Late notice precludes coverage for False Claims Act settlement

PAMC v National Union Fire Insurance Company of Pittsburgh [12.02.19]

Last month, a California federal judge found that no coverage was available to the operator of a medical health facility in California (PAMC) for the defense and settlement of a False Claims Act lawsuit or the costs of responding to a related Department of Justice (DOJ) investigation because of PAMC’s failure to submit the matters in accordance with the relevant policy’s reporting obligations.

Background and timeline

On June 14, 2013, a qui tam lawsuit (a type of whistle-blower claim) was filed under seal – and, therefore, not on the public record - against various defendants, including PAMC, alleging violations of the Federal and California False Claims Act, statutes designed to protect US and state governments from being-overcharged.

On June 9, 2015, PAMC received a subpoena from the DOJ requesting certain documents related to the allegations in the qui tam lawsuit. The letter accompanying the subpoena stated:

… this Office requests that you not disclose the existence of or compliance with the subpoena for an indefinite period of time or until the Office notifies you that the investigation has been completed or until a court orders disclosure… We request that you give this office advance notice if you plan to disclose the existence of or compliance with the subpoena.

The complaint was unsealed on December 15, 2015; however, PAMC asserted that it was not made aware of the qui tam lawsuit until the complaint was served on March 14, 2016.

On January 5, 2017, the DOJ notified PAMC that its investigation was complete and it did not intend to pursue criminal charges.

On February 11, 2017, PAMC and the relator mediated the qui tam lawsuit and agreed to resolve the matter for US$42 million.

On April 20, 2017, PAMC for the first time submitted notice of these matters to its insurer under the management liability policy in place for the February 28, 2015 to March 29, 2016 policy period.

The insurer denied coverage on the ground that neither the qui tam lawsuit nor the subpoena were timely reported under the claims-made-and–reported policy. The policy provided that coverage is afforded “solely with respect to claims first made during the Policy Period…” and reported “as soon as practicable” but in no event later than “ninety days (90) after the end of the Policy Period.” PAMC filed suit challenging the coverage position and the insurer moved to dismiss.

Court’s decision

Deciding in the insurer’s favour, the court found that the unambiguous language of the policy required PAMC to provide notice of these matters within 90 days of the policy’s expiration date.

In reaching its decision, the court refused to extend the notice-prejudice rule to claims-made-and–reported policies. In addition, the court rejected PAMC’s assertion that the DOJ’s letter prohibited disclosure when, in fact, it merely requested non-disclosure. The court also pointed out that PAMC failed to articulate a reason why the DOJ’s letter would preclude it from submitting notice of the qui tam lawsuit once it had become public.

Further, the court refused to find coverage on equitable grounds noting that PAMC waited over four months from when it believed it was no longer prohibited from disclosing the matters before submitting them for coverage and in the interim settled the qui tam lawsuit without the insurer’s knowledge or consent.

Comment

Notice and “claims made” issues are inherent to regulatory investigations and qui tam lawsuits where the scope of an insured’s non-disclosure obligations is not always clear. Importantly, the court in this case reinforced that the insured’s reporting obligations are a condition precedent to coverage in claims-made-and-reported policies. Insurers may wish to consider notice and reporting provisions and the timing aspects of such claims when they are submitted for coverage.

Read other items in Professions and Financial Lines Brief - March 2019