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(Article from Insurance Law Alert, June 2020)

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The Fourth Circuit ruled that a professional liability insurer was obligated to defend a False Claims Act suit, finding that allegations that an adult home care center submitted false Medicaid reimbursement claims “arose out of” a medical incident.  Affinity Living Grp., LLC v. Starstone Specialty Ins. Co., 2020 WL 2630845 (4th Cir. May 26, 2020).

Affinity Living Group was sued under the False Claims Act for allegedly submitting Medicaid claims for services that were never provided.  Affinity’s insurer refused to defend, arguing that the damages sought in the underlying action did not “result from a claim arising out of a medical incident,” as required by the policy.  A North Carolina district court agreed, finding that the qui tam complaint did not seek damages for rendering or failing to render personal care services, but instead sought recovery based on the submission of false reimbursement claims.  The Fourth Circuit vacated the ruling.

Under North Carolina law, “arising out of” is interpreted broadly, to require only a causal connection (rather than proximate causation) when it is used in a provision extending coverage.  As such, the Fourth Circuit concluded that Starstone had a duty to defend the qui tam suit so long as the false billing claims were causally connected to the “failure to render” services, which was a covered “medical incident” under the policy.  The court ruled that this causation standard was met because “but for the failure to provide the services, no claim for damages exists.”  In so ruling, the court rejected the insurer’s contention that billing services are “wholly disassociated from, independent of, and remote from” personal care services.