No Coverage for Qui Tam Suit Filed Before Inception of Policy

Investigation of Qui Tam Suit Not Covered by D&O Policy

Sep 28, 2021

INSURANCE COVERS A LOT BUT NOT EVERYTHING

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Posted on September 28, 2021 by Barry Zalma

Responding to lawsuits and investigations is expensive (even when they are without merit). That reality became clear when Plaintiff Springstone, Inc. incurred substantial legal fees responding to a government subpoena based on a sealed qui tam lawsuit. Springstone thought it had purchased insurance from Defendant Hiscox Insurance Company, Inc. to cover it from certain legal claims, including the expenses of dealing with the government. In Springstone, Inc. v. Hiscox Insurance Company, Inc., No. 20-6014, United States Court of Appeals, Sixth Circuit (September 17, 2021) the Sixth Circuit was asked to compel an insurer to pay for defense costs resulting from a whistleblower law suit that Hiscox proved to the trial court it was not covered.

FACTS & POLICY WORDING

Springstone provides behavioral health services across several facilities. In January 2017, it purchased insurance from Hiscox. That insurance plan included Directors &Officers (D&O) Liability Coverage. Only two parts of that coverage were relevant to the litigation:

Coverage B: Company Reimbursement Coverage

This D&O Coverage Part shall pay the Loss of a Company arising from a Claim first made against an Individual insured during the Policy Period or the Discovery Period (if applicable) for any actual or alleged Wrongful Act of such Individual Insured, but only when and to the extent that such Company has indemnified such Individual Insured for such Loss.

Coverage C: Company Coverage

This D&O Coverage Part shall pay the Loss of a Company arising from a Claim first made against a Company during the Policy Period or the Discovery Period (if applicable) for any actual or alleged Wrongful Act of a Company.

In July 2016, a qui tam lawsuit was filed-under seal-against Springstone. It alleged that “Springstone had violated the False Claims Act by obtaining reimbursement from Medicare and Medicaid for medically unnecessary services that it provided to patients.” A year after the lawsuit was filed, the Office of the Inspector General for the Department of Health and Human Services sent Springstone a subpoena related to its investigation of the qui tam complaint. That subpoena requested documents related to Springstone’s patient treatment and management practices.

A few months later, Springstone informed Hiscox that it had received the subpoena and sought coverage for its response under the D&O Coverage. Hiscox denied Springstone’s request. In its response, Hiscox stated that there was no “Claim,” and the subpoena did not allege a “Wrongful Act.” A large legal bill ensued.

In 2019, the qui tam lawsuit was dismissed, and the complaint was unsealed. Springstone informed Hiscox of the lawsuit and again sought coverage for its response. Hiscox denied that second request for coverage.

Springstone sued Hiscox alleging: (1) a breach of contract; (2) common law bad faith; (3) violations of the Kentucky Unfair Claims Settlement Practice Act and Kentucky Consumer Protection Act; and (4) unjust enrichment. Springstone also sought a declaration of rights under the insurance agreement and punitive damages. Hiscox removed to federal court and filed a motion to dismiss. The district court agreed with Hiscox and found that neither Coverage B nor Coverage C covers the costs of responding to the subpoena and that Coverage C specifically excludes non-monetary relief.

ANALYSIS

Springstone alleges that the qui tam action and the government subpoena triggered coverage under its D&O Policy. Under the plain meaning of the Policy, Hiscox could deny coverage for three reasons.

the qui tam lawsuit was not filed during the policy period,
Springstone failed to indemnify any individual as required by Coverage B, or
non-monetary relief is excluded from Coverage C.

Underlying Qui Tam

Springstone asserts that the underlying qui tam lawsuit constitutes a Claim under the Policy. The qui tam complaint was filed six months before the Policy Period. The definition of made is the past simple and past participle of make. A lawsuit is first produced or created when it is filed not when it was unsealed.

Indemnification

Coverage B also requires indemnification of an Individual Insured. And indemnification is a duty to make good any loss, damage or liability incurred by another. In other words, the Individual Insured must have a duty to pay the loss. Indemnity in its most basic sense means reimbursement, and may lie when one party discharges a liability which another rightfully should have assumed. Springstone did not indemnify any Individual Insured by retaining counsel to respond to a subpoena directed at the company.

Exclusion

Under Coverage C, “[t]he Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured: seeking fines or penalties or nonmonetary relief against the Company.” Even if the subpoena was a written demand for nonmonetary relief, it is excluded from Coverage C. Importantly, the exclusion forecloses payment for any Loss, including Defense Costs. Under these circumstances, Hiscox properly denied coverage.

Remaining claims

The district court appropriately dismissed the remaining state law claims because Hiscox was entitled to deny Springstone’s insurance claims and, as a result, there cannot support a claim of bad faith.

Springstone understandably sought reimbursement for an expensive investigation. But the insurance it purchased did not cover either the actions of the government or a complaint filed before the Policy Period. Springstone, therefore, recovers nothing.

ZALMA OPINION

Springtone learned, by this litigation, that no insurance policy covers every possible incident that might cost the insured money to defend every possible event. In addition, a D&O policy is claims made and there is no right to recover if the suit was filed – as was the qui tam suit, before the policy came into effect. Insurance covers a lot but not everything.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders.

He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business.

He is available at http://www.zalma.com

and zalma@zalma.com. Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award. Over the last 53 years Barry Zalma has dedicated his life to insurance, insurance claims and the need to defeat insurance fraud. He has created the following library of books and other materials to make it possible for insurers and their claims staff to become insurance claims professionals.

Go to the podcast Zalma On Insurance at https://anchor.fm/barry-zalma; Follow Mr. Zalma on Twitter at https://twitter.com/bzalma; Go to Barry Zalma videos at https://www.rumble.com/zalma ; Go to Barry Zalma on YouTube- https://www.youtube.com/channel/UCysiZklEtxZsSF9DfC0Expg; Go to the Insurance Claims Library – https://zalma.com/blog/insurance-claims-library/ The last two issues of ZIFL are available at https://zalma.com/zalmas-insurance-fraud-letter-2/ podcast now available at https://podcasts.apple.com/us/podcast/zalma-on-insurance/id1509583809?uo=4