Investigation of <i>Qui Tam</i> Suit Not Covered by D&O Policy
Barry Zalma | November 15, 2021
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 the 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 Ins. Co., Inc., No. 20-6014 (6th Cir. Sep. 17, 2021), the Sixth Circuit Court of Appeals was asked to compel an insurer to pay for defense costs resulting from a whistleblower lawsuit where Hiscox proved to the trial court that it was not covered.
Facts of the Case
Springstone provided behavioral health services across several facilities. In January 2017, it purchased insurance from Hiscox. That insurance plan included directors and 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 CoverageThis 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." Litigation, resulting in 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 covered the costs of responding to the subpoena and that Coverage C specifically excluded nonmonetary relief.
Analysis of the Case
Springstone alleged 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.
- Nonmonetary relief is excluded from Coverage C.
Underlying Qui Tam
Springstone asserted that the underlying qui tam lawsuit constituted a claim under the policy. The qui tam complaint was filed 6 months before the policy period incepted. 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 is 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 exist when one party discharges a liability that 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, "the 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 was no support for 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, recovered nothing.
Conclusion
Springstone learned, by this litigation, that no insurance policy covers every possible incident that may cost the insured money, nor does it jump in to defend every possible event. In addition, a D&O policy is triggered when a claim is made; therefore, there is no right to recover if the suit was filed—as was the qui tam suit in this case—before the policy came into effect.
© 2021 Barry Zalma, Esq., CFE
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