused to defend H.D. Smith and filed this action seeking a declaration that it owed no defense or coverage obligations in connection with the underlying lawsuit.

         H.D. Smith asserted a counterclaim against Cincinnati seeking a declaration that Cincinnati must defend and indemnify H.D. Smith and asserting a claim for breach of contract for ...


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