Insurer’s Inadequate Communication with Policyholder Necessitates Trial in $22 Million Bad Faith Case

By Bradley Guldalian

In Wallace Mosley, a minor by and through his co-guardians, Roslyn Weaver & Dina Cellini, Esq., v Progressive American Ins. Co., Case No. 14-cv-62850, 2018 U.S. Dist. LEXIS 199078 (S.D. Fla. Nov. 25, 2018), the Southern District of Florida denied an insurer’s Motion for Summary Judgment in a bad faith claim seeking the recovery of a $22,663,058.00 judgment against its insured holding that questions of fact existed regarding the insurer’s alleged breach of its duty of good faith towards its insured where the insurer tendered its $10,000 insurance policy limits to the claimant’s attorneys in a timely manner but the insured refused to prepare a financial affidavit because he believed, pursuant to his religious and moral beliefs, that he was immune from suit as a sovereign citizen and claimed the affidavit was an “invasion of his privacy.”  In so holding, the court found that even though the insurer sent the insured a letter the insurer had received from the claimant’s attorneys asking the insured to prepare and send a financial affidavit verifying he had no viable assets, a question of fact existed as to whether the insurer acted in good faith because the insurer failed to send any documentation to its insured “explaining in any discernable detail the gravity of the situation” the insured was facing including the probable outcome of the litigation, the possibility that an excess judgment could be entered against him, or of the steps he might take to avoid entry of an excess judgment being entered against him. 


Third Circuit Holds No Coverage for Faulty Workmanship Despite Insured’s Expectations

By Brian Margolies

In its recent decision in Frederick Mut. Ins. Co. v. Hall, 2018 U.S. App. LEXIS 31666 (3d Cir. Nov. 8, 2018), the United States Court of Appeals for the Third Circuit had occasion to consider Pennsylvania’s doctrine of reasonable expectations in the context of a faulty workmanship claim.

Hallstone procured a general liability policy from Frederick Mutual to insure its masonry operations. Notably, when purchasing the policy through an insurance broker, Hallstone’s principal stated that he wanted the “maximum” “soup to nuts” coverage for his company.  Hallstone was later sued by a customer for alleged defects in its masonry work.  While Frederick agreed to provide a defense, it also commenced a lawsuit seeking a judicial declaration that its policy excluded coverage for faulty workmanship. The district court agreed that the business risk exclusions applied, but nevertheless found in favor of Hallstone based on the argument that Hallstone had a reasonable expectation that when applying for an insurance policy affording “soup to nuts” coverage, it this would include coverage for faulty workmanship claims.

On appeal, the Third Circuit acknowledged that the reasonable expectations doctrine can overrule policy language when the insured is issued a policy different than what it specifically requested to purchase.  The court nevertheless reasoned that this doctrine did not apply to Hallstone, which generally asked for a broad policy, but not specifically a policy that would insure faulty workmanship claims – a coverage the court acknowledged does not exist.  The pointed out the absurdity of relying on the reasonable expectations doctrine to overcome the policy’s otherwise plain and unambiguous language, observing that “Hall’s claim that he expected Hallstone’s ‘maximum,’ ‘soup to nuts’ liability policy to include workmanship coverage is no more reasonable than if a purchase of auto insurance expected his policy to cover repairs if his car breaks down, even if he asked for ‘soup to nuts’ coverage.”

Wisconsin Supreme Court Holds Fire Damage Resulted from Single Occurrence

By Brian Margolies

In its recent decision in Secura Ins. v. Lyme St. Croix Forest Co., LLC 2018 WI 103 (Oct. 30, 2018), the Wisconsin Supreme Court had occasion to consider whether a forest fire that caused damage to several homes and properties should be considered a single or multiple occurrences.

Secura insured Lyme St. Croix Forest Company under a general liability policy.  Of relevance was the policy’s $500,000 sublimit of coverage for property damage due to fire arising from logging or lumbering operations, subject to a $2 million general policy aggregate limit.  Lyme St. Croix sought coverage under the policy for a fire that resulted from its logging equipment.  The fire lasted for three days, burning nearly 7,500 acres and causing damage to numerous homes and businesses. 

Lyme St. Croix argued, and the trial and appellate courts agreed, that there was a separate occurrence each time the fire spread to a new piece of real property, and that as such, Secura was required to pay up its policy’s full $2 million aggregate rather than a single $500,000 limit of liability.  The appellate court based its decision, in part, on the 2014 Wisconsin Supreme Court decision in Wilson Mut. Ins. Co. v. Falk, 857 N.W.2d 156 (Wis. 2014), where the Court considered the issue of number of occurrences in a situation involving manure runoff from a farm that resulted in contamination of numerous drinking wells.  The FalkCourt rejected the argument that the spreading of manure as a fertilizer was the occurrence, instead concluding that there was an occurrence each time a unique well was contaminated by manure running off of the insured’s property.

Revisiting its decision in Falk, the Wisconsin Supreme Court drew a distinction between runoff that contaminates several wells over a lengthy period of time with a forest fire that consumes multiple properties over a short duration of time. The Court reasoned that in determining number of occurrences questions, “we must take into account elements of time and geography” and that as such, a single occurrence takes place if the “cause and result” are “so simultaneous or closely linked in time and space” as to be considered a single event by the “average person.”  The Court drew a distinction between loss scenario in Falk, which involved seepage of manure over an unspecified period of time, with that of a three-day fire, explaining:

A three-day fire in a discrete area caused by a single precipitating event would reasonably be considered by the average person to be one event. Regardless of how many property lines the fire crossed, the damage closely follows the cause in both time and space.



Recent Bad Faith Decisions in Florida Raise Concerns

By Michael Kiernan, Lauren Curtis and Ashley Kellgren

The State of Florida has long been known as one of the most challenging jurisdictions for insurance carriers in the context of bad faith – to say the least. Two recent appellate decisions have taken an already difficult environment and seemingly “upped the ante” in what constitutes good faith claims handling in the context of third-party liability claims. Set forth below is an analysis of the Bannon v. Geico Gen. Ins. Co. and Harvey v. Geico Gen. Ins. Co. decisions.

In terms of background and context, for decades, the bad faith standard in Florida, known as the “totality of the circumstances” standard, was set forth in Boston Old Colonial Insurance Company v. Gutierrez, 386 So. 2d 783 (Fla. 1980), where the Florida Supreme Court held:

An insurer, in handling the defense of claims against its insured, has a duty to use the same degree of care and diligence as a person of ordinary care and prudence should exercise in the management of his own business. For when the insured has surrendered to the insurer all control over the handling of the claim, including all decisions with regard to litigation and settlement, then the insurer must assume a duty to exercise such control and make such decisions in good faith and with due regard for the interests of the insured. This good faith duty obligates the insurer to advise the insured of settlement opportunities, to advise as to the probable outcome of the litigation, to warn of the possibility of an excess judgment, and to advise the insured of any steps he might take to avoid same. The insurer must investigate facts, give fair consideration to a settlement offer that is not unreasonable under the facts, and settle, if possible, where a reasonably prudent person, faced with the prospect of paying the total recovery, would do so. Because the duty of good faith involves diligence and care in the investigation and evaluation of the claim against the insured, negligence is relevant to the question of good faith. The question of failure to act in good faith with due regard for the interests of the insured is for the jury.

Id. at 785 (citations omitted). In two recent opinions, the Eleventh Circuit and the Florida Supreme Court weighed in further on what constitutes bad faith in the context of failure to timely tender policy limits.

The first of these opinions is an unpublished opinion issued by the Eleventh Circuit in Bannon v. Geico Gen. Ins. Co., 2018 U.S. App. LEXIS 20204, 2018 WL 3492111 (11th Cir. 2018). The facts of that case are as follows. Geico’s insured was involved in an automobile accident, resulting in serious injuries to the driver of the other vehicle involved.  The accident occurred on October 27 and Geico was advised of the accident on November 2.  Within three days of being placed on notice of the auto accident, Geico noted that the insured was 100% liable and internally flagged the claim due to of the seriousness of the injuries and available limits ($250,000). Nine days after being placed on notice, Geico was advised that the claimant was in a coma, needed brain surgery, required a feeding tube and had other serious injuries.   Over the next several days, Geico sent excess letters to its insureds, and obtained witness statements and information regarding the claimant’s medical bills.  Geico internally authorized the tender of policy limits on day sixteen, but did not tender limits to the clamant until November 22—twenty days after being placed on notice of the claim.  The claimant rejected Geico’s tender and, after years of litigating the underlying negligence claim, a $2.95 million consent judgment was entered.

During the bad faith litigation, the trial court denied Geico’s motion for summary judgment, finding that there were issues of fact as to: (i) whether Geico had an affirmative duty to initiate settlement discussions before November 22; (ii) whether Geico knew that its insured was clearly liable for causing the accident before November 22; and (iii) the question of when Geico knew that the claimant’s injuries were serious and that damages would exceed the policy limit. In light of these issues, the court concluded that it could not find that offering the limits twenty days from first notice of the claim was good faith as a matter of law.  These factual issues were tried to a jury and the jury rendered a verdict in favor of the plaintiffs. Geico filed a motion for a new trial, as well as a renewed motion for judgment as a matter of law—both of which were denied.  In doing so, the trial court reiterated its previous conclusions on summary judgment and noted that the evidence showed that as of November 5, Geico had already assigned 100% liability, and, by November 10, Geico had visited the claimant in the neurosurgical ICU and ordered reserves on the claim to be set at policy limits. Continuing, the court noted that the very next day, Geico advised its insureds that there was a potential for an excess verdict and that it would make every effort to settle the claim within the policy limits. 

Geico appealed the district court’s denial of its renewed motion for judgment as a matter of law and, on appeal, the Eleventh Circuit affirmed the trial court’s determination, finding that a reasonable jury had more than enough evidence to conclude that Geico acted in bad faith, citing to the timeline of events detailed above.

Two months later, the Florida Supreme Court issued a 4-3 decision in Harvey v. Geico General Insurance Co., 2018 Fla. LEXIS 1705, 2018 WL 4496566 (Fla. 2018). The Harvey case involved an automobile accident, which resulted in the death of John Potts, who left behind a surviving wife and three children. The accident occurred on August 8. Two days after the accident, Geico determined that liability was unquestionably adverse to its insured. Three days after accident, Geico sent excess letters to its insured. On August 14, counsel for the claimant contacted Geico and requested a recorded statement from Geico’s insured to determine if he had other insurance and assets—Geico’s claims adjuster denied the request and did not relay the request to the insured. Three days later, on the ninth day after the accident, Geico tendered full policy limits ($100,000).

Over the next several weeks, there were multiple exchanges between Geico and its insured, and Geico and counsel for the claimant regarding the insured’s statement. Ultimately, the insured did not provide a statement, which was allegedly due to Geico’s failure to respond to and relay messages to counsel for the claimant. Geico’s $100,000 insurance check was returned and, two weeks later, suit was filed, resulting in an $8.5 million verdict against the insured.

The insured filed suit against Geico for bad faith and prevailed at trial. On appeal, the Fourth District reversed the trial court’s denial of Geico’s motion for directed verdict, finding that there was insufficient evidence to find Geico in bad faith. The Florida Supreme Court, however, concluded that the Fourth District “went astray,” and held that there was competent, substantial evidence to support the jury’s finding that Geico acted in bad faith in failing to settle the claim against its insured. In reaching this conclusion, the Florida Supreme Court made the following statements regarding the Florida’s bad faith standard:

Florida’s totality of the circumstances test is not a “mere checklist.” 


An insurer is not absolved of liability simply because it advises its insured of settlement opportunities, the probable outcome of the litigation, and the possibility of an excess judgment.


[T]he critical inquiry in a bad faith [sic] is whether the insurer diligently, and with the same haste and precision as if it were in the insured’s shoes, worked on the insured’s behalf to avoid an excess judgment.


In such a case where liability is clear and injuries so serious that an excess judgment is likely … the financial exposure to the insured is a ticking financial time bomb and suit can be filed at any time, any delay in making an offer under the circumstances of this case even where there was no assurance that the claim could be settled could be viewed by a fact finder as evidence of bad faith.


Bad faith jurisprudence…places the focus of the actions on the insurer – not the insured.

A significant factor in the majority decision appears to be the fact that Geico “dropped the ball” with respect to its insured’s sworn statement—i.e., its initial refusal to allow the insured’s recorded statement and failure to advise the insured of the counsel for the claimant’s request for the recorded statement, as well as its subsequent failure to inform counsel for the claimant that the insured intended to provide a statement. Although Geico had unconditionally tendered policy limits within nine days of the accident, the Court explained that Geico’s tender alone did not relieve it of its obligations to its insured– particularly since it knew the claimant had demanded a statement from the insured as to any additional assets or other insurance. According to the Florida Supreme Court, Geico’s duty to act in good faith “continued through the duration of the claims process.”

The dissenting judges took issue with the majority’s decision to reinstate the jury verdict, noting that, “although Geico’s claims agent handled the claim less than perfectly,” the majority’s decision “muddies the waters between negligence and bad faith and bolsters ‘contrived bad faith claims.’”   Continuing, Justice Canaday explains:

By adopting a negligence standard in all but name, ignoring the controlling conduct of the insured and the third-party claimant, and relying on unsupported assumptions, the majority incentivizes a rush to the courthouse steps by third-party claimants whenever they see what they think is an opportunity to convert an insured’s inadequate policy limits into a limitless policy.

In closing, whether these two opinions are limited to the particular facts of each case, or substantially alter bad faith jurisprudence by effectively adopting a negligence standard, as suggested in the Harvey dissent, is yet to be seen. Nonetheless, it is a virtual certainty that these two cases have “raised the bar” as to what constitutes good faith claims handling. As such, it is imperative that carriers and practitioners alike be very mindful of these decisions.

Florida Supreme Court Rejects Adoption of Daubert Standard

By Bradley T. Guldalian

In Richard Delisle v. Crane Co., __ So. 3d. __, No.: SC16-2182 (Fla., Oct. 15, 2018), the Florida Supreme Court rejected the Florida legislature’s attempt to legislatively adopt the standard for admissibility of expert testimony set forth by the United States Supreme Court in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), holding that the legislature’s attempt to codify the Daubert standard in Section 90.702 of the Florida Evidence Code infringed upon the Florida Supreme Court’s rulemaking authority and was unconstitutional. In so holding, the Court reaffirmed that the Frye standard set forth in Frye v. United States, 293 F. 1013 (D.C. Cir. 1923) (which requires an expert’s opinion be generally accepted in the relevant scientific community and sufficiently reliable before it is admitted into evidence) remains the law in the State of Florida. Importantly, the Florida Supreme Court noted that the Florida legislature could overrule the Court’s decision and legislatively adopt the Daubert standard so long as the legislature adopts the Daubert standard via a two-thirds vote in both the Florida House of Representatives and the Florida Senate. Given the upcoming election in November, it remains to be seen whether the Florida House of Representatives and the Florida Senate will take up the legislative adoption of the Daubert standard during the next legislative session.

New York Court Holds Radioactive Materials Exclusion Precludes E&O Coverage for Negligent Phase I Report

By Brian Margolies

In its recent decision in Merritt Environmental Consulting Corp. v. Great Divide Ins. Co., 2018 U.S. Dist. LEXIS 175527 (E.D.N.Y. Oct. 10, 2018), the United States District Court for the Eastern District of New York had occasion to consider the application of a radioactive materials exclusion in a professional liability policy.

Great Divide’s insured, Merritt Environmental, was hired as an environmental consultant by a bank in connection with a mortgage refinance of a property located in Westchester County, New York.  Merritt’s responsibility was to prepare a Phase I environmental report concerning the property, which the bank ultimately relied on in agreeing to the refinance. It was later claimed, however, that Merritt’s report failed to document the full extent of the property’s radium and uranium contamination resulting from its use in the Manhattan Project. Merritt was named in two separate lawsuits as a result of its allegedly faulty report, including one by the bank alleging that Merritt negligently prepared its report.

Merritt sought coverage under the professional liability coverage part of a packaged policy issued by Great Divide.  Great Divide denied coverage on the basis of a policy exclusion barring coverage for “any liability of whatever nature arising out of, resulting from, caused by or contributed by … Radioactive contamination however caused, whenever or wherever happening.”

In considering the exclusion, the court observed that under New York law, the phrase “arising out of” is unambiguous and means “originating from, incident to, or having connection with.” The court further observed that the applicability of an “arising out of” exclusion requires only a “but for” causation. The court concluded that this was satisfied since the claims against Merritt would not exist but for the radioactive materials contaminating the property.  It was not relevant to the court that the suit alleged a cause of action against Merritt based on negligence, “because no liability on the part of Merritt, whether by negligence, professional malpractice or any other theory could exist but for the presence of radioactive contamination.”

Florida Court Holds No Duty To Defend Data Breach Claim Under CGL Policy

By Brian Bassett

In St. Paul Fire & Marine Ins. Co. v. Rosen Millennium, 2018 U.S. Dist. LEXIS 173072 (Sept. 28, 2018), the U.S. District Court for the Middle District of Florida held that an insurer owed no duty to defend an insured under a CGL policy where the insured was accused of failing to prevent hackers from accessing credit card information held by the claimant.

St. Paul Fire & Marine Insurance Company (“St. Paul”) issued two consecutive commercial general liability policies to Rosen Millennium (“Millennium”) during 2014 and 2015. Millennium provided data security services for Rosen Hotels & Resorts (“RHR”). In 2016, RHR learned that third party malware caused a credit card breach in one of its hotels between September 2014 and February 2016. RHR alleged Millennium’s negligence caused the breach but has not initiated litigation against Millennium.

Millennium sought coverage for the claim from St. Paul, and St. Paul initiated a declaratory judgment action against Millennium and RHR seeking a finding of no coverage.  The defendants argued that the personal injury coverage of the policy was implicated as a result of the alleged disclosure of credit card information. They also contended that the loss of customers’ use of credit cards was covered “property damage,” and the costs incurred by RHR in complying with notification statutes were covered under the policies.

The court first considered the nature of the underlying claim. Because no underlying litigation existed, the court focused on RHR’s notice of claim and demand letter to Millennium. The only relevant allegation in that letter is that a breach occurred within certain dates and that Millennium “made private information known to third parties that violated a credit card holder’s right of privacy.” RHR’s letter failed to mention property damage or costs incurred from complying with the notification statute. Accordingly, the court held that the issue of whether the policies covered any potential “property damage” and any notification costs is unripe.

The court then examined the issue of whether the third party breach was covered by the St. Paul policies. The definition of “personal injury” in the policies included “[m]aking known to any person or organization covered material that violates a person’s right to privacy.” The parties agreed that credit card information was released upon breach, and they agreed that “making known” material was synonymous with “publication” of material. Citing Innovak International, Inc. v. Hanover Ins. Co., 280 F. Supp. 3d. 1340 (M.D. Fla. 2017), the court held that policy coverage required the insured, rather than a third party, to publish the personal information that is the subject of the claim.  As the breach resulted from third party malware, and not from Millennium’s publication of personal information, RHR’s claim was not covered by the St. Paul policies. The court granted St. Paul’s motion for summary judgment and denied defendants’ motions as moot.

Illinois Court Holds Ten Separate Lawsuits Are Sufficiently Related To Constitute One “Claim”

By Brian Bassett

In Lloyd’s Syndicate 3624 v. Biological Res. Ctr. Of Ill., LLC, 2018 U.S. Dist. LEXIS 160263 (Sept. 19, 2018), the U.S. District Court for the Northern District of Illinois held that Hiscox’s $2 million single “Claim” limit applies to ten underlying lawsuits that involved a similar pattern of alleged wrongdoing.

Hiscox issued a professional and general liability policy (“Policy”) to Biological Resource Center of Illinois, LLC (“BRCI”), which Policy provided coverage on a claims-made basis. The Policy provided limits of $2 million for each “Claim” and $3 million in aggregate. The Policy defined a “Claim” as “any notice received by the Insured of a demand for Damages or for non-monetary relief based on any actual or alleged Wrongful Act.” The Policy further stated that “All Claims based upon or arising out of any and all continuous, repeated or related Wrongful Acts or Accidents committed or allegedly committed by one or more of the Insureds shall be considered a single Claim. . . .”

BRCI was named as a defendant in ten underlying lawsuits arising out of the alleged mishandling and/or sale of human remains. The complaints alleged that BRCI induced plaintiffs or their decedents to donate human remains for medical or scientific purposes, but then BRCI improperly sold, mishandled and/or desecrated the remains.

BRCI tendered the suits to Hiscox and Hiscox funded BRCI’s defense costs in the underlying lawsuits under a reservation of rights. Both parties agree that Hiscox paid more than $2 million in “Claim Expenses” in defending the claim, as that term was defined to include attorneys’ fees.

Hiscox filed a declaratory judgment action requesting an adjudication that it owe no further duty to defend or indemnify because the underlying lawsuits constitute a single “Claim,” and the “Claim Expenses” exceeded the $2 million per “Claim” limit of liability. BRCI argued that the underlying lawsuits qualified as separate, unrelated “Claims” and therefore Hiscox should continue defending the underlying lawsuits until the $3 million aggregate limit is reached.

In determining the number of “Claims” asserted against BRCI, the court focused its analysis on the term “related” in the context of phrase, “continuous, repeated, or related Wrongful Acts.” The court defined the term “related” broadly. The court cited Gregory v. Home Ins. Co., 876 F.2d 602 (7th Cir. 1989), where the Seventh Circuit found the term “related” to incorporate both logical and causal connections. The court cited to similar definitions of “related” by the Illinois Appellate Court in Cont’l Cas. Co. v. Howard Hoffman & Assocs., 955 N.E.2d 151, 162-63 (Ill. App. Ct. 2011).

The court then held that the underlying lawsuits constitute a single “Claim” under the Policy. The underlying complaints all alleged that (1) BRCI promised to use the human remains for medical and/or scientific purposes; (2) BRCI falsely represented and breached its duty by mishandling and/or selling the human remains; and (3) this conduct was discovered following an FBI raid. Because the underlying cases are all based upon the same conduct, the court found the cases plainly related under the Policy. Further, it did not matter that the underlying lawsuits contained varying causes of action, or identified different body parts sold by BRCI at different periods of time.

Instead, as the claims pertained to the same specific course of wrongdoing – BRCI’s unauthorized mishandling and/or sale of body parts – the suits were sufficiently related and constitute one “Claim.” The court granted judgment on the pleadings to Hiscox.

New York Court Holds No Additional Insured Coverage Where Loss Not Proximately Caused BY Named Insured’s Negligence

By Brian Margolies

In its recent decision in Pioneer Cent. Sch. Dist. v Preferred Mut. Ins. Co., 2018 N.Y. App. Div. LEXIS 6621 (N.Y. App. 4th Dep’t Oct. 5, 2018), the New York Appellate Division for the Fourth Department had occasion to visit the “proximate cause” issue for additional insured coverage raised by the Court of Appeals in Burlington Ins. Co. v NYC Transit Authority, 57 N.Y.S.3d 85 (N.Y. 2017).

J&K Kleanerz contracted to perform janitorial services for the Pioneer Central School District. The contract required that Kleanerz name Pioneer as an additional insured under its general liability policy and that it indemnify Pioneer for any harms arising or resulting from any act, omission, negligence or misconduct. At issue was coverage for a claim brought against Pioneer by an employee of Kleanerz who alleged that she slipped and fell on ice in a school parking lot after she had exited the school upon completion of her shift for the day.

Pioneer sought additional insured status for the suit under Kleanerz’s general liability policy, which contained an endorsement extending additional insured status to persons or entities, where required by written contract, for injuries “caused, in whole or in part” by Kleanerz’s acts, errors or omissions. Citing to the Court of Appeals’ 2017 decision in Burlington, the court observed that the appropriate standard for determining additional insured status under comparable wording is whether the insured was the “proximate cause” of the injury, not merely a “but for” cause.

The court held that Pioneer failed to establish this proximate cause requirement since Kleanerz had no responsibility for clearing snow and ice from the school’s parking lot, and therefore was not the proximate cause of the accident. In reaching this decision, it rejected Pioneer’s argument that Kleanerz caused the accident by instructing the injured employee to exit the school through a particular door near the parking lot. The court reasoned that exiting through that particular door may have allowed for the accident to happen, but it was not the cause of the accident. In other words, plaintiff’s use of that particular door was a “but for” cause of the accident, but it was not the proximate cause of the accident.

Based on this finding, as well as its conclusion that Kleanerz’ contractual indemnity obligation was not triggered by the accident, the court concluded that Preferred Mutual, as the general liability insurer of Kleanerz, had no indemnity obligation to Pioneer, and that as a consequence, it could have no defense obligation either.

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.