Court Opinion

ID: 4410338
Source: CourtListenerOpinion
Date Created: 2019-06-26 17:02:43.165351+00
Date Added: 2024-06-11T14:52:00.273954
License: Public Domain

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

CONDUENT STATE HEALTHCARE,
LLC, f/k/a/ XEROX STATE
HEALTHCARE, LLC, f/k/a ACS STATE
HEALTHCARE, LLC,

Plaintiff, C.A. No. N18C-12-074 MMJ CCLD

V.

AIG SPECIALTY INSURANCE
COMPANY, f/k/a CHARTIS
SPECIALTY INSURANCE COMPANY,
et. al.,

New Nee Nae Ne Nome ee eee ee ee eee ee eee ee ee “ee”

Defendants.
Submitted: May 23, 2019
Decided: June 24, 2019
Upon Defendants’ Partial Motion to Dismiss

DENIED

OPINION
Robin L. Cohen, Esq., Keith McKenna, Esq. (Argued), McKool Smith, P.C., New
York, New York; Jennifer C. Wasson, Esq., Carla M. Jones, Esq., Potter,
Anderson, & Corroon, LLP, Wilmington, Delaware, Attorneys for Plaintiff
John L. Reed, Esq. (Argued), Matthew Denn, Esq., Harrison S. Carpenter, Esq.,

DLA Piper LLP, Wilmington, Delaware; Robert S. Harrell, Esq., Mayer Brown
LLP, Houston, Texas, Attorneys for Defendants

JOHNSTON, J.
FACTUAL AND PROCEDURAL CONTEXT

This is a coverage dispute between Plaintiff Conduent, an insured, and
Defendants AIG Specialty Insurance (“AIG”) and Lexington Insurance Company
(“Lexington”), its insurers.

AIG issued a professional liability insurance policy (“Policy”) to Conduent.
Lexington is an excess insurer that issued a follow form policy. Conduent seeks
insurance coverage for three alleged claims under the Policy. The allegations arise
from services provided by Conduent to the Texas Health and Human Services
Commission. Conduent processed requests from orthodontic providers for “prior
authorization” of orthodontic services under Medicaid.

The three claims at issue are collectively referred to by Conduent as the
Medicaid-Related Claims. Conduent labels these claims as the Medicaid
Investigation, the Provider Actions, and the State Action. Each of the causes of
action in this underlying lawsuit are based on all three of these Medicaid-Related
Claims. Two of the causes of action — Breach of Contract and Declaratory Relief —
are brought against AIG. Conduent alleges that AIG breached its obligations under
the Policy by failing to defend and indemnify Conduent for the Medicaid-Related
Claims. Conduent also seeks a declaration under the Policy, as well as the excess

policies, to pay Conduent’s costs in connection with the Medicaid-Related Claims.
Conduent has brought two additional causes of action against Lexington:
Breach of Contract, and Anticipatory Breach of Contract. The Breach of Contract
claim is substantially similar to the Breach of Contract claim brought against AIG.
The Anticipatory Breach of Contract Claim alleges that Lexington anticipatorily
repudiated the obligations under their policies by refusing to defend or indemnify
Conduent for the Medicaid-Related Claims.

Defendants have moved to dismiss one of the Medicaid-Related Claims: the
Medicaid Investigation.

According to the Complaint, there was a Dallas, Texas local news
investigation in the summer of 2011. Conduent claims that this investigation
prompted the Medicaid Investigation. The Policy became effective May 26, 2012.
On June 8, 2012, the Texas Attorney General Issued a Civil Investigative Demand
(“CID”) to Conduent.'! The CID stated that the Texas Attorney General was
“investigating the possibility of Medicaid fraud involving the prior authorization
process for orthodontia services.” The CID stated further that the Texas Attorney
General “has reason to believe you may have information relevant to its

investigation.” Conduent reported the 2012 CID to AIG.

 

' Conduent was known previously as Affiliated Computer Services (ACS State Healthcare) (A
Xerox Company).
Conduent alleges that the Defendants’ duty to defend and/or indemnify was
triggered when the CID was issued. Defendants argue that the CID does not
constitute a Claim as defined in the Policy. The relevant Policy provision
provides: “The Insurer shall pay on an Insured’s behalf all Loss in excess of the
applicable Retention that such Insured is legally obligated to pay resulting from a
Claim alleging a Wrongful Act.” Therefore, the central issue in this motion is

whether the CID constitutes a “Claim alleging a Wrongful Act” under the Policy.

STANDARD OF REVIEW
In a Rule 12(b)(6) Motion to Dismiss, the Court must determine whether the
claimant “may recover under any reasonably conceivable set of circumstances
susceptible of proof.”? The Court must accept as true all well-pleaded allegations.*
Every reasonable factual inference will be drawn in the non-moving party’s favor.*
If the claimant may recover under that standard of review, the Court must deny the

Motion to Dismiss.”

 

2 Spence v. Funk, 396 A.2d 967, 968 (Del.1978).

3 Id.

4 Wilmington Sav. Fund. Soc’v, F.S.B. v. Anderson, 2009 WL 597268, at *2 (Del. Super.) (citing
Doe v. Cahill, 884 A.2d 451, 458 (Del.2005)).

5 Spence, 396 A.2d at 968.
ANALYSIS
The Policy states: “The Insurer shall pay on an Insured’s behalf all Loss in
excess of the applicable Retention that such Insured is legally obligated to pay
resulting from a Claim alleging a Wrongful Act.” The Policy defines Claim as:
“(1) a written demand for money, services, non-monetary relief or injunctive relief;
or (2) a Suit).” There is a split of authority as to what constitutes a claim under

such policy language.

Authority — CID NOT a Claim
In MusclePharm Corporation v. Liberty Insurance Underwriters, Inc.,° the
plaintiffs, MusclePharm, received a letter from the Securities and Exchange
Commission (“SEC”) stating that the SEC was “conducting an inquiry into
MusclePharm” and “requesting that MusclePharm voluntarily produce
documents.”’ The SEC later issued to MusclePharm an “Order Directing Private
Investigation and Designating Officers to Take Testimony.”® That Order contained

a disclaimer, stating that “it should be understood that the Commission has not

 

6 712 Fed. Appx. 745 (10% Cir. 2017).
7 Td. at 750.
8 a
determined whether any of the persons or companies mentioned in the order have
committed any of the acts described or have in any way violated the law.”?

The SEC later subpoenaed MusclePharm and its officers, requiring both the
company and its individual officers to produce documents and to appear for
testimony.!° The parties eventually settled, and MusclePharm sought defense costs
under its insurance policy. MusclePharm appealed the trial court’s decision
denying coverage, claiming that the trial court “misconstrued the policy terms
‘claim’ and ‘allege’ and therefore erred in concluding that its expenses incurred in
responding to the...Order and the related subpoenas are not covered under the
policy.”!! MusclePharm argued that the Order and related subpoenas were non-
monetary demands for relief.'? The court upheld the trial court’s ruling, explaining
that “the insured does not have a covered ‘claim’ without an allegation of
wrongdoing against an insured person, and the SEC stated in the...Order and the
related subpoenas that these documents were not alleging wrongdoing.”

The MusclePharm court relied on Employers’ Fire Ins. Co v. ProMedica

Health Systems, Inc.“ in reaching its decision.!° In Employers’ Fire, the FTC sent

 

° Id. at 750-51.

10 Td. at 751.

"Td. at 752.

"2 Td. at 753.

13 Td. at 754.

142013 WL 1798978 (6" Cir.).

15 MusclePharm, 712 Fed.Appx. at 754.
a letter to ProMedica, stating that it would be “conducting a non-public preliminary
investigation” to determine whether ProMedica violated Section 7 of the Clayton
Act, or Section 5 of the Federal Trade Commission Act.'® The FTC sent a letter to
ProMedica on August 6, 2010, stating that it was transitioning its investigation to
full-phase and expected to authorize compulsory process shortly.'’ The FTC later
subpoenaed employees of ProMedica.!®

The court held that “none of the actions taken by the FTC in August 2010,
viewed individually or taken together, satisfy all of the requirements for a
‘claim.’”!? The court explained that the FTC “did not ‘assert to be true’ or
‘declare’ that antitrust violations had occurred or would occur....Rather, the
communications...only indicated that the FTC sought to determine ‘whether’ such
violations had occurred or would occur.””? The court stated that the “FTC has
broad investigatory powers and that ‘investigations’ do not necessarily amount to
‘allegations.’”?! The court held that a claim did not arise until the FTC initiated

administrative and civil actions against ProMedica.””

 

'6 Employers’ Fire Ins. Co., 2013 WL 1798978, at *2.
7 Td. at *3.

18 Td.

19 Td. at *4,

20 Td. at *5.

*! Td. at *6.

22 Td. at *1.
In W.R. Starkey Mortgage, LLP v. Chartis Specialty Insurance Co.,”? the
Department of Justice (“DOJ”) sent the plaintiffs a written request for information
relating to an investigation that it was conducting.”* Starkey complied with the
DOJ’s requests and sought coverage for the costs it incurred in complying with the
request.*> The court held that the DOJ’s request for information did not constitute
a claim.”° The court explained that “no court has found that a request for
information that was not accompanied by a subpoena was sufficient to constitute a
‘demand’ or a ‘claim.’”?’

In Oceans Healthcare, L.L.C. v. Illinois Union Insurance Company,”* a
healthcare provider brought an action against an insurer for costs incurred when
the provider received a subpoena from the Department of Health and Human
Services.”” The subpoena demanded documents relating to an investigation into
possible False Claims Act violations committed by the provider.’ The court cited

Starkey Mortgage,*' in which the court held that a “request accompanied by a

threat of a subpoena is not sufficient to establish a ‘demand for something due,’

 

232013 WL 12138896 (E.D. Tex.).
24 Td. at *1.

25 Td.

26 Td. at *6.

27 Td.

28 2019 WL 1437955 (E.D. Tex.).
29 Td. at *1.

30 Tq.

312013 WL 12138896 (E.D. Tex.).
since without the subpoena, nothing is actually due.”3*_ The Oceans Healthcare
court stated that unlike in Starkey Mortgage, the subpoena in Oceans Healthcare
was required by law, and was “undoubtedly a demand for something due....”??
The court stated that a “subpoena is determinative as to whether a request is a
demand for something due.”** The Court ruled that the subpoena was a claim for a
wrongful act, as defined by the policy.*°

In First Horizon National Corporation v. Houston casualty Company,”*© the
court found that CIDs issued by the DOJ did not “constitute a Claim under the
Policy because the documents [did] not contain allegations of a ‘Wrongful Act.’”?”
The court relied on ProMedica in determining that “the mere possibility that an
investigation may lead to a formal allegation of a Wrongful Act is not sufficient to

constitute a Claim.”3° Further, the CIDs did not include specific allegations against

the insured.*?

 

32 Td. at *6.

33. 9019 WL 1437955, at *5 (E.D. Tex.).
34 Tq.

33 Td. at *7.

36 2017 WL 2954716 (W.D. Tenn.).

37 Td. at *10.

38 Tq.

39 Id.
Authority — CID IS a Claim

In Syracuse University v. National Union Fire Ins. Co. of Pittsburgh, PA,"
the plaintiff sought relief for breach of contract, and for a declaratory judgment to
define the parties’ rights and obligations under the subject insurance policy. The
plaintiff alleged that it was an insured under a “not-for-profit individual and
organization insurance policy sold to it by the defendant.”“! In November 2011,
the plaintiff became aware of media coverage regarding allegations of sexual abuse
within the plaintiff's basketball organization.” The plaintiff informed the insurer
that a claim might arise.”

The plaintiff received six subpoenas related to state and federal
investigations surrounding the sexual abuse allegations: three grand jury subpoenas
from the United States Attorney’s Office and three grand jury subpoenas from the
Onondaga County District Attorney’s Office.“* The federal subpoenas sought
relevant information relating to the alleged abuser’s conduct, and any documents
relating to any complaints made about the alleged abuser.*° The subpoenas also

sought information relating to the plaintiffs response in handling any complaints

 

40 2013 WL 3357812 (N.Y. Sup. Ct.).
4l 7d. at *1.

2 Td

43 Td.

7

tS ql

10
about the alleged abuser.*° The District Attorney’s Office subpoenas sought
records relating to Syracuse basketball games, meet and greet sessions, and video
footage of the games.*” In December, 2011, a civil complaint was filed against the
plaintiff seeking damages for alleged acts or omissions in relation to the abuse
allegations.*®

The plaintiff sought coverage for the subpoenas received in connection with
the investigation.” The court held that the subpoenas constituted a claim. The
court found that the term Claim was defined unambiguously in the policy as: “(1) a
written demand for monetary, non-monetary or injunctive relief....” The court
held that “[t]he grand jury’s investigations and the subpoenas constitute ‘a written
demand...for non-monetary relief and the investigations are ‘criminal proceedings
for monetary or non-monetary relief....”

The Syracuse court relied on MBIA Inc. v. Federal Ins. Co.*° in reaching its
decision. In MBIA, the court found that governmental investigative subpoenas

constituted a claim. The subject insurance policy defined the term “claim” as a

“formal or informal administrative or regulatory proceeding or inquiry commenced

 

46 Td.
47 Td.
48 Td.
9 Td.
5° 652 F.3d 152 (2™ Cir. 2011).

11
by the filing of a notice of charges, a formal or informal investigative order or
similar document.”°! The court stated:

We reject the insurers' crabbed view of the nature of a subpoena as a

“mere discovery device” that is not even “similar” to an investigative

order. The New York case law makes it crystalline that a subpoena is

the primary investigative implement in the NYAG's tool shed. We

also reject the insurers' argument that because the definition does not

include a proceeding commenced by service of a subpoena, a

subpoena is not included. This reading puts form over substance; the

fact that the definition does not say “service of a subpoena” is not

dispositive.>

Other courts have reached similar conclusions even when a subpoena was
not issued. In Weaver v. Axis Surplus Ins. Co.,>> the court held that a Maryland
Attorney General’s letter was a claim because it was a written demand for non-
monetary relief.°! The court reasoned that the letter “meets the definition of a
‘demand’ because it is a request for relief under a claim of right and puts [the
party] on notice that legal obligations have been triggered.”

In Minuteman International, Inc. v. Great American Insurance Co.,*° the

court held that an SEC order and subsequent subpoenas were “demands for relief

in that they were demands for something due.”°’ The court stated further that a

 

5! Td. at 159.

>2 Id. at 160.

53.2014 WL 5500667 (E.D.N.Y.).
%4 Td. at *7.

5 Id. at *8.

5° 2004 WL 603482 (N.D. IIL).
57 Td. at *7.

12
“demand for ‘relief is a broad enough term to include a demand for something

due, including a demand to produce documents or appear to testify.”*°

* * *

The case law is split on this issue. The Court finds the authority that
supports the CID constituting a “Claim” more persuasive. The Texas CID to
Conduent is a “Claim” as defined in the insurance policy because it is a “demand
for...non-monetary relief” specifically targeted at the insured. Additionally, the
opinions finding that such requests are not claims do not distinguish information
requested by adjudicative bodies or law enforcement, as opposed to information
requests issued by other entities. The “no claim” opinions do not address the

ability of the issuer to compel compliance without judicial intervention.

Claim “Alleging a Wrongful Act”

The June 2012 CID stated: “The Office of the Attorney General of Texas is
investigating the possibility of Medicaid fraud involving the prior authorization
process for orthodontic services. Such activities may violate the Texas Medicaid
Fraud Prevention Act, Tex. Hum. Res. Code §§ 36.002, et. seg., and other Texas

law.”°?

 

8 Id.
°° Am. Compl. ¥ 39.

13
Medicaid fraud clearly would be a Wrongful Act. It is also clear that the
focus of the CID is Conduent’s predecessor entity. The predecessor entity is not an
unrelated third party who might have had relevant information, but was not
intended as the focus of the investigation. If that had been the situation, the CID
would have been seeking information not necessarily targeted at the insured. The
central question is: when are requests for information or investigations sufficient to
trigger coverage under the policy terms?

There is a broad duty to pay defense costs. Terms in an insurance contract
generally are given their plain and ordinary meaning. Any ambiguity in the
contract is construed against the insurer and in favor of coverage.*! The duty to
defend arises whenever a complaint against the insured, read as a whole and with
all reasonable inferences made in light most favorable to the policyholder, alleges

facts that potentially fall within the scope of coverage.”

 

6° The policy defines a Wrongful Act, in relevant part as “any negligent act, error or omission,
misstatement or misleading statement in an Insured’s performance of Professional Services for
others occurring on or after the Retroactive Date and prior to the end of the Policy Period....”
(Policy at Endorsement No. 13).

61 See ConAgra Foods, Inc. v. Lexington Ins. Co., 21 A.3d 62, 73 (Del. 2011); Ayers v. Assoc. of
County Com’rs of Georgia-Interlocal Risk Management Agency, 771 S.E.2d 743, 748 (Ga. Ct.
App. 2015); Auto-Owners Ins. Co. v. Neisler, 779 S.E.2d 55, 59 (Ga. App. Ct. 2015); Blue Cross
& Blue Shield of Ga., Inc. v. Shirley, 699 S.E.2d 616, 619 (Ga. App. Ct. 2010); Gabriel v. Mount
Vernon Fire Insurance Company, 199 A.3d 79, 83 (Conn. App. Ct. 2018); Cohen & Slamowitz,
LLP y, Zurich Am. Ins. Co., 92 N.Y.S.3d 365, 367 (N.Y. App. Div. 2019); Selective Ins. Co. of
America v. County of Rensselaer, 47 N.E.3d 458, 461 (N.Y. 2016).

6 See Verizon Commc’ns Inc. v. Ill. Nat’l Ins. Co., 2017 WL 1149118, at *7 (Del. Super.)(‘the
test is whether the allegations of the complaint, when read as a whole, assert ‘a risk within the
coverage of the policy’”); DaCruz v. State Farm Fire & Cas. Co., 846 A.2d 849, 858 (Conn.
2004)(duty to defend under Connecticut law is “measured by the allegations of the complaint”

14
For the purposes of interpreting Plaintiff's Policy, the Court is not persuaded
that investigating an alleged unlawful act by the insured, is different from actually
alleging an unlawful act. This is a distinction without a difference.

The Policy language controls. The Court finds that the CID was a request
for information in connection with an investigation. The investigation was
initiated by law enforcement, and clearly was focused on the insured. The stated
purpose of the CID was to investigate the possibility of wrongful acts that may
violate the law. The CID is a Claim for non-monetary relief, alleging a Wrongful
Act under the Policy terms. This finding is consistent with the view that the duty
to pay defense costs should be construed broadly, and in favor of coverage

whenever factual allegations raise the possibility of liability covered by the policy.

 

and is “triggered whenever a complaint alleges facts that potentially could fall within the scope
of coverage”); Langdale Co. v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., 110 F. Supp. 3d
1285, 1301 (N.D. Ga. 2014), aff'd, 609 Fed. App’x 578 (11th Cir. 2015)(duty to defend under
Georgia law is triggered “[i]f the facts as alleged in the complaint even arguably bring the
occurrence, within the policy’s coverage, the insurer has a duty to defend the action’).

15
CONCLUSION

The Court finds that there is a split of authority on the issue of whether or
not a Civil Investigative Demand constitutes a Claim for the purposes of triggering
an insurer’s duties to defend and indemnify. The Court finds that the authority,
supporting the position that the CID constitutes a claim, is more persuasive.

The CID is a request for information related to an investigation targeted at
the insured. The purpose of issuing the CID was to investigate unlawful acts that
may have been committed by the insured. The CID is a Claim for non-monetary
relief that alleged a Wrongful Act under the Policy terms.

THEREFORE, Defendants’ Partial Motion to Dismiss is hereby
DENIED.

IT IS SO ORDERED.

tp
The Hphorable Maty M. Johnston

 

16