Court Opinion

ID: 9915266
Source: CourtListenerOpinion
Date Created: 2024-01-04 22:02:37.244002+00
Date Added: 2024-06-11T13:09:17.270981
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.,      )
                                 )
      Defendants.                )
                                 )

                        Submitted: November 28, 2023
                          Decided: January 4, 2024

         On Plaintiff’s Motion for Summary Judgment on Exclusion 3(a)
                                   GRANTED

        On Defendants’ Motion for Summary Judgment on Exclusion 3(a)
                                  DENIED

                                  OPINION

Orrie A. Levy, Esq., (Argued), Robin L. Cohen, Esq., Keith McKenna, Esq., Cohen
Ziffer Frenchman & McKenna LLP, New York, New York; Jennifer C. Wasson, Esq.,
David A. Seal, Esq., Carla M. Jones, Esq., Potter Anderson & Corroon LLP,
Wilmington, Delaware; Attorneys for Plaintiff

Kenneth J. Nachbar, Esq., Megan Ward Cascio, Esq., Courtney Kurz, Esq., Emily C.
Freidman, Esq. Neal M. Glazer, Esq., Izak Weintraub, Esq., London Fischer, LLP;

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Robert J. Katzenstein, Esq., Julie O’Dell, Esq., Smith Katzenstein & Jenkins, LLP;
Maaren A. Shah, Esq., (Argued), Michael B. Carlinsky, Esq., Todd G. Bettie, Esq.
Jonathan E. Feder, Esq., Quinn Emanuel Urquhart & Sullivan, LLP; Robert S.
Harrell, Esq., Mayer Brown; Peter H. Kyle, Esq., John L. Reed, Esq., DLA Piper
LLP (US); Attorneys for Defendants

JOHNSTON, J.

      The jury trial in this case lasted six days. The jury’s verdict was in the form

of answers to 10 specific questions. Plaintiff filed a Renewed Motion for Judgment

as a Matter of Law Pursuant to Rule 50, To Set Aside/Amend/Alter the Judgment

Under Rule 59(d), and/or for a New Trial Under Rule 59(a).

      By Opinion dated February 14, 2023, the Court held:

                 The Court finds that there are four principal reasons
            compelling retrial.

                    The Court acknowledges that, in hindsight, the
            Winter Submission was so replete with evidentiary
            problems (hearsay, double or triple hearsay, inability to
            cross-examine the declarant, admitted lack of knowledge
            by the declarant), that it never should have been
            admitted—despite the agreement of the parties. As the
            trial progressed, that document, and speculative evidence
            about the bias and credibility of the absent witness,
            became a central focus.

                  Contrary to several explicit written and bench
            rulings of the Court, AIG’s counsel repeatedly referred to
            the jury a Press Release that had been unequivocally
            deemed inadmissible.
                                         2
                  Despite repeated admonishments by the Court,
           AIG’s closing argument was intended to persuade the jury
           to draw improper inferences from information set forth in
           privilege logs.

                  AIG further inaccurately and improperly argued
           that AIG never had any coverage obligation to Conduent.
           This argument is directly in violation of the Court’s
           pretrial holding that AIG breached its contractual duty to
           pay defense costs.

                  The Court finds that, in order to prevent manifest
           injustice, exceptional circumstances exist demonstrating
           that justice would miscarry if the jury’s verdicts were
           allowed to stand. THEREFORE, Plaintiff’s Motion to
           Set Aside the Judgment Under Rule 59(d) and for a New
           Trial Under Rule 59(a) is hereby GRANTED.

                  FURTHER THEREFORE, Plaintiff’s Motion for
           Judgment as a Matter of Law pursuant to Rule 50 is hereby
           GRANTED IN PART. The Court finds, as a matter of
           law, that AIG’s initial denial of coverage, and continued
           repudiation of coverage obligations, relieved Conduent of
           any duty to cooperate or to seek consent with regard to
           settlement with the Texas Attorney General.

                 IT IS SO ORDERED.

              Plaintiff’s Application to Maintain Sealing is hereby
           GRANTED.

     The parties have filed cross-motions for Summary Judgment on Exclusion

3(a). Application of Exclusion 3(a) is a purely legal issue. The Court stayed

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resolution of this issue until after trial because it was possible that the jury’s verdict

would have rendered the matter moot.

                                  EXCLUSION 3(a)

                                         Waiver

      Plaintiff argues that the Defendant Insurers waived Exclusion 3(a) as a

defense.

      Superior Court Rule 12(b) requires that every defense “shall be asserted in the

responsive pleading.” Defendants asserted the defense of Exclusion 3(a) in the

answer to the original complaint, in the answer to the amended complaint, and in the

amended answer to the amended complaint.

      At a hearing prior to trial, the Court found that application of Exclusion 3(a)

was a question of law. No questions of fact - concerning interpretation of Exclusion

3(a) - had been identified by any party that would require resolution by the jury. The

Court held that no testimony solely relating to Exclusion 3(a) would be admitted at

trial. The issue would be resolved after trial, if the verdict did not make it moot.

Resolution of Exclusion 3(a) is not moot at this juncture.

      The Court finds that Defendants have not waived the Exclusion 3(a) defense.

                            Application of Exclusion 3(a)

      Exclusion 3(a) provides:

                                            4
             This policy shall not cover Loss in connection with a
             Claim made against an Insured:
                   (a) alleging, arising out of, based upon or attributable to a
                   dishonest, fraudulent, criminal or malicious act, error or
                   omission, or any intentional or knowing violation of the law....

      Loss is defined as “compensatory damages, judgments, settlements, pre-

judgment and post-judgment interest and Defense Costs....”

      Claim includes a “Suit.” Suit “means a civil proceeding for monetary, non-

monetary or injunctive relief, which is commenced by service of a complaint or

similar pleading....”

      It is not disputed that the settlement between Conduent and the State of Texas,

which is at the heart of this litigation, is a Loss as defined in Exclusion 3(a). By

paying the settlement amount, Plaintiff experienced a Loss in connection with a Suit,

which constituted a Claim made against the Plaintiff Insured. The essential

question raised in these cross-motions is whether Exclusion 3(a) applies to exclude

coverage on the basis that the settlement of the underlying Texas action was for

contentions “alleging, arising out of, based upon or attributable to a dishonest,

fraudulent, criminal or malicious act, error or omission, or any intentional or

knowing violation of the law....”

      New York law applies to policy interpretation in this case. Insurance policy

exclusions must be read strictly and narrowly against the insurer. The insurer bears

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the burden of proving that an exclusion applies to defeat coverage. The burden is to

establish that the exclusion is subject to no other reasonable interpretation.1

          It is not unusual for an underlying suit to allege facts relating to excluded

conduct as well as conduct that would not fall within the exclusion. For example,

fraud in the inducement and breach of contract counts frequently are brought within

the same complaint. It would be unreasonable for a fraud exclusion to eliminate

coverage for a loss relating to contract claims. Including factual allegations - of

dishonesty, intentional misrepresentation, or violation of law - does not mean that

the entire complaint becomes a single “claim” or “loss.” Such an interpretation of

“‘arising out of’ effectively extends coverage of the exclusion to just about anything

remotely connected....”2

          The Court must look to the substance, or gravamen, of the underlying lawsuit.

The question is whether the alleged facts are solely or primarily based on acts

prohibiting coverage under Exclusion 3(a) - “dishonest, fraudulent, criminal or

malicious act, error or omission, or any intentional or knowing violation of the law”.3

1
 J.P. Morgan Sec. Inc. v. Vigilant Ins. Co., 37 N.Y.3d 443, 447-48 (N.Y. 2021); Cragg v. Allstate
Indem. Corp., 17 N.Y.3d 118, 122 (N.Y. 2011).
2
    ACE American Ins. Co. v. Guaranteed Rate, Inc., 2023 WL 5965619, at *8 (Del.).
3
 See Lewis & Stanzione v. St. Paul Fire & Marine Ins. Co., 2015 WL 3795780, at *4 (N.D.N.Y
2015) (exclusion applied because the only interpretation of the claims was that the insured acted
dishonestly or fraudulently, or at least with knowledge of dishonest and fraudulent behavior);
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       The action originally brought by the State of Texas was under the Texas

Medicaid Fraud Prevention Act. The Texas action alleged dishonest and fraudulent

acts and omissions, as well as knowing violations of law.

       The controlling pleading is the Third Amended Petition. In addition to claims

under the Texas Medicaid Fraud Prevention Act, the Third Amended Petition

included the following factual allegations.

              • “Xerox assumed operations under the 2003 contract on
              or around January 1, 2004. At or around that same time,
              Xerox implemented a different procedure than that
              described in its P&Ps [policies and procedures]. Without
              submitting documentation of this change to HHSC, Xerox
              instructed its clerical personnel assigned to the dental prior
              authorization department to begin automatically
              approving orthodontic prior authorization requests for
              Medicaid patients, age 12 or over, accompanied by an
              HLD score sheet that showed a score of 26 or above on its
              face.”
              • “The clerical personnel hired and assigned to the dental
              prior authorization department had no qualifications in the
              field of dentistry and were not qualified to evaluate the
              patients’ condition as reflected in the diagnostic records,
              much less confirm the accuracy of the diagnosis and HLD
              scores dental providers submitted. Indeed, the clerical

Gibbs v. CNA Ins. Cos., 263 A.D.2d 836, 837-38 (3d Dep’t 1999) (This case is distinguishable.
Coverage for indemnification was excluded where the gravamen of the claim was acts of sexual
abuse. The defendant had pled guilty in the related criminal case, even though the civil case was
based solely on negligence. In this action, there has been no admission by Plaintiff of conduct
specifically enumerated in Exclusion 3(a)).

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personnel under the direction of Xerox supervisors made
no attempt to do so.”
• “By 2008, Xerox had the clerical personnel working
remotely from home without access to the diagnostic
materials. In most instances, the clerical personnel did not
confirm that any or all of the required diagnostic records
were actually submitted by the provider as required by
Medicaid policy. Further, the clerical personnel were not
trained to review the HLD sheet for obvious over-scoring
or violations of Medicaid policy that were evident on the
face of the HLD sheet.”
• “If a prior authorization request contained an HLD sheet
for a person who met Medicaid eligibility requirements
and the HLD sheet contained a score of 26 or higher,
approval was entered by the clerical personnel without
further examination. Xerox’s process drastically reduced
the number of orthodontic prior authorization requests
reviewed by the dental director, who was the only person
employed by Xerox with dental qualifications to be able
to review the requests and determine whether patients’
conditions qualified as a severe handicapping
malocclusion.”
• “Xerox implemented cost-saving measures for its own
operation, not Medicaid’s, that made adequate reviews less
likely. In or around August 2006, Xerox launched its
Activity Based Compensation (‘ABC’) plan. Under ABC,
clerical personnel reviewing prior authorization requests
were compensated on a piece-work basis. This
incentivized employees to process more prior
authorization requests in less time.”
• “From 2004 to 2012, Xerox entered approvals for
thousands of orthodontic prior authorization requests into
the State’s Medicaid system without conducting a
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            substantive prior authorization review and by having
            unqualified clerical staff not verifying whether the patients
            actually qualified under Medicaid policy for the
            orthodontia benefit and services requested.”
      The Settlement Agreement and Release was signed by a representative of the

Office of the Attorney General of the State of Texas, and by the Conduent

defendants. The Agreement provides that the civil action filed against Conduent in

August 2014 asserted “several grounds for alleged non-compliance with contractual

obligations purportedly owed by Conduent [to Texas] and seeking, among other

things, the return of documents and information [Texas] claimed it owned under the

2010 Contract.” The Agreement states:

            I.    The allegations in the Audit Reports, the Notice of
                  Termination, the State Action, the Related Actions,
                  and the HHSC Action arise out of services provided
                  to the State of Texas under the 2003 Contract and
                  the 2010 Contract, including without limitation the
                  prior authorization process for orthodontic services
                  under Texas Medicaid.

            J.     Prior to entering into and reaching this Agreement,
                   the State of Texas advised DEFENDANTS that it
                   was prepared to amend the State Action to add
                   causes of action for breach of contract of the 2003
                   Contract and 2010 Contract, including the claimed
                   contractual breaches discussed in the Audit
                   Reports and in the Notice of Termination, and
                   negligence in the performance of contractual
                   services for HHSC.

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             K.       This Agreement is the result of the Parties’
                      compromise on disputed issues of fact and law and
                      the Parties’ desire to buy peace and avoid further
                      litigation and associated uncertainty and expense
                      regarding the Audit Reports, the Notice of
                      Termination, the State Action, the Related
                      Actions, the HHSC Action, and any other present
                      or future disputes arising out of the 2003 Contract
                      or 2010 Contract, and this Agreement is neither an
                      admission of facts, wrongdoing, or liability by
                      DEFENDANTS nor a concession by HHSC
                      and/or the State of Texas that their allegations and
                      claims are not well-founded.

      The Settlement Agreement allocates the entire Settlement Amount “to

reimburse [Texas] for monetary losses claimed to have resulted from alleged failures

to comply with obligations by Conduent...under the 2003 Contract and 2010

Contract” and “towards payment of attorneys’ fees, costs, and legal expenses....”

“No portion of the Settlement Amount shall be allocated or attributed to the payment

of fines, penalties, or other punitive assessments, or to disgorgement or revenues.”

      The Court has reviewed the plain language of Exclusion 3(a). The language

must be read strictly and narrowly against the insurer.          The Court finds that

Defendant have failed to prove that Exclusion 3(a) applies to defeat coverage. The

bulk of the original Petition is based on dishonest or fraudulent acts, or on intentional

or knowing violations of the law. The Third Amended Petition sets forth numerous

allegations arising from alleged breaches of contract. While the facts underlying all
                                           10
allegations are related, the Court finds that the gravamen of the Third Amended

Petition is not solely based on excluded conduct. The contract claims are separate

and distinct from the claims based on fraud, dishonest acts, or knowing violations of

the law.

      The Settlement Agreement and Release encapsulates the actual Loss. The

Agreement unequivocally states that the entire monetary amount is allocated to

contractual liability. Upon retrial, a jury may find that the Settlement resulted from

fraud or collusion.     In that event, Defendants would be relieved of any

indemnification obligation and the Exclusion 3(a) issue would be moot.

                                  CONCLUSION

      The Court finds that Defendants have not waived the Exclusion 3(a) defense.

The Court further finds that Defendant have failed to prove that Exclusion 3(a)

applies to defeat coverage.

      THEREFORE, Plaintiff’s Motion for Summary Judgment on Exclusion 3(a)

is hereby GRANTED. Defendants’ Motion for Summary Judgment on Exclusion

3(a) is hereby DENIED.

      IT IS SO ORDERED.

                                            Mary M. Johnston
                                       The Honorable Mary M. Johnston

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