On March 17, 2022, the California Court of Appeals in Cardiovascular Consultants Heart Center. vs. Norcal Mutual Insurance Company, 2022 Cal. App. Cancel ad. LEXIS 1642, *11 ruled that False Claims Act (FCA) allegations in a Civil Inquiry Application (CID) were not covered by a professional liability policy.
The court held that the CID contained “no allegation of substandard medical care so as to constitute a potential claim under the policy”. Further, he noted that “the FCA attaches liability, not to the underlying fraudulent activity (“excessive, medically unnecessary and/or insufficiently documented cardiovascular procedures”), but to the demand for payment.”
To understand the court’s reasoning, we need to delve into the specific wording of the policy at issue, as is usually the case when reviewing a policy for coverage. In the Cardiovascular Advisors Heart Center case, the policy in question covered claims resulting from a “medical incident”, defined as “any act or omission or series of related acts or omissions resulting directly from the provision or failure to provide professional health care services.” (Emphasis added). Professional health care services” have been defined, in the relevant part, as “medical or health care services provided by the insured, including 1) direct medical, surgical, dental or nursing care. . . [and] 2) make a medical diagnosis and render medical opinions or a medical service. The CID concerned “allegations that [the insured] Ha[d] submitted false claims to the U.S. government for excessive, medically unnecessary, and/or insufficiently documented cardiovascular procedures.
The insured took the claim to his professional liability insurer, who refused cover on the grounds that the FCA’s allegations did not involve a “medical incident”. The trial court agreed and the California Court of Appeals upheld.
The court’s opinion is in line with that of a number of other courts which have recently analyzed FCA’s claims under professional liability policies. In Iberiabank Corp. against Illinois Union Insurance Company2019 WL 585288 (ED La. Feb. 13, 2019), Affirmed, 953 F.3d 339 (5th Cir. 2020), for example, the Eastern District of Louisiana observed that “[e]A very federal circuit facing the issue has ruled that coverage under a professional liability insurance policy is not triggered by claims made under the False Claims Act because those claims are not based on professional services. of the insured who are covered by such a policy. Iberiabank involved a qui tam action against a government lender alleging violations of the FCA arising from the underwriting and granting of mortgages by the lender.
While Iberiabank sought coverage focusing on its underwriting as a “professional service” triggering coverage under the policy, the district court found that the “conduct which[s] at the heart of the FCA’s claim and which does not fall under the insurance coverage “were Iberiabank’s false certifications to the government that it had provided the agreed level of underwriting as part of obtaining the insurance FHA.” Because substandard underwriting alone does not result in an FCA claim, coverage under a professional liability insurance policy was not available.
Several courts have also distinguished conduct that gives rise to False Claims Act claims from the underlying professional service. For example, the court of Am from Zürich. Ins. Co. c. O’Hara Reg’l Ctr. for rehabilitation.529 F.3d 916, 921-23 (10th Cir. 2008) found no coverage under a professional liability policy because “[t]he government injury was not caused by [insured’s] professional services, but rather [the insured’s] submission of false and fraudulent reimbursement requests”). In Horizon W., Inc. c. St. Paul Fire & Marine Ins. Co.45 F. App’x 752, 753-54 (9th Cir. 2002), the court found no coverage because “[t]FCA injury did not ‘result from’ [the insured’s] failure to provide professional services, but for his submission of allegedly fraudulent invoices and his alleged misrepresentation of standards of care.
However, this does not mean that all hope of coverage by a professional liability insurance policy is lost. The court in Affinity Living Group, LLC v StarStone Specialty Ins. Co.959 F.3d 634, 642-43(4th Cir. 2020), for example, found coverage for the FCA claims under professional liability insurance.
What about D&O coverage?
So what does this mean for an insured facing False Claims Act allegations? This means don’t put all your eggs in one basket. In the event of a claim, it is preferable to submit a bid to all the carriers concerned. However, when it comes to claims under the False Claims Act, it is essential for an insured to bid not only to their professional liability insurer, but also to their directors and officers (D&O) insurer. After all, D&O insurance is intended to provide coverage for losses resulting from false or misleading information on behalf of directors, officers and/or the company. And while these policies typically include exclusions for losses arising from “the rendering of professional services,” the breadth of case law concluding that False Claims Act claims do not fall within the realm of professional services might prove helpful. .
Indeed, several courts have found at least some coverage potential under D&D policies. In Call One Inc. v. Berkley Ins. Co., No. 21-CV-00466, 2022 WL 580802 (ND Ill. Feb. 25, 2022), the Northern District of Illinois ruled that the policyholder filed a claim for breach of contract and denial of improper coverage. faith when his insurer D&O refused to defend and indemnify him against a subpoena issued under the Illinois False Claims Act. In that finding, the district court rejected D&O carriers’ claims that the FCA claims are excluded as an uninsurable loss under the policy. In another case, Astellas US Holding, Inc. v. Starr Indem. & Lib. Co., No. 17-CV-08220, 2021 WL 4711503, at *22 (ND Ill. Oct. 8, 2021), court granted summary judgment in favor of coverage of FCA’s allegations under D&O policy; this case was appealed to the Seventh Circuit.
Likewise, in Gallup, Inc. vs. Greenwich Ins. Co., CA No. CV N14C-02-136FWW, 2015 WL 1201518, at *14 (Del. Super. Ct. February 25, 2015), a Delaware superior court has ruled that an FCA settlement is a loss covered by a policy of D&O liability. The court found that the settlement constituted a “loss” as defined by the D&D policy because 1) the definition of “loss” in the policy expressly included “settlements” and 2) the exclusion of the policy for fraud/ Ill-gotten gains required a final decision and was therefore inapplicable to the settlement in question. Further, the court ruled that the policy’s “professional services” exclusion did not extend to the policyholder’s fraudulent billing practices and was instead to be construed narrowly to apply only to policyholder survey and consultation services.
Of course, a host of issues can arise once you submit your claim to an insurer. A D&O carrier may argue that your FCA claim is not a covered “loss” or is excluded under a separate exclusion in the policy, such as an exclusion for fraud or ill-gotten gains. To protect coverage, an insured facing denial of coverage should not be resigned to insurers’ denial and should consider available options, including consulting an insurance attorney.