North Carolina Court Holds No E&O Coverage for Qui Tam Action

By Brian Margolies

In its recent decision in Affinity Living Grp., LLC v. Starstone Specialty Ins. Co., 2018 U.S. Dist. LEXIS 163655 (M.D. N. Car. Sept. 25, 2018), the United States District Court for the Middle District of North Carolina had occasion to consider a professional liability insurer’s coverage obligation with respect to a qui tam proceeding.

Affinity Living and one of its principals were named as defendants in a qui tam action brought under the federal False Claims Act, and a similar North Carolina statute, for alleged Medicaid fraud committed in connection with their operation of adult care homes. Affinity sought coverage under a primary layer professional liability policy issued by Homeland Insurance Company.

While the Homeland policy afforded broad coverage for loss resulting from the insured’s professional services, the policy contained exclusions for any claim involving any actual or alleged:

(4) Dishonest, fraudulent, criminal or intentionally malicious act, error or omission by an Insured; . . . or the gaining of any profit, remuneration or advantage by an Insured to which such Insured was not legally entitled, including, but not limited to, health care fraud . . . [or]

(16) Claim made by or on behalf of any federal, state or local governmental or regulatory agency or entity, including but not limited to any Claim alleging health care fraud . . . .

Considering first the fraudulent acts exclusion, the court agreed that the qui tam claim consistently and repeatedly alleged that the insureds had engaged in false and fraudulent acts, and that the predicate conduct for the False Claims Act (and the state analogue) was dishonest conduct. The court, therefore, rejected the assertion that the suit could be read as alleging negligent or inadvertent conduct potentially insurable under the Homeland policy. It also found that the underlying suit alleged that the insured acted for the purpose of gaining profit to which it was not legally entitled by submitting bills for reimbursement to the government for services never rendered. The court concluded, therefore, that the exclusion applied on its face. The court reasoned similarly with respect to Exclusion 16, applicable to any claim asserted by a governmental agency. Since the suit alleged health care fraud, explained the court, the exclusion applied to bar coverage.

In reaching its holding that Homeland had no coverage obligations with respect to the underlying suit, the court rejected the insureds’ argument that Homeland was required to “investigate the veracity of the claim” before denying coverage rather than denying coverage solely based on the allegations in the complaint. The court observed that the policy exclusions applied to claims involving mere allegations of dishonesty or health care fraud, and that because the facts as alleged were not even arguably covered, Homeland had no defense or indemnity obligation.