(Article from Insurance Law Alert, October 2016)
For more information, please visit the Insurance Law Alert Resource Center. A Nevada federal district court ruled that a qui tam action against an insured fell within the coverage period of a professional liability policy, but that a limit set forth in an endorsement capped the insurer’s liability and defense obligations. My Left Foot Children’s Therapy, LLC v. Certain Underwriter’s at Lloyd’s London, 2016 WL 5219458 (D. Nev. Sept. 19, 2016).
After receiving notice of a qui tam action alleging that it provided medically unnecessary services in violation of federal and state law, a policyholder tendered the claim to Underwriters under a professional liability policy. Underwriters extended $25,000 of coverage pursuant to a Billing Errors Endorsement. The insured filed suit, seeking a declaration that Underwriters had a duty to defend up to $2 million in expenses and to indemnify the underlying claims. Underwriters argued that the qui tam action falls outside the policy’s coverage period and that any available coverage was limited to $25,000. Ruling on cross-motions for summary judgment, the court rejected Underwriters’ argument about the coverage period, but agreed with its argument as to policy limits.
The court’s coverage analysis turned on application of a Billing Errors Endorsement. Pursuant to the Endorsement, the policy provided coverage for the period of April 15, 2015 to April 16, 2016, but was not required to respond to events “which arise from any facts, circumstances, situations, events, transactions or causes of action which are underlying or alleged in litigation pending on or prior to the initial effective date.” Underwriters argued that it had no coverage obligation because the qui tam action was filed on October 28, 2014. The court rejected this argument, citing “the unique procedural stature of qui tam lawsuits under the False Claims Act,” which contemplates that complaints will remain under seal for at least 60 days after being filed, causing significant delays in providing notice to the defendant. The court therefore concluded that the operative date for purposes of a qui tam coverage suit is when the insured receives notice of the suit. The court reasoned, “[i]t would be superfluous for the Endorsement to explicitly state that the date of service is the date of notice for purposes of coverage as it is commonly understood that a qui tam suit under the FCA becomes active once the defendant has notice of the law suit and that notice most often occurs at the time of service.” Because the insured received notice of the qui tam action in June 2015, the court held that it fell within the Endorsement period.
As to policy limits, the court ruled that the Endorsement expressly limited coverage to $25,000, inclusive of defense costs. The court rejected the argument that the Endorsement was ambiguous as to whether the $25,000 limit included defense costs. The court explained that policy language requiring the Underwriters to “indemnify the Insured for Loss . . . which the Insured is obligated to pay and Claims Expenses which the Insured incurs” makes clear that both defense and indemnity costs are capped at the $25,000 limit.