A critical coverage issue under “claims made” liability insurance policies—which typically cover only claims made against a policyholder and noticed to an insurance carrier during the applicable policy period (or shortly thereafter)—is determining when a matter becomes a “claim” and when that claim was first “made.” While these may sound like straightforward determinations, they can be contentious in certain contexts. One such context is qui tam actions. Policyholders who face possible qui tam liability should be aware that the unique procedural rules applied to qui tam actions are leading to a growing number of coverage disputes between qui tam defendants and their insurers.
In a qui tam action, an individual (known as a “relator”) brings suit under § 3730(b) of the False Claims Act on behalf of the government concerning a government contract. The relator’s complaint must be filed under seal and remain sealed until the government determines whether to intervene in the action. While determining whether to intervene, the government typically seeks additional information regarding the relator’s allegations, often communicating with and issuing subpoenas to the defendant (who has not yet seen the sealed complaint). The complaint is unsealed only after the government determines whether to intervene, which can take years.
Due to these procedural quirks, a defendant might for years be unaware of a pending qui tam action or be aware of the action (and even responding to government subpoenas) but unable to obtain an unsealed copy of the complaint. Because most insurance policies that potentially provide coverage for qui tam actions are “claims made” and were not written with these procedural idiosyncrasies in mind, a qui tam defendant may find its insurers arguing that coverage falls outside their respective policy periods. For instance, an insured might hold separate policies for 2014, 2015, and 2016 and face a qui tam action filed during the 2014 policy period, disclosed to the policyholder (while still sealed) during the 2015 policy period, and unsealed during the 2016 policy period. In that case, the issuer of the 2014 policy may deny coverage, arguing that (1) there is no “claim” until the complaint is unsealed and served, (2) a claim cannot be “made” until the complaint is served (especially if a policy provides that a claim is not “made” until a summons is served on the policyholder), and/or (3) any notice provided after the proscribed notice period (even if provided as soon as the policyholder learns of the qui tam action) is untimely. Conversely, the issuer of the 2015 policy and the issuer of the 2016 policy may both argue that coverage is unavailable because (1) there is a “claim” as soon as the sealed complaint is filed, which is “made” at that time (and not covered by later policies), and (2) even if a claim was made during the policy period, it relates to an action commenced prior to the policy period, and is thus barred under common exclusionary provisions. Because each policy issuer may seek to defeat coverage based on different policy terms, policyholders should be aware that they may face not only finger pointing between policy issuers but also arguments that coverage is not available under any policy, even if the policyholder purchased coverage throughout the entire relevant period.
The facts of AmerisourceBergen Corp. v. Ace Am. Ins. Co. highlight the potential dangers policyholders face from such arguments. 100 A.3d 283 (Pa. Super. Ct. 2014). There, the carrier—whose policies commenced after the relator’s complaint was filed but covered the period when the policyholder learned of the qui tam action, was served a copy of the complaint, and provided notice of the action—argued that the qui tam action fell outside its policy period. Specifically, the carrier argued that coverage was precluded by an exclusion for any claim “arising out of . . . any prior or pending litigation . . . filed or commenced” before the policy period. Id. at 288. The court accepted this argument and held that the applicable policy was the one in effect when the relator’s complaint was filed (which had been issued by another insurer). Id. However, the policyholder was not aware of the qui tam action during that earlier policy period (and thus could not have provided notice during that policy’s proscribed notice period), so that insurer likely argued that untimely notice defeated coverage. While the AmerisourceBergen ruling is silent regarding the earlier policy, the policyholder here likely faced arguments that collectively raised the possibility that it would receive no coverage despite consistently purchasing insurance.
In combatting such arguments, policyholders should pay close attention to their policies’ terms (which may differ among policies) and the counterarguments they can build from those terms, but would also be well-advised to stress that it would be unreasonable and inequitable to allow the procedural quirks of qui tam actions to completely remove coverage for an insured who purchased insurance throughout the relevant time period. A recent case, My Left Foot Children’s Therapy, LLC v. Certain Underwriter’s At Lloyd’s London Subscribing To Policy No. HAH15-0632, is instructive on this front. No. 215CV01746MMDGWF, 2016 WL 5219458 (D. Nev. Sept. 19, 2016). There, the carrier—whose policy covered the period when the policyholder learned of the relator’s complaint but postdated the complaint’s filing—argued that the applicable policy period was when the relator’s complaint was filed under seal. The court rejected the carrier’s argument, holding that the applicable policy period was the one during which the qui tam action was disclosed to the insured. Id. at *3. While the court’s decision was rooted in the relevant policy’s language, the court also took a practical view of the issue, noting that the carrier’s argument was “tenuous given the unique procedural stature of qui tam lawsuits,” where it is “commonly understood that a [suit] . . . becomes active once the defendant has notice of the lawsuit.” Id.
Policyholders facing qui tam actions should be aware of these issues and prepared to address them with their insurance carriers. Additionally, all insureds involved with government contracts may want to consider these issues when next renewing their insurance policies.
This article was first published in The National Law Review.