Insurance Recovery Law

Despite Prior Suits, Policyholder Entitled to Coverage for DOJ Investigation

Why it matters: A policyholder was entitled to coverage for a Department of Justice (DOJ) investigation despite already facing possibly similar qui tam suits because the government's inquiry was "shrouded in secrecy," a federal court judge in California concluded, and it was therefore unclear whether the investigation related back to the earlier lawsuits against the insured. Millennium Labs was served with subpoenas by the DOJ about possible healthcare-related offenses, including violations of the Health Insurance Portability and Accountability Act (HIPAA) and the submission of fraudulent claims for reimbursement. The company tendered defense to Allied World Insurance Company, but the insurer rejected the tender, arguing that the insured was named as a defendant in more than one lawsuit filed prior to the inception of the policy involving the submission of false claims and thus was precluded by one or more exclusions limiting coverage for related prior litigation or claims that existed prior to the inception of the policy. But the court said that coverage for the DOJ investigation was not precluded by the earlier suits, despite acknowledging the potential for similarities between the actions. "There is no evidence before the court that the current DOJ investigation arises out of, results from, or is the consequence of the same or related facts, circumstances, situations, transactions, or events," the court said, characterizing the agency's efforts as "shrouded in secrecy." Granting Millennium's motion for summary judgment, the court ordered Allied to provide coverage up to the $5 million policy limit.

Detailed discussion: A specialty diagnostics laboratory, Millennium Laboratories offers drug testing of chronic-pain patients for doctors and other health providers, with approximately 30 percent of its service paid for by government-sponsored programs such as Medicare and Medicaid.

Millennium purchased a healthcare organizations directors and officers liability policy from Allied World Insurance Company for the period of December 1, 2011 to December 1, 2012. The policy provided $5 million in coverage with a sublimit for "Regulatory Claims Coverage" of $100,000.

Beginning in March 2012, the DOJ served Millennium with a total of six subpoenas. A wide variety of potential healthcare offenses were listed in the various subpoenas with broad discovery requests. In one letter from the agency to the insured, the DOJ explained that "this Office is presently conducting a joint criminal and civil investigation of … Millennium, and its officers, employees and agents. That conduct includes, without limitation, allegations that Millennium and certain of its officers, employees and agents may have violated various federal criminal statutes including but not limited to … [conspiracy to defraud, submission of false, fictitious, fraudulent claims to the U.S., health care fraud offenses, mail fraud and/or wire fraud, anti-kickback acts and certain civil statutes including civil false claims acts and administrative statutes] … in connection with billing false or fraudulent claims to federal health care programs and/or other payors; payment of remuneration to physicians and/or others to induce referrals of laboratory tests to Millennium, and interference with witnesses and /or destruction of evidence."

Prior to the inception of the policy period, Millennium had been named as a party in six qui tam and private lawsuits. The actions involved allegations that Millennium had gained a competitive advantage by engaging in unlawful business practices such as encouraging healthcare providers to submit false and/or fraudulent claims to health insurers as well as providing unlawful kickbacks.

Upon receiving the first DOJ subpoena, Millennium requested coverage from Allied. The insurer sent a payment of $100,000 but expressly reserved its rights and defenses under the policy. When the insurer failed to chip in any more, the insured—having incurred more than $5 million in legal fees defending the DOJ subpoenas—eventually filed suit seeking declaratory relief that Allied was obligated to reimburse Millennium.

Ruling on cross motions for summary judgment, U.S. District Court Judge Cynthia Bashant sided with the policyholder.

Millennium's claim fell within the policy terms, the court first determined, as the insured established that it received the subpoenas during the policy period that detailed a formal civil or criminal investigation being conducted by the DOJ. The "Related Claims" provision did not operate to preclude coverage, despite the court's acknowledgement that some similarities might exist between the earlier qui tam and private lawsuits and the DOJ allegations under investigation.

"[T]here is no evidence before the court that the current DOJ investigation arises out of, results from or is the consequence of the same or related facts, circumstances, situations, transactions or events," Judge Bashant wrote. "There may be similar allegations between the earlier actions and the current DOJ investigation, but that does not mean the investigation arises out of the earlier allegations."

The court next considered the multiple exclusions relied upon by Allied. None of the exclusions—for "Prior or Pending Litigation," "Prior Noticed Claims," or "Specific Claims Exclusion"—were applicable, the court said.

The Prior or Pending Litigation provision excluded "any Claim alleging or derived from the same or essentially the same facts, or the same or related Wrongful Acts, as alleged in such pending or prior litigation." Allied was unable to establish the necessary overlap between the qui tam and private lawsuits and the DOJ investigation, the court said.

"The subpoenas ask for a wide variety of non-specific documentary materials and state only that the DOJ is investigating Millennium for Federal health care offenses," Judge Bashant wrote. "[T]here is no way to determine whether there is substantial overlap between the earlier lawsuits and this investigation. The simple fact that the DOJ has requested copies of documents filed in prior lawsuits is not dispositive. The investigation is shrouded in secrecy, and the allegations being investigated by the DOJ are listed broadly without specificity. It is impossible to determine whether the investigation or allegations being investigated arise out of, are based upon, or are attributable to the prior actions."

Turning to the Prior Noticed Claims exclusion, the court found it also failed to bar coverage. "Again, Allied is unable to point to any evidence demonstrating the DOJ investigation is based upon or attributable to the same facts as any earlier claim reported under any policy," the court said.

The same reasoning applied to the "Specific Claims Exclusion," a provision added by the parties to explicitly bar coverage for the listed qui tam and private lawsuits already filed against Millennium.

Having failed to provide any evidence to support its burden of showing the applicability of a policy exclusion, Allied made one final argument: the $100,000 sublimit for Regulatory Claims Coverage was all that Millennium was entitled to for the DOJ investigation. The court disagreed.

"Although an argument can be made that the DOJ subpoena is a claim for a regulatory wrongful act, the letter from the DOJ attorney appears to expand the claim to include more than just a regulatory wrongful act, including breaches of duty, misstatements or misleading statements, and violations of HIPAA," Judge Bashant said. "Insurance coverage is interpreted broadly to afford the greatest possible protection to the insured. Construing coverage broadly, Allied World is responsible for coverage under the $5,000,000 maximum limit."

To read the order in Millennium Laboratories v. Allied World Insurance Co., click here.

back to top

Insurer's Delay in Providing Defense Resulted in Lost Right to Control Defense

Why it matters: Better late than never doesn't apply to insurance coverage, a California federal court recently concluded, holding that an insurer lost its right to control the defense of its insured where it failed to provide the policyholder with a defense immediately after its duty to defend was triggered—even though the insurer later provided coverage. Centex Homes was hit with multiple construction defect lawsuits and requested defense from Travelers Indemnity Company of Connecticut. Waiting to hear back from the insurer, Centex retained its own counsel to defend against the suits. When Travelers eventually agreed to provide a defense, Centex refused to cede control. Travelers filed suit, seeking a declaration that it had the right to control the defense. Relying on the California Supreme Court's decision in J.R. Marketing v. Hartford, the court noted that no clear line exists where delay amounts to a breach of duty but found that Travelers crossed the line. A period of time existed where the insured had to provide its own defense counsel to meet court deadlines, the judge said. "A failure to provide counsel or to guarantee the payment of legal fees immediately after an insurer's duty to defend has been triggered constitutes a breach of the duty to defend, even if the insurer later reimburses the insured," the court wrote.

Detailed discussion: Several construction defect lawsuits were filed against Centex Homes in California state court. A participant in the development of residential communities, Centex operated as a general contractor, hiring companies as subcontractors to build the homes it sold. Each of its subcontractors purchased commercial general liability (CGL) insurance from various insurers, naming Centex as an additional insured.

Centex sought coverage under the policies for the construction defect lawsuits. But the insurers—Travelers Indemnity Company of Connecticut and St. Paul Fire and Marine Insurance Company, collectively referred to in the coverage dispute as Travelers—hesitated before providing a defense.

Faced with court deadlines, Centex retained a law firm to provide a defense in the underlying litigation. When Travelers finally stepped up to the plate, it insisted on appointing its own counsel. Centex argued that Travelers lost its right to control the defense by waiting too long to participate.

Travelers filed a declaratory action seeking an order that it had the right to control Centex's defense, along with claims for breach of contract and breach of the implied covenant of good faith and fair dealing. In a somewhat convoluted procedural history, the federal court first granted Centex's motion for partial summary judgment in May 2012 before reconsidering its decision and later reversing itself in April 2013.

Centex then filed a motion for reconsideration. The court granted the motion, finding that the April 2013 order was inconsistent with a decision from a California appellate panel in J.R. Marketing v. Hartford. When that case went up to the state's highest court, the judge stayed the Centex dispute pending review. The California Supreme Court affirmed the relevant part of the J.R. Marketing decision and the court lifted the stay.

Evaluating Centex's motion for reconsideration as to Travelers' right to control Centex's defense in two of the underlying suits—Acupan and Conner—the court reversed itself again to grant summary judgment in favor of the insured.

The decision in J.R. Marketing stands for the proposition that an insurer forfeits its right to control the defense of an action where the insurer breaches its duty to defend, the court said. In the April 2013 order, the court held that an insurer can lose its right to control the insured's defense solely "through waiver, forfeiture, or estoppel," a position that was in error in light of J.R. Marketing, U.S. District Court Judge Samuel Conti wrote.

Although Travelers subsequently reimbursed Centex for its legal expenses in the Acupan and Conner actions, a gap existed between the insured providing notice of the claim and the insurer's agreement to provide a defense.

Did this delay result in the insurer's loss of its right to control the defense? Yes, Judge Conti said.

The burden is on the insured to make a prima facie showing that a third-party claim potentially falls within the insuring provisions of its policy, and an insurer's duty to defend will not ripen until a third party files a complaint against the insured, the court explained. However, the duty is not triggered the instant the insurer receives the complaint filed against the policyholder but when an insurer is required to act on the insured's behalf—such as filing an answer to the complaint.

"At that point, the insurer has an immediate duty to defend until it can show conclusively that the damages sought in the third party lawsuit are not covered under the policy," the court said.

In the Acupan action, Centex first notified Travelers on January 21, 2011 and made a prima facie showing that the action potentially fell within its coverage by February 1, when it submitted copies of subcontracts and other documents at Travelers' request. The actual complaint in Acupan was filed on April 19, 2011. In California, a responsive pleading is not due until 30 days after the complaint is filed, triggering Travelers' duty to defend on May 19, 2011.

"Travelers did not accept Centex's tender, however, until June 1, 2011," Judge Conti wrote. "Thus, there were at least 13 days during which Travelers had a duty to defend Centex but did not provide a defense. As a result, Centex had to employ its own counsel."

As for the Conner lawsuit, Centex initially provided notice to the insurer on September 8, 2010 and made a prima facie showing that the action potentially fell within coverage on the same day. The Conner complaint was filed on October 15 and Travelers' duty to defend arose on November 15. "Travelers did not accept Centex's tender, however, until January 21, 2011," the court said. "Its acceptance, therefore, was made 67 days after its duty to defend was triggered."

Travelers argued that it had a right to conduct a reasonable investigation before accepting Centex's tender and that it reimbursed the insured for legal costs incurred prior to acceptance.

But the court said that was insufficient.

"The duty to defend imposes upon the insurer several responsibilities, including that it 'employ competent counsel to represent the insured,'" Judge Conti wrote. "A failure to provide counsel or to guarantee the payment of legal fees immediately after an insurer's duty to defend has been triggered constitutes a breach of the duty to defend, even if the insurer later reimburses the insured."

An insured's desire for defense coverage is "as significant a motive" for the purchase of insurance as indemnity for possible liability, the court said.

"Of course, an insurer is free to conduct an investigation beyond the point at which its duty to defend has been triggered," the judge added. "Such an investigation may lead to facts establishing that there is no possibility of coverage, thereby ending the insurer's duty to defend. An insurer may not, however, deprive an insured of the security implicit in the duty to defend—specifically, 'the right to [immediately] call on the insurer's superior resources' as opposed to having to marshal its own resources to mount a defense against a claim that possibly falls within the policy's coverage."

Judge Conti ruled that Travelers breached its duty to defend by failing to provide Centex with a defense at least 30 days after the complaints were filed in the Acupan and Conner actions and lost its right to control Centex's defense in the process.

To read the decision in Travelers Indemnity Co. of Connecticut v. Centex Homes, click here.

back to top

Hang Tags Are an Advertisement, Coverage Required for Copyright Suit

Why it matters: Do hang tags on clothing forming the basis of a trademark and copyright infringement lawsuit constitute an advertising injury? A federal court in Florida answered in the affirmative, ruling in a coverage dispute that started when a policyholder was sued by a competitor over the use of a similar shield logo. E.S.Y., a clothing manufacturer and retailer, used "an identical or substantially similar mark" on its hang tags, Exist alleged in its complaint, asserting claims for copyright infringement, trademark infringement, unfair competition, and false designation of origin. But when E.S.Y. asked Scottsdale Insurance Company for defense of the suit, the insurer denied the request. The allegations in the underlying complaint did not fall under the commercial general liability policy's coverage for "advertising injury," the insurer argued. Noting the broad use of the term "your advertisement" in the policy, the court said it was unclear whether hang tags were covered by the definition. Because of the ambiguity of the policy, the court held the insurer had a duty to defend.

Detailed discussion: A clothing manufacturer and retailer, E.S.Y., Inc. purchased a commercial general liability (CGL) policy from Scottsdale Insurance Company that included coverage for advertising injury. The company was hit with a lawsuit from competitor Exist alleging that E.S.Y. used label and hang tags "in such a manner that its use causes and is causing actual confusion in the marketplace, or is likely to cause such customer confusion," displaying a "shield logo" similar to the one used by Exist.

The complaint included seven counts, including copyright infringement, trademark infringement, false designation of origin, and unfair competition, and requested injunctive relief, actual damages, and treble damages.

E.S.Y. turned to Scottsdale for a defense, but the insurer denied the request. The Exist complaint did not allege plaintiffs were liable for injury as defined under the policy, Scottsdale said, and even if it did, multiple exclusions applied.

The policyholder filed suit and then filed a motion for summary judgment. Taking a close look at the policy language, U.S. District Court Judge Cecelia M. Altonaga granted the motion.

She began with policy definitions. The policy defined "advertisement" as "a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters." Advertising injury covered a list of offenses, including three subsections applicable to the case: "(d) Oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services"; "(f) The use of another's advertising idea in your 'advertisement'"; and "(g) Infringing upon another's copyright, trade dress or slogan in your 'advertisement.'"

As required by the policy, E.S.Y. proved an alleged violation gave rise to an advertising injury, that a causal connection between that injury and the advertising activity existed, and that Exist sought damages, the court said.

The court found the insured failed to trigger coverage under the "oral or written publication" subsection because it could not prove slander or disparagement was alleged in the underlying complaint. While the hang tags allegedly bear a resemblance, E.S.Y.'s "conduct was not alleged to make any express comparisons to Exist," the court said. "To the extent the visual similarity between the marks and tags can be construed as Plaintiffs' implicit reference to Exist, nothing about that reference was alleged to dishonor or denigrate Exist. Exist may not have liked that Plaintiffs allegedly copied them, but, at least under Exist's allegations, imitation is not disparagement as there was no comparison suggesting Exist's brand was inferior to Plaintiffs'."

E.S.Y. had better luck under the subsections for "use of another's advertising idea" and "infringing upon another's copyright." Judge Altonaga found that hang tags are a form of printed advertisement, rejecting Scottsdale's position that they were simply part of the garment. The hang tags "were attached to Plaintiffs' garments but were not part of the garments themselves—they hung off the garments," the court said. "And while the hang tags provided information—at a minimum, identifying [E.S.Y.'s brand]—the hang tags' special design presumably had the additional function of attracting consumers to the garments themselves and to the brand more generally. If the hang tags' only purpose was to provide information, they would not need such a particular aesthetic."

Certainly the issue was not as clear-cut as a billboard or magazine advertisement, "but the broad definition of 'advertisement' in the Policy governs," the judge wrote. "If the hang tags did not clearly fit within this category, the definition at least is ambiguous with respect to the question of the hang tags. Under Florida law, such ambiguities are resolved in favor of coverage. Thus, on a fair reading of the complaint and a liberal interpretation of this ambiguous Policy term, the hang tags were advertisements."

The "infringing upon another's copyright" subsection also triggered coverage, the court said, as no question existed that the complaint asserted a claim of copyright infringement.

After finding an "advertising injury," Judge Altonaga then determined that the Exist complaint alleged a causal connection between the injury and E.S.Y.'s advertising activity. "Exist claimed Plaintiffs' copying of Exist's hang tags caused harm to Exist by creating confusion among Exist's customers as to Exist's hang tags and Plaintiffs'," the court said. As for damages, the Exist complaint specifically requested damages in multiple counts.

The court then shifted the inquiry to the exclusions Scottsdale claimed precluded coverage.

The Infringement of Copyright, Patent, Trademark or Trade Secret exclusion barred coverage "arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. Under this exclusion, such other intellectual property rights do not include the use of another's advertising idea in your 'advertisement.' However, this exclusion does not apply to infringement, in your 'advertisement,' of copyright, trade dress or slogan."

While the first sentence of the exclusion arguably barred coverage, the carve-out at the end of the provision brought the complaint back within range of coverage, the court said.

A second exclusion—the Knowing Violation of Rights of Another provision—prohibited from coverage personal and advertising injury "caused by or at the direction of the insured with knowledge that the act would violate the rights of another and would inflict personal and advertising injury."

The Exist complaint stated violations of the Lanham Act, Copyright Act, and related state law claims, alleging "intentional, malicious, willful and wanton misconduct" and seeking actual and treble damages. But Judge Altonaga said the exclusion did not apply because a showing of intent is not necessary under the Lanham Act or Copyright Act to recover actual damages.

Granting E.S.Y.'s motion for summary judgment, the court said Scottsdale had a duty to defend in the Exist suit.

To read the order in E.S.Y., Inc. v. Scottsdale Insurance Company, click here.

back to top

Policyholder Entitled to Discovery on Related Policies, Court Orders

Why it matters: H.J. Heinz Company triumphed in a discovery dispute over Starr Surplus Lines Insurance as part of a coverage case over losses for contaminated Heinz baby cereal that was sold in China. Starr balked at paying an estimated $30 million for the costs associated with the recall and tried to rescind the applicable policy, arguing that Heinz omitted material information from its application. In response, Heinz asked for information from Starr's underwriting files related to other product contamination policies sold by the insurer to policyholders with similar annual sales. A Pennsylvania federal court judge granted the request, ordering Starr to produce other policyholders' applications, the applicant's loss history information, information that the insurer obtained during the underwriting process about the applicant, premiums charged, and any analysis conducted by Starr on whether to issue the policy or set the premiums. Heinz was entitled to the information because it is "the main mechanism" to defend against Starr's claim and test what the insurer considered "material" when underwriting a policy, the judge wrote.

Detailed discussion:

In 2014, H.J. Heinz Company recalled infant food sold in China after regulators found levels of lead in excess of the allowable amount. To cover the costs of the recall and destruction of the products, the company turned to Starr Surplus Lines Insurance Company pursuant to a product contamination policy. When Starr balked, Heinz filed suit in Pennsylvania federal court seeking coverage for damages estimated north of $30 million.

Starr responded by attempting to rescind the policy, arguing that Heinz omitted material information from its application. Heinz countered with a motion to compel. The policyholder requested that Starr produce:

"All underwriting files relating to Product Contamination insurance policies that You sold to policyholders with annual sales exceeding $8 billion, other than Heinz, in 2014 (including policy applications submitted to You, loss information provided to You, dollar amounts of premiums charged by You, and Product Contamination insurance policies issued by You). You may redact the name of the policyholders."

Starr objected, calling the request overly broad and unduly burdensome. The parties tried to settle the issue themselves, holding at least three meetings. After negotiating, Heinz narrowed its request from the entire underwriting file to:

"(1) the application of the insured, as required by Starr (can be redacted as to any identifying information, we mainly want the form of the application); (2) the loss history page (again, can redact any identifying information as to the insured, the prior losses, we want the form used, the dates of prior losses required and the amounts of the prior losses); (3) the page or pages in the file that identifies the 'subjectives' required of the insured by Starr during the underwriting of the polic(ies) (redacted if needed but generally the 'subjectives' appear generic, without any identifying information); (4) the amount of premium charged for the respective policies; and (5) any analysis Starr conducted in deciding to issue the policy or set the premium."

At an impasse, the parties turned to the court. Finding that the information was essential to Heinz's case, U.S. District Court Judge Arthur J. Schwab granted the motion to compel.

The court did not think production of the requested information would complicate the case, was unduly burdensome, would violate the privacy of third-party insureds, or was not focused enough on similar policies.

"At this early stage, the Court finds that Heinz is entitled discovery that may reveal information that is relevant to combat Starr's position on rescission; the main mechanism to do so is through examining other comparable policies issued by Starr and associated risks," the court wrote.

The requested production was appropriate in terms of the narrow issue of rescission and materiality, the court said. "The requested documents are also appropriately limited in scope, being that the request is confined to a specific set of potential policies (product contamination policies sold by Starr), involving a comparable amount (annual sales in excess of $8 billion), and limited to a temporal period (2014)."

Because the request allowed for redaction and other safeguards, the confidential information of third-party insureds should remain safe, the court said. Mindful of discovery expenses, "Heinz's request is proportional to the amount in dispute in this litigation," Judge Schwab added.

To read the order in H.J. Heinz Company v. Starr Surplus Lines Insurance, click here.

back to top