Why it matters

A whistleblower suit in which the government declined to intervene did not trigger an exclusion for cases brought by governmental entities, according to a New York Supreme Court Justice. A former employee filed a False Claims Act suit claiming a hospital engaged in a total of $30 million in overbilling. The insurer rejected a request for defense coverage, pointing to an exclusion for cases brought by governmental entities. But the court distinguished cases brought by government entities from those “on behalf” of the government. “Limiting the exclusion to actions in which the government has an active, participatory role in enforcing its statutory rights … would draw a meaningful distinction between lawsuits that are brought in a regulatory or official capacity, and those that are not,” the court wrote, granting summary judgment for the insured.

Detailed Discussion

Huron Consulting Group brought a declaratory judgment action against insurer Lloyd’s of London to determine defense obligations under a professional liability policy. Huron and a consulting firm performed work on behalf of St. Vincent’s Hospital in New York in an attempt to reverse the hospital’s failing finances.

A relator filed a False Claims Act (FCA) suit in New York federal court alleging that some of the billing practices engaged in by the hospital during Huron’s consulting period constituted illegal overbilling of Medicare and Medicaid payments. According to the complaint, the government made over $30 million in unjustified payments to St. Vincent’s as a result.

The government provided notice that it declined to intervene in the litigation, reserving the right to do so based on future developments. The FCA suit was later dismissed with prejudice.

Huron shouldered its own defense costs after Lloyd’s refused to pay because of a policy exclusion. Exclusion N stated: “The coverage under this Insurance does not apply to Damages, Penalties or Claims Expenses in connection with or resulting from any Claim, or to any Privacy Notification Costs: Brought by or on behalf of the Federal Trade Commission, the Federal Communication Commission, or any federal, state, local or foreign governmental entity, in such entity’s regulatory or official capacity.”

Lloyd’s again relied upon the exclusion in response to Huron’s summary judgment motion, as well as Exclusion A, which precluded coverage for actions alleging criminal, dishonest, fraudulent, or malicious conduct until such time as the insured was finally adjudicated to have engaged in such intentional wrongdoing.

The court found no merit in either contention. Exclusion A provided that the insurer would advance defense costs for the specific claims subject to recoupment in full should the insured be adjudged liable. But Lloyd’s failed to advance defense costs, New York Supreme Court Justice Saliann Scarpulla wrote, and the case against Huron had already been dismissed. “As the [FCA] action was dismissed with prejudice, with the court specifically finding that Huron’s billing practices were not false or fraudulent, Underwriters remain liable for those expenses,” the court said.

Turning to Exclusion N, the court similarly found it did not defeat coverage. “Although some courts have characterized qui tam actions under the FCA as being brought ‘on behalf’ of the government, it is also true that ‘[q]ui tam relators pursue their claims essentially as private plaintiffs, except that the government may displace a relator as the party with primary authority for prosecuting an action,” Justice Scarpulla said.

“In this case, the government declined to participate as a party,” the court said. “Accordingly construing the clause narrowly and in favor of the insured, the court finds that Exclusion N does not bar coverage in FCA actions which are pursued by private parties without government intervention.”

The court’s conclusion was bolstered by the additional language in the exclusion that the government entity must be functioning in its official or regulatory capacity.

“While Underwriters argue that FCA actions further the government’s regulatory and official objectives, that would be true of any action that could be brought on its behalf, and thus render the qualification illusory,” the court explained. “Limiting the exclusion to actions in which the government has an active, participatory role in enforcing its statutory rights, however, would draw a meaningful distinction between lawsuits that are brought in a regulatory or official capacity, and those that are not.”

To read the decision in Certain Underwriters at Lloyd’s, London v. Huron Consulting Group, click here.