Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_06-cv-03069/USCOURTS-cand-3_06-cv-03069-5/pdf.json

Nature of Suit Code: 110
Nature of Suit: Insurance
Cause of Action: 28:1441 Petition for Removal- Insurance Contract

---

United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA EX REL,;

STATE OF CALIFORNIA EX REL.;

CALIFORNIA ADVOCATES FOR

NURSING HOME REFORM; ISA FOULK;

and PHYLLIS PENNINGTON,

Plaintiffs,

 v.

AMERICAN INTERNATIONAL

SPECIALTY LINES INSURANCE

COMPANY, and DOES 1 through 20,

Defendants. /

No. C 06-03069 JSW

ORDER GRANTING

DEFENDANT’S MOTION FOR

SUMMARY JUDGMENT AND

DENYING PLAINTIFF’S CROSSMOTION FOR SUMMARY

JUDGMENT

Now before the Court is the motion for summary judgment filed by Defendant American

International Speciality Lines Insurance Company (“AISLIC”) and the cross-motion for

summary judgment filed by Plaintiffs United States of America Ex Rel., State of California Ex

Rel., California Advocates for Nursing Home Reform, Isa Foulk, and Phyllis Pennington

(“Plaintiffs”). The Court finds that this matter is appropriate for disposition without oral

argument and it is hereby deemed submitted. See Civ. L.R. 7-1(b). Accordingly, the hearing

set for January 18, 2008 is HEREBY VACATED. Having considered the parties’ pleadings and

the relevant legal authority, the Court hereby GRANTS AISLIC’s motion for summary

judgment and DENIES Plaintiffs’ cross-motion for summary judgment.

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 1 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1

 Plaintiffs and AISLIC request that this Court take judicial notice of documents

filed in the underlying action, of documents filed in this action, and an assignment of rights

filed in a bankruptcy proceeding. The Court HEREBY GRANTS these requests pursuant to

Federal Rule of Evidence 201.

2

BACKGROUND

Plaintiffs filed this coverage action to recover defense and indemnity costs under its

AISLIC insurance policy, which provides commercial general liability coverage. Plaintiffs seek

coverage for an underlying legal proceeding entitled United States of America, et rel., et al. v.

Lenox Healthcare, Inc., et al., United States District Court, Northern District, Case No. 99-0651

CRB, a false claims action brought on behalf of federal and state governments. 

A. The Underlying Action.

In the underlying action, the plaintiffs alleged that Lenox Healthcare, Incorporated

(“Lenox”) submitted false certifications regarding its compliance with state and federal laws

and regulations in order improperly to obtain continued Medi-Cal and Medicare funding and

submitted false claims for services rendered. (Plaintiffs’ Request for Judicial Notice, Ex. A, ¶¶

55, 58.)1 The plaintiffs in the underlying action further alleged that Lenox owned and operated

the Mill Valley Healthcare Center (the “Center”) since March 1, 1997. (Id., Ex. A., ¶ 8.) In

October of 1997, the California Department of Health Services (“DHS”) conducted its annual

certification survey of the Center and found almost thirty deficiencies. (Id., Ex. A., ¶ 31.) The

DHS gave the Center an opportunity to correct the deficiencies through the submission of

proposed plans of corrections. The plans of corrections had to be approved by the DHS to

avoid decertification. (Id., Ex. A., ¶ 32.) Between October of 1997 and March of 1998, the

Center submitted three plans of corrections which the DHS found unacceptable. (Id.) On

March 26, 2008, the Center submitted another plan which DHS determined made credible

allegations of compliance by April 20, 1998, but DHS found numerous deficiencies when it

conducted a follow-up survey. (Id., Ex. A., ¶ 33.)

Lenox defaulted in the underlying action and the court entered judgment against it. (Id.,

Exs. B, L.) The court found that from at least December 7, 1997 through July 7, 1998:

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 2 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

[D]efendants, acting in reckless disregard of the falsity of their claims and

statements, submitted claims and represented that they complied with Federal and

State nursing home laws. Defendants also recklessly committed in their plans of

corrections to correct cited deficiencies in nursing home care in order to continue

collections of Medi-Cal and Medicare payments for the care of residents at the

[Center]. These statements and commitments were false.

(Id., Ex. L.) The court awarded $1,415,000 in damages under the Federal and State False

Claims Acts and awarded $4,245,000 in trebled damages, as well as attorneys’ fees and

expenses. (Id., Exs. L, N.)

B. The AISLIC Insurance Policy.

AISLIC issued to Lenox a Nursing Home Professional Liability Policy, number GL 819-

18-25, effective from February 7, 1997 to March 13, 1998. (Coleman Declaration, Ex. A.) 

Endorsement No. 1 to the policy provides the following:

The Company will pay on behalf of the insured all sums which the insured shall

become legally obligated to pay as damages because of the injury to which this

insurance applies caused by a medical incident which occurs during the policy

period.

(Coleman Decl., Ex. A.) The endorsement defines “medical incident” as:

any act or omission ... in the furnishing of professional health care services

including the furnishing of food, beverages, medications or appliances in

connection with such services and the postmortem handling of human bodies... . 

(Id.)

AISLIC and Plaintiffs filed cross-motions for summary judgment on the issue of

whether AISLIC had a duty to defend Lenox in the underlying action. 

ANALYSIS

A. Legal Standard for Motions for Summary Judgment.

A court may grant summary judgment as to all or a part of a party’s claims. Fed. R. Civ.

P. 56(a). Summary judgment is proper when the “pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that the moving party is entitled to judgment as a

matter of law.” Fed. R. Civ. P. 56(c). An issue is “genuine” only if there is sufficient evidence

for a reasonable fact finder to find for the non-moving party. Anderson v. Liberty Lobby, Inc.,

477 U.S. 242, 248-49 (1986). A fact is “material” if the fact may affect the outcome of the case.

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 3 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

Id. at 248. “In considering a motion for summary judgment, the court may not weigh the

evidence or make credibility determinations, and is required to draw all inferences in a light

most favorable to the non-moving party.” Freeman v. Arpaio, 125 F.3d 732, 735 (9th Cir.

1997). 

A principal purpose of the summary judgment procedure is to identify and dispose of

factually unsupported claims. Celotex Corp. v. Cattrett, 477 U.S. 317, 323-24 (1986). The

party moving for summary judgment bears the initial burden of identifying those portions of the

pleadings, discovery, and affidavits which demonstrate the absence of a genuine issue of

material fact. Id. at 323. Where the moving party will have the burden of proof on an issue at

trial, it must affirmatively demonstrate that no reasonable trier of fact could find other than for

the moving party. Id. Once the moving party meets this initial burden, the non-moving party

must go beyond the pleadings and by its own evidence “set forth specific facts showing that

there is a genuine issue for trial.” Fed. R. Civ. P. 56(e). The non-moving party must “identify

with reasonable particularity the evidence that precludes summary judgment.” Keenan v. Allan,

91 F.3d 1275, 1279 (9th Cir. 1996) (quoting Richards v. Combined Ins. Co., 55 F.3d 247, 251

(7th Cir. 1995)) (stating that it is not a district court’s task to “scour the record in search of a

genuine issue of triable fact”). If the non-moving party fails to make this showing, the moving

party is entitled to judgment as a matter of law. Celotex, 477 U.S. at 323.

B. Governing Insurance Coverage Principles.

A liability insurer owes a duty to defend whenever there is a potential for indemnity

coverage under the insurance policy. See, e.g., Montrose Chem. Corp. v. Superior Court, 6 Cal.

4th 287, 299-300 (1993). Where any allegation demonstrates a potential for coverage, the

insurer must mount and fund the defense of the entire action, including claims for which there is

no potential for coverage. Buss v. Superior Court, 16 Cal. 4th 35, 48 (1997). In order to

determine whether an insured has made a claim for covered damages, the court must compare

the underlying complaint with the terms of the policy. Waller v. Truck Ins. Exch., 11 Cal. 4th 1,

18 (1995). If the underlying complaint and any relevant extrinsic evidence submitted by the

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 4 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

insured do not demonstrate that the underlying claims seek damages that are potentially covered

under the policy, the insurance company has no duty to defend. Id. at 19.

To interpret the meaning of the policy language, courts must first look at the written

provisions of the policy. “If the policy language is clear and explicit, it governs. ... When

interpreting a policy provision, we must give its terms their ordinary and popular sense, unless

used by the parties in a technical sense or a special meaning is given to them by usage.” Palmer

v. Truck Ins. Exch., 21 Cal. 4th 1109, 1115 (1999) (citations omitted). In undertaking this

analysis, courts must read limitations on coverage narrowly and insuring agreements “broadly

so as to afford the greatest possible protection to the insured.” MacKinnon v. Truck Ins. Exch.,

31 Cal. 4th 635, 648 (2003) (quoting White v. Western Title Ins. Co., 40 Cal. 3d 870, 881

(1985)). 

Plaintiffs have the initial burden of demonstrating that the AISLIC Policy could

potentially cover some damages alleged in any part of the underlying action. See Montrose, 6

Cal. 4th at 300. 

C. The AISLIC Policy Did Not Cover the Underlying Action.

Plaintiffs argue that the underlying action alleged a covered “medical incident” because

the preparation of Lenox’s plans of correction, the false statements that formed the basis of the

underlying False Claims Act (“FCA”) action, involved the furnishing of professional health care

services. “To state a claim under the FCA, [a plaintiff] must allege that defendant submitted a

false claim for payment from the government, that the claim was false or fraudulent, and that

the defendant knew the claim was false or fraudulent.” Horizon West Inc. v. St. Paul Fire and

Marine Ins. Co., 214 F. Supp. 2d 1074, 1077 (E.D. Cal. 2002) (citing 31 U.S.C. § 3729(a)); see

also United States ex rel. Hopper v. Anton, 91 F.3d 1261, 1266 (9th Cir. 1996) (“What

constitutes the FCA offense is the knowing presentation of a claim that is either fraudulent or

simply false.”). “The injury suffered by the United States under the FCA is the difference

between what the government actually paid and the amount it would have paid in the absence of

a fraudulent claim.” Horizon West, 214 F. Supp. 2d at 1077 (internal quotes and citation

omitted). Liability under the FCA is premised on upon presenting a false claim for payment,

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 5 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

“not upon the underlying conduct used to establish the falsity of such a claim.” Id.; see also

Hopper, 91 F.3d at 1266 (explaining that the FCA “attaches liability, not to the underlying

fraudulent activity, but to the claim for payment”) (internal quotes and citation omitted).

Similar to the instant action, in Horizon West, the plaintiffs in the underlying action

alleged that a retirement home “violated the FCA by submitting Medicare and Medicaid claims

for services that were not provided, and by falsifying records to conceal substandard conditions

at the nursing homes.” Horizon West, 214 F. Supp. 2d at 1076. The retirement home argued

that the insurance company had a duty to defend the FCA action pursuant to a professional

liability insurance policy which covered injuries resulting from providing or failing to provide

professional services. Id. at 1076-77. The court applied the Ninth Circuit’s definition of

“professional services” in the context of insurance policies covering such services: 

A “professional” act or service is one arising out of a vocation, calling, occupation,

or employment involving specialized knowledge, labor, or skill, and the labor or

skill involved is predominantly mental or intellectual, rather than physical or

manual. ... In determining whether a particular act is of a professional nature or a

“professional service” we must look not to the title or character of the party

performing the act, but to the act itself.

Id. (quoting Bank of California v. Opie, 663 F.2d 977, 981 (9th Cir. 1981)). Based on this

definition, the court held that the submission of false claims did not involve specialized

knowledge required to be considered professional services. Therefore, the court found that

there was no duty to defend the FCA action. Horizon West, 214 F. Supp. 2d at 1079. 

Similarly, in M/G Transport Services, Inc. v. Water Quality Insurance Syndicate, 234

F.3d 974 (6th Cir. 2000), the plaintiff purchased a pollution liability insurance policy from the

defendant. A FCA complaint was filed against the plaintiff, which alleged that the plaintiff had

knowingly falsified records to hide violations of the Clean Water Act in order to obtain payment

from the United States. Id. at 976. The plaintiff argued that the underlying FCA action fell

within the pollution liability insurance policy, which covered any amount paid “by reason of or

with respect to” liability to the United States under the Clean Water Act, because the FCA

action was brought on behalf of the United States and proof of a Clean Water Act violation was

a predicate to establishing any claim to the United States was false. Id. at 978. The court

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 6 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

rejected the plaintiff’s arguments for coverage, reasoning that “[a]n FCA action is not converted

into a Clean Water Act action simply because a violation of the Clean Water Act is a predicate

to establishing the falsity of a claim, or may be used as a measure of damages under the FCA.” 

Id.

The Court finds that Plaintiffs’ reliance on PMI Mortgage Insurance Co. v. American

International Speciality Lines Insurance Co., 394 F.3d 761 (9th Cir. 2005), is misplaced and

that their attempts to distinguish Horizon West fail. PMI was a large financial institution that

sold mortgage guaranty insurance and was sued for violating the anti-kickback provisions of the

Real Estate Settlement Procedures Act. The underlying complaint alleged that PMI was

undercharging its lender clients for various insurance products and services in exchange for

customer referrals on mortgage insurance. Id. at 762. PMI sought coverage for the underlying

action under a professional liability insurance policy which provided insurance for loss arising

from a claim alleging a wrongful act in the rendering or failure to render professional services. 

Id. at 763. Unlike the policy at issue here, the policy in PMI defined “professional services”

broadly as “those services of the Company permitted by law or regulation rendered by an

Insured ... pursuant to an agreement with the customer or client.” Id. at 764. Based on this

definition, the court held that the underlying action fell within the plain meaning of the broad

professional services provision because the action resulted directly from PMI’s provision of

mortgage insurance services under various agreements with clients. Id. In fact, the court noted

that the definition in the policy was “significantly broader” than in previous cases interpreting

“professional services” in liability insurance polices. Id. at 767. Moreover, the court found it

significant that PMI was not engaged in one of the traditional “professions” and does not render

physical or intellectual acts of service commonly associated with doctors or lawyers. Id. In

addition to the broader definition of “professional services” and the different nature of the

profession at issue, the underlying action at issue in PMI arose under the Real Estate Settlement

Procedures Act, not the FCA. The Court therefore finds that PMI is inapposite.

Plaintiffs’ efforts to distinguish Horizon West do not fare any better. Plaintiffs argue

that the claims in Horizon West were limited to claims for payment, whereas here, the FCA

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 7 of 8
United States District Court

For the Northern District of California

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

action was premised on the false statements within the plans for correction. According to

Plaintiffs, creating and submitting plans for correction are not merely administrative acts similar

to the billing at issue in Horizon West. However, the underlying action at issue in Horizon West

alleged that the retirement home violated the FCA by submitting false claims and by falsifying

records to conceal substandard conditions. Horizon West, 214 F. Supp. 2d at 1076. Moreover,

as AISLIC argues, Lenox’s liability under the FCA was premised on the presentation of false

claims and records or statements to the government, not the underlying deficiencies in patient

care that was used to establish the falsity of Lenox’s claims and representations. Notably, the

underlying complaint did not allege that Lenox prepared these plans in order to provide a

professional health care service separate and apart from obtaining the Medi-Cal and Medicare

payments. Rather, the underlying complaint alleged that Lenox submitted the plans of

correction solely to keep receiving the fraudulently-claimed payments. The falsified plans of

correction thus were merely the predicate to Lenox’s submission of false claims for which the

government sought restitution in the FCA action.

The Court finds that, based on the reasoning in Horizon West and M/G Transport

Services, the FCA action does not qualify as a “medical incident” which requires the furnishing

of “professional services” under the AISLIC policy. Accordingly, the Court concludes that

there was no claim for which there was a potential for coverage under the AISLIC policy, and

thus AISLIC did not have a duty to defend the underlying FCA action. See Waller, 11 Cal. 4th

at 19.

CONCLUSION

For the foregoing reasons, the Court GRANTS AISLIC’s motion and DENIES

Plaintiffs’ cross-motion for summary judgment.

IT IS SO ORDERED.

Dated: November 27, 2007 

JEFFREY S. WHITE

UNITED STATES DISTRICT JUDGE

Case 3:06-cv-03069-JSW Document 50 Filed 11/27/07 Page 8 of 8