Source: https://www.insurancelawhawaii.com/insurance_law_hawaii/2008/06/index.html
Timestamp: 2019-04-23 12:01:47+00:00

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Liability Policy for Professional Services Does Not Cover Alleged Violations Under False Claims Act.
Coverage for a suit involving false billing claims submitted in violation of the False Claims Act is generally not recognized under a liability policy. This was the result reached in a recent case decided by the Tenth Circuit. See Zurich Am. Ins. Co. v. O'Hara Regional Center for Rehabilitation, Nos. 06-1357 and 06-1370 (10th Cir. June 18, 2008).
The insured entered provider agreements with the United States under the Medicare and Medicaid programs. Following an audit, the government determined the insured had submitted inflated invoices for patient services. The government filed suit under the False Claims Act, 31 U.S.C. 3729 (a) to recover the overpayments made to the insured. The insured tendered the suit to its three general liability insurers. The insurers' policies covered liability for "professional services," meaning liability caused by errors and omissions in furnishing or failing to furnish professional services. The insured argued the underlying suit arose from failure to provide professionally adequate nursing or medical services. Further, its billing practices pursuant to the Medicare and Medicaid provider agreements constituted professional services covered by the policies. Two insurers accepted the tender under a reservation of rights, while the third disclaimed coverage.
The insurers filed a suit for declaratory judgment on their duty to defend, claiming the professional services provisions did not cover claims of fraud made by the government in the underlying suit. The district court granted summary judgment to the insurers.
The Tenth Circuit affirmed. The government's injury was not caused by the insured's failure to provide professional services, but instead resulted from the insured's submission of bills for services it did not provide. Further, the preparation of bills or invoices did not qualify as professional services. Because the underlying suit did not allege an injury caused by an activity covered by the policies, the insurers had no duty to defend or indemnify.
Hawai`i appellate courts have never addressed whether allegations made against an insured under the False Claims Act are covered.
The United States Supreme Court decided an insurance-related case last week involving the insurer's potential conflict of interest in its dual role in administering and paying benefits under an ERISA plan. Metropolitan Life Ins. Co. v. Glenn, No. 06-923 (U.S. Supreme Ct. June 19, 2008). MetLife was the administrator and insurer of Sears, Roebuck & Company's long-term disability insurance plan, governed by ERISA. As the plan administrator, MetLife had discretionary authority to determine the validity of an employee's benefits claim. MetLife also paid the claim.
The employee was initially found eligible for twenty-four months of disability benefits for a heart condition that impaired her ability to work. The employee actually received Social Security disability benefits, for which MetLife had encouraged her to apply. When MetLife eventually had to determine whether she could work in order to establish entitlement to extended benefits, it found her capable of doing sedentary work, and denied her benefits.
The employee filed suit but lost before the District Court. The 6th Circuit reversed, however, finding MetLife had abused its discretion. MetLife had ignored the findings of the Social Security Administration, disregarded certain medical reports that supported the employee's claim, withheld some of the reports from an expert hired to review the medical files, and failed to address evidence that job-related stress exacerbated the employee's condition. Further, the 6th Circuit found MetLife had a conflict of interest in both determining the employee's eligibility for benefits and paying the benefits from its own pocket.
The Supreme Court affirmed, but provided sparse guidance to the lower courts. The Court agreed the conflict of interest was one of many factors to be weighed in determining whether there was an abuse of discretion. The significance of the conflict of interest factor would depend on the circumstances of a particular case, however. The 6th Circuit's decision was proper in that it did not find the conflict of interest alone determinative, but also focused on other factors related to MetLife's mishandling of the employee's claim. These serious concerns, taken together with some degree of conflict of interest, led the court to set aside MetLife's discretionary decision.
When Does the Duty to Defend Start?
The question "when does the duty to defend start?" arises quite frequently. Succinctly, it starts immediately upon the filing of a covered lawsuit and tender to the insurer. "The defense duty is a continuing one, arising on tender of defense and lasting until the underlying lawsuit is concluded, or until it has been shown that there is no potential for coverage, . . . Imposition of an immediate duty to defend is necessary to afford the insured what it is entitled to: the full protection of a defense on its behalf.” Haskel, Inc. v. Superior Court of Los Angeles County, 33 Cal. App. 4th 963, 974 (1995) (citing Montrose Chemical Corp. v. Superior Court, 861 P.2d 1153 (Cal. 1993)) (emphasis in original; citations omitted).
Upon receiving tender of the defense, an insurer may (1) refuse to defend at the risk of acting in bad faith, (2) defend under a reservation of rights and attempt to litigate the coverage issues, or (3) assume the defense without reservation. An insurer is NOT entitled to conduct discovery or conduct an unreasonably long investigation into the underlying lawsuit. If an insurer pursues options #1, it is immediately required "to prove that it would be impossible for the [claimant] to prevail against [the insured] in the underlying lawsuit . . . on a claim covered by the policies.” Tri-S Corp. v. Western World Ins. Co., 110 Hawai`i 473, 488, 135 P.3d 82 (2006) (quoting Dairy Road Partners v. Island Ins. Co., Ltd., 92 Hawai`i 398, 412-413, 992 P.2d 93, 107-108 (2000)) (emphasis added). This is, obviously, a very high standard - "impossibility." Failure to meet this standard and the past/concurrent refusal to defend puts the insurer at the risk of a bad faith claim.
On the other hand, an insured need merely demonstrate a mere possibility of coverage, which requires nothing more than a review of the allegations in the underlying complaint and the insurance policy. As a matter of public policy, any "close calls" are construed in the insured's favor because insureds should not be required to litigate both the underlying case and a coverage case at the same time -- the so-called "procrustean dilemna."
As an example of this principle at work, in Haskel, the California court overruled a trial court that had “simply” taken a motion for summary judgment off calendar and refused “to hear it until the insurers’ discovery was complete.” 33 Cal. App. 4th 963 at 976.
If the claims asserted in the underlying action raise a potential for coverage, the insurers have a duty to provide a defense to Haskel upon tender of those claims unless and until they produce in court undisputed extrinsic evidence which conclusively establishes that there is no potential for coverage.
The insurers were either aware of such evidence at the time of the tender or they were not; they did not need discovery from Haskel to determine the existence of that evidence. The insurers, if they wanted to defeat Haskel’s summary adjudication motion, should have set forth such conclusive evidence in a proper opposition to the motion. If, on the other hand, they did not have such conclusive evidence, then they could not successfully oppose Haskel’s claim for an immediate judicial recognition of the fact that a defense obligation then existed.
The insurers contend that this case really only involves a discovery dispute. They argue that they require a full opportunity to complete their discovery into coverage questions before they can file a proper opposition to Haskel’s summary adjudication motion. This confuses the principles surrounding the creation of a defense obligation with those applicable to its termination.
Id. at 977 (emphasis added); see also The Travelers Indem. Co. Of Illinois v. Ins. Co. Of North America, 886 F. Supp. 1520, 1526-27 (S.D. Cal. 1995).
I like to think of this principle in this fashion: the creation of the duty to defend starts at the earliest possible moment. To obtain a duty to defend, the requisite "proof" is deliberately set at a low threshold. Termination, on the other hand, occurs only upon the establishment of conclusive proof and requires a much higher threshold (impossibility of coverage). This sometimes can occur as a matter of law, e.g., the policy period is inapplicable, but frequently involves issues of fact that cannot be resolved until the underlying case is completed. Unfair to the insurer? Not really. This is what bargain for when we purchase an insurance policy.
In a prior post, we discussed two appeals by Dr. Emerson Jou to the Hawai`i Intermediate Court of Appeals regarding notice requirements for reimbursement from no-fault policies. In a recent, third case pursued by Dr. Jou, the ICA agreed notice of denial of benefits was required pursuant to Haw. Rev. Stat. 431:10C-304 (3)(B) when reduced or partial payments were made. See Jou v. Schmidt, No. 27652 (Haw. Ct. App. June 4, 2008). Nevertheless, Dr. Jou was not entitled to payment from the insurer once the applicable policy limits were exhausted.
The ICA confirmed that once the insurer paid the full amount of the policy limits, its obligation to pay any additional outstanding bills due to the providers was extinguished. Here, the insurer's limit was $20,000. Although Jou appealed the conclusion of law that the insurer had no further responsibility for bills incurred by the insured, he did not appeal the finding that the policy limits were indeed exhausted. Therefore, the Circuit Court did not err in rejecting Dr. Jou's claim that he was entitled to additional payments from the insurer.
The Ninth Circuit recently decided that the insurer's reliance upon a non-existent policy limit referenced by an endorsement was not supportable. See Ferguson v. Coregis Ins. Co., No. 06-35867 (9th Cir. June 3, 2008).
The policy issued to Coeur d-Alene School District by Coregis referred in several places to the general liability limit of $2,000,000 per occurrence. An endorsement to the policy attempted to change the policy limit by referring to the limit of liability set forth in an Idaho statute. The statute stated every policy issued to a governmental entity shall have a policy limit of "not less than $500,000 for bodily or personal injury." The District Court granted summary judgment to Coregis, finding the policy limit was indeed $500,000.
The Ninth Circuit reversed. Although the policy's endorsement attempted to limit the liability as indicated in the statute, there was no such limit in the statute. Instead, the statute set a minimum dollar amount of coverage. The endorsement's reference to a non-existent standard rendered the endorsement uncertain and unenforceable.
The Hawaii Federal District Court recently remanded a coverage case to allow the Hawaii state court to decide whether an exclusion in a professional liability policy was applicable. See Keown v. Tudor Ins. Co., 2008 U.S. Dis;t. LEXIS 42996 (D. Haw. May 30, 2008).
The insured was a realtor and held a professional liability policy issued by Tudor. The insured was sued by the Honpa Hongwanji on Kauai for his involvement in arranging a co-tenancy between the Hongwanji and Early School, of which the insured happened to be the principal. The underlying complaint alleged that the insured, acting as principal of Early School, represented both parties in negotiating a purchase of the property. The property was purchased without an agreed-upon written co-tenancy agreement being entered. A mortgage was later filed on the property, identifying the insured as the mortgagee of an undivided 1/2 interest in the property. The Honwanji's complaint sought: (1) a partition and declaration that its property was not encumbered by the mortgage; and (2) damages from the insured for breaching his duty of care in representing the Hongwanji in the purchase.
The insured sought a defense from Tudor. Tudor denied coverage because the insured was not acting as a realtor at the time of purchase. The insured sued in Hawaii state court, for declaratory relief and attorney fees, but Tudor removed to federal court on diversity grounds.
Judge Seabright affirmed the magistrate's Findings and Recommendations that the case should be remanded to state court. Although Tudor argued the request for attorney fees was a claim for monetary relief, the Court noted the fee request was dependent on the claim for declaratory relief. Fees were sought under Haw. Rev. Stat. 431:10-242, which did not create a separate cause of action for attorney's fees, but instead conditioned the payment of fees on the insured's prevailing on its liability claim. Further, the case involved a state law issue not yet addressed by the Hawaii courts. Specifically, the insured challenged the denial of coverage on the basis that the real estate transaction arose from the insured's services as a school principal. It was unclear under Hawaii state law whether the claim was excluded by the policy. By remanding the case, the Hawaii state courts could determine the proper scope of the exclusion.
Perhaps the most surprising aspect of a recent decision by the Hawaii Federal District Court is that the insurer agreed to defend under a homeowner's policy, albeit under a reservation of rights.
In Allstate Ins. Co. v. Sylvester, 2008 U.S. Dist. LEXIS 42386 (D. Haw. May 21, 2008), the insured husband and wife operated a hotel-like business by renting out their beach front house. Instead of a commercial general liability policy, the insureds purchased a homeowner's policy from Allstate. The policy covered liability for bodily injury arising from an occurrence, but excluded coverage for bodily injury arising out of the business activities of an insured person.
A guest fell as she entered her rented room, suffering a fractured hip. When the insureds' business was sued in state court, Allstate agreed to defend pursuant to a reservation of rights. Allstate then filed a coverage action in federal district court.
Judge Mollway determined there was no duty to defend nor indemnify. First, the husband and wife were the insureds under the homeowner's policy, not their business. Second, the policy expressly excluded claims arising from a business. The insureds further argued Allstate was estopped from denying coverage because it knew about the rental business and assured the insureds there was coverage under the policy. The court rejected this argument as well because even if the insureds were led to believe they were "covered" by the homeowner's policy, this would not be the same as being covered for liability arising out of a business.
In Sturla, Inc. v. Fireman's Fund Ins. Co., 67 Haw. 203, 684 P.2d 960 (1984), the Hawai`i Supreme Court determined that the distributor of allegedly defective carpet was an insured under a Vendor's Endorsement, but found there was no coverage based on exclusions in the policy. The opposite result was reached in a recent case from the Fifth Circuit where the Court determined an insured under a Vendor's Endorsement was covered by the policy in a product liability suit. See Weaver v. CCA Industries, Inc., No. 07-30597 (5th Cir. May 27, 2008).
Weaver sued for a stroke allegedly incurred when he ingested Permathene, a product marketed and sold by CCA. Weaver alleged Permathene, a diet drug/appetite suppressant, contained phenylprpanolamine. He filed a products liability suit against CCA, as manufacturer and seller of Permathene.
"In consideration of the premium charged, it is hereby agreed that the definition of insured is amended to include any person or organization designated as a vendor but only with respect to the distribution or sale in the regular course of the vendor's business of the Named Insured's products . . . ."
When NY Marine denied coverage, CCA filed a third-party complaint against the insurer. The district court found that CCA was not an additional insured under the endorsement because the claims were based on CCA's independent negligence.
The Fifth Circuit reversed. Weaver's suit alleged not only the independent negligence of CCA, but also asserted a strict liability claim, alleging the product was unreasonably dangerous. Therefore, if Phoenix failed to follow the formula in manufacturing the product, CCA could be liable as a manufacturer under strict liability despite its lack of fault. Thus, CCA qualified as an additional insured under the endorsement. The Fifth Circuit further determined the district court erred in relying upon two exclusions to deny coverage.

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