Seventh Circuit: Insurer Has Duty to Defend Drug Distributor in “Pill Mill” Lawsuit

This week, a unanimous Seventh Circuit panel found that a major insurance company has a duty to defend H.D. Smith, L.L.C. against a lawsuit brought by the State of West Virginia. The lawsuit claims that the drug distributor helped cause the state’s prescription drug abuse epidemic by knowingly oversupplying painkillers to certain pharmacies and clinics, pejoratively known as “pill mills.” The decision reversed an earlier ruling by the U.S. District Court for the Central District of Illinois.

By way of background, in June 2012, the State of West Virginia sued 13 different drug distributors, including H.D. Smith, seeking damages arising from the state’s prescription drug abuse epidemic. The suit sought damages including the costs of providing medical care to drug addicts unable to afford their own health insurance. The complaint alleged that certain pharmacies and clinics — often referred to as “pill mills” — knowingly issued bogus prescriptions for controlled substances, not for legitimate medical purposes but to profit from their patients’ addictions. The complaint further alleged that the “pill mills” ordered drugs from the distributors in such massive quantities that the distributors knew or should have known that the drugs were being used for illegal purposes.

Upon receiving the complaint, H.D. Smith asked its insurer, Cincinnati Insurance Company, to provide a defense. At the time, H.D. Smith had a general commercial liability policy providing that Cincinnati would pay damages incurred “because of bodily injury.” The policy defined the term “bodily injury” as “bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.”

Cincinnati sought a declaratory judgment that its policy did not cover West Virginia’s claims. The District Court granted Cincinnati’s motion for summary judgment, finding that West Virginia was only seeking damages for financial losses associated with providing public services. The District Court determined that those losses did not qualify as “damages because of bodily injury” under the terms of the policy.

On appeal, the Seventh Circuit expressly rejected the District Court’s logic. In doing so, the Court highlighted a couple of hypothetical situations the parties addressed at oral argument. In the initial hypothetical, a West Virginian suffers personal injury due to drug addiction and sues H.D. Smith for negligence. Such a suit would be covered by the policy and counsel for Cincinnati acknowledged that result.

The second (or next step) in the hypothetical was whether the injured persons mother, having spent her own money to care for her child’s injuries, could sue H.D. Smith for negligence and whether that would be covered. The mother’s claim would also be covered under the policy, and that too was acknowledged by counsel. The court rejected Cincinnati’s attempt to distinguish a mother’s claim from the lawsuit brought by West Virginia, stating: “Legally, the result is no different merely because the plaintiff is a state instead of a mother.” The court concluded that Cincinnati had a duty to defend H.D. Smith.

This case may have vast ramifications for distributors of pain killers and their carriers in terms of the quantity of suits they may have to defend. While legal options remain for Cincinnati, including seeking en banc review at the Seventh Circuit, or to petition the Supreme Court of the United States, both would be uphill battles. Thus, it is probable that other distributors and carriers will face similar suits, not only from States, but potentially from individuals who used the drugs, their families, public and/or private insurers and/or the federal government. Additionally, this case highlights the liability of the physicians that write the prescriptions and the pharmacies that fill them.

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