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.