Federal Court Finds FCA Liability Not Covered by Nursing Home Insurance Policy
A California federal court has ruled that an insurance company did not have to pay defense and indemnity costs under a nursing home’s commercial general liability policy in connection with a False Claims Act (“FCA”) case against the nursing home.
In its November 27th decision, the federal district court in California held the FCA action did not qualify as a “medical incident” requiring the furnishing of “professional services” under the policy at issue. Therefore, the insurance company did not have a duty to defend the underlying FCA action.
In the original FCA action, the California Advocates for Nursing Home Reform (“CANHR”) and two individual relators filed a FCA qui tam complaint alleging Lenox Healthcare Inc. (“Lenox”) submitted false certifications regarding its compliance with state and federal laws to improperly obtain continued funding under California’s Medicaid program and Medicare, and then submitted false claims for services rendered.
Specifically, the relators alleged Lenox owned and operated the Mill Valley Healthcare Center (“Center”), which in October 1997 was found to have multiple deficiencies following a certification survey. From that time through March 1998, according to relators, the Center submitted four plans of corrections that were ultimately found unacceptable by the Division of Health Services.
Lenox defaulted in the FCA action and the court entered judgment against it. The Court concluded both Lenox and the Center had “acted in reckless disregard of the falsity of their statements” in submitting claims and representing that they complied with federal and state nursing home laws, and in drafting plans of correction for the Center in order to continue receiving Medicaid and Medicare payments.
CANHR and the relators were awarded $1,415,000 in damages under federal and state FCAs, an additional $4,245,000 in trebled damages, and attorneys’ fees and expenses. Lenox filed for bankruptcy and CANHR and the other relators filed an action to recover defense and indemnity costs from American International Specialty Lines Insurance Co. (“AISLIC”), which had issued Lenox an insurance policy providing commercial general liability coverage over the time period at issue. This case did not involve the usual circumstances where an insured itself was seeking coverage under its own insurance policy. Rather, the plaintiffs in the case were seeking to force the defendant insurance company to cover the damages assessed against the provider for violation of the FCA.
The plaintiff relators argued that the underlying action alleged a covered “medical incident” because the preparation of Lenox’s plans of correction, the false statements that formed the basis of the underlying FCA action, involved the furnishing of professional health services. Under the policy, AISLIC agreed to pay on behalf of the insured “all sums which the insured shall become legally obligated to pay as damages because of the injury to which this policy applies caused by a medical incident which occurred during the policy period.” The policy defined a “medical incident” as “any act or omission . . . in the furnishing of professional health services.”
The court rejected plaintiffs’ argument, holding instead that Lenox’s liability under the FCA was premised on the presentation of false claims and records or statements to the government, not the underlying deficiencies in patient care that were used to establish the falsity of Lenox’s claims and representations. Significantly, the underlying complaint did not allege that Lenox prepared the plans in order to provide a professional health care service separate and apart from obtaining the Medicaid and Medicare payments. Instead, the underlying complaint alleged that Lenox submitted the plans of correction solely to keep receiving the fraudulently claimed payments.
The court refused to require payment by the insurance company to plaintiffs and to order recoupment of attorneys’ fees and costs to plaintiffs from the policy proceeds. The case also suggests that a provider seeking coverage for defense costs in an FCA case may be unable to force its insurer to cover those costs.
The court found that the FCA action did not qualify as a “medical incident,” which requires the furnishing of “professional services” under the AISLIC policy. The court further concluded that there was no claim for which there was potential for coverage under the AISLIC policy.
United States ex rel. California Advocates for Nursing Home Reform v. American Intl Specialty Lines Ins. Co., No. 3:06-cv-03069-JSW (N.D. Cal. November 27, 2007).
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