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State found to be substitute for individual in insurer’s duty defense
JAY S. JUDGE
Law Bulletin columnist
Published: November 15, 2016
In a rather unusual situation, the state of West Virginia sued H.D. Smith LLC, which distributed painkillers such as hydrocodone, oxycodone and codeine to pharmacies, for medical expenses the state paid for uninsured West Virginians afflicted with drug addictions.
In the case, Cincinnati Insurance Co. v. H.D. Smith LLC, 829 F.3d 771 (7th Cir. 2016), the 7th U.S. Circuit Court of Appeals found actual or potential coverage for a West Virginia claim and a duty to defend, contrary to the district court, which ruled that Cincinnati owed no coverage and had no duty to defend.
When sued by West Virginia, H.D. Smith sought coverage from Cincinnati under its commercial general liability policy:
“Under the policy, Cincinnati agreed to cover damages that H.D. Smith became legally obligated to pay ‘because of bodily injury.’ Cincinnati also agreed to defend H.D. Smith against any suit seeking such damages. The policy defines ‘bodily injury’ as ‘bodily injury, sickness or disease sustained by a person, including death resulting from any of these at any time.’ And ‘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.’”
Cincinnati filed a declaratory judgment action, seeking to deny a defense and indemnity to H.D. Smith on the grounds that West Virginia sustained no bodily injury that would have been covered by the policy. The U.S. District Court granted summary judgment for Cincinnati, finding no bodily injury.
In an opinion by Judge Ann Claire Williams, the 7th Circuit reversed, finding a duty to defend and setting out the test for determining when and if a defense is owed:
“We must ‘liberally constru[e]’ the allegations ‘in favor of the insured.’ And because the duty to defend is ‘much broader’ than the duty to indemnify, we will hold that a duty to defend exists ‘unless it is clear from the face of the underlying complaint’ that the case is not ‘within or potentially within the insured’s policy coverage.’
“Importantly, ‘if several theories of recovery are alleged in the underlying complaint against the insured, the insurer’s duty to defend arises even if only one of several theories is within the potential coverage of the policy.’”
Finding the West Virginia complaint triggered a duty to defend, Williams explained:
“Here, West Virginia alleged that its citizens suffered bodily injuries and the state spent money caring for those injuries — money that the state seeks in damages. On its face, West Virginia’s suit appears to be covered by Cincinnati’s policy. Cincinnati argues to the contrary, stressing that West Virginia seeks its own damages, not damages on behalf of its citizens.”
The court observed that the complaint clearly sought money the state paid for hospital and medical expenses of its residents. Williams offered the following examples that Cincinnati’s attorney acknowledged at oral arguments were covered:
“Suppose a West Virginian suffers bodily injury due to his drug addiction and sues H.D. Smith for negligence. Cincinnati’s counsel acknowledged that such a suit would be covered by its policy. Now suppose that the injured citizen’s mother spent her own money to care for her son’s injuries. Cincinnati’s counsel acknowledged that her suit would be covered too — remember the policy covers ‘damages claimed by any person or organization for care … resulting … from the bodily injury.’
“The mother’s suit is covered even though she seeks her own damages (the money she spent to care for her son), not damages on behalf of her son (such as his pain and suffering or money he lost because he missed work). Legally, the result is no different merely because the plaintiff is a state instead of a mother. Cincinnati’s lawyer acknowledged as much.”
Finding that the Cincinnati policy language “because of bodily injury” differed from policy language providing coverage “for bodily injury,” Williams offered this illustration:
“[A]n individual has automobile insurance; the insured individual caused an accident in which another individual became paralyzed; the paralyzed individual sues the insured driver only for the cost of making his house wheelchair-accessible, not for his physical injuries. If the insured driver had a policy that only covered damages ‘for bodily injury’ it would be reasonable to conclude that the damages sought in the example do not fall within the insurer’s duty. However, if the insurance contract provides for damages ‘because of bodily injury’ then the insurer would have a duty to defend and indemnify in this situation.”
Cincinnati relied Medmarc Casualty Insurance Co. v. Avent America Inc., 612 F.3d 607 (7th Cir. 2010), where the insured sold baby bottles with a dangerous chemical in the plastic and the buyer sued for the costs of the defective bottles. The 7th Circuit found no coverage in Medmarc, but Williams said Medmarc was inapplicable because there was no bodily injury.
Finding a duty to defend and reversing the district court here, Williams explained that West Virginia’s claim was clearly one for the medical and hospital costs it paid:
“H.D. Smith’s actions caused West Virginia to spend money ‘addressing and combating the prescription drug abuse epidemic.’ In particular, ‘[h]ospital services … are being consumed by persons with prescription drug abuse issues,’ many of whom ‘have no medical insurance coverage.’
“So the state has incurred ‘excessive costs related to diagnosis, treatment and cure of addiction,’ and has ‘provide[d] necessary medical care, facilities and services for treatment of citizens’ who cannot afford their own care.
“West Virginia seeks reimbursement of such ‘damages and losses sustained as the proximate result’ of H.D. Smith’s negligence.”