(Article from Insurance Law Alert, March 2015)
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An Illinois federal district court ruled that a liability insurer was obligated to defend an underlying qui tam suit filed under the False Claims Act ("FCA") because the suit alleged wrongful employment practices within the scope of policy coverage. United States Liab. Ins. Co. v. Sigmatek, Inc., 2015 WL 801504 (N.D. Ill. Feb. 20, 2015).
A former employee of Sigmatek, a manufacturer of gun mounting systems, sued the company alleging violations of the FCA. The complaint alleged that Sigmatek knowingly submitted false documents to federal agencies in order to receive more than $20 million in government contracts. Sigmatek tendered defense of the FCA suit to its insurer, who denied coverage on the basis that the complaint did not allege covered "wrongful employment practices." The court disagreed.
The insurance policy covered any "Claim" made against Sigmatek for "Wrongful Acts," defined as any actual or alleged act of discrimination, harassment, retaliation, wrongful termination, or workplace tort. The court concluded that the FCA complaint supported a claim for "Wrongful Acts" because it alleged a violation of Section 3730(h) of the FCA (entitled "relief from retaliatory actions"), which permits an employee to obtain damages for harassment, discrimination, or discharge. Although only one paragraph of the 200-plus paragraph complaint contained such wrongful act-based allegations, the court noted that the aforementioned paragraph was incorporated in each of the six counts of FCA violations. The court held that "incorporating Section 3730(h) in each count, along with his broad prayer for all relief to which he may reasonably appear entitled to, is sufficient to assert a claim for relief for wrongful employment practices." The court therefore ruled that the insurer had a duty to defend the FCA action. Importantly, the court distinguished cases in which the underlying qui tam plaintiff did not seek damages for wrongful employment acts. The insurer filed an appeal to the Seventh Circuit on March 20, 2015.
A Louisiana federal district court reached a different conclusion in XL Specialty Ins. Co. v. Bollinger Shipyards, Inc., 2015 WL 853993 (E.D. La. Feb. 26, 2015). In Bollinger, the coverage dispute turned on whether the policyholder had provided timely notice of FCA claims under two claims-made D&O policies. The court held that it did not, and therefore that the insurers had no duty to defend.
The FCA suit arose out of a ship conversion project that Bollinger had completed for the U.S. Coast Guard. Bollinger sought coverage from several insurers for the costs of defending the suit. The insurers refused to defend on the basis that Bollinger failed to report a claim within the policies’ applicable deadlines. Both policies at issue required claims to be reported during the policy period or within thirty days after the end of the policy period. Because the factual record established that notice was not provided within the designated time frame of either policy, the court found no coverage. In so ruling, the court expressly rejected Bollinger’s argument that notice should be considered timely because its "Policy Period has been extended year after year by its repeated renewals of its D&O coverage." As the court noted, Louisiana law rejects this "merged into one" argument for notice requirements in back-to-back claims-made policies. Last month, the Colorado Supreme Court rejected a similar "seamless coverage" argument in Craft v. Philadelphia Indemnity Insurance Co., 2015 WL 658785 (Colo. Feb. 17, 2015) (reported in our February 2015 Alert).