News & Events

Major Summary Judgment Victory in D&O Coverage Case Involving a Medicare Qui Tam Action

July 29, 2014
The firm won a major summary judgment decision on all counts of a long-running and complex coverage litigation in Pennsylvania state court. The decision is notable in several respects. The court held the insureds were required to show “actual payment” of all underlying limits including an insolvent layer to reach the excess attachment point. In so doing, the Court adopted under Pennsylvania law the Second Circuit’s in-fill holding in another victory by the firm, Ali v. Federal Insurance Company, 719 F.3d 83 (2d Cir. 2013) (requiring insureds to show “actual payment” of underlying limits to be consistent with excess carriers’ “clear, bargained-for interest” and to avoid to moral hazard of artificially inflated settlements structured solely to force excess carriers to drop down). Importantly, the court also held, in a case of first impression under Pennsylvania law, that monies paid to settle a qui tam action alleging fraudulent Medicare billing were uninsurable as a matter of law despite policy language requiring finding “in fact” of illegal personal profit. And, the court held that settlement payments by related medical practices did not count as in-fill in reaching the excess attachment point because entities sold to fund the settlement were neither insureds nor subsidiaries of the insured under the policy. The court also dismissed the bad faith claim as time barred.

 

Background of the Action

The case is Mountainside Holdings, LLC, et al. v. American Dynasty Surplus Lines Insurance Company, et ano., 2014 Pa. Dist. & Cnty. Dec. LEXIS 73, No. 2003-127, and the decision is here. The plaintiffs—the named insured and three former-directors and officers—sought coverage for defense fees and settlement of a qui tam action in which the government (based on allegations brought by the relator, a formerly affiliated doctor) alleged the insured and numerous associated medical professional corporations that were neither subsidiaries of the insured nor additional named insureds over-billed Medicare for millions of dollars. Plaintiffs first sued their primary (Steadfast) and first excess carriers (Reliance), each with $5 million policies. Having reached settlements involving payment of Steadfast’s full limits, and a much smaller settlement with the Liquidation estate of Reliance, the plaintiffs pursued our client (the second-excess carrier with a $10 million policy), alleging breach of insurance contract and bad faith.



Summary Judgment Decision

After four years of litigation against our client, we moved for and won summary judgment. Senior Judge David E. Grine held coverage under the second-excess policy was not triggered because: (1) there was no obligation to drop down and “in fill” the insolvent first-excess carrier’s level; (2) the qui tam settlement constituted uninsurable ill-gotten gains; and (3) the plaintiffs’ defense and settlement costs did not reach the $10 million second-excess attachment point.

In requiring the plaintiffs to show “actual payment” of the underlying limits of $10 million to trigger the second-excess layer, the court was persuaded by the Second Circuit’s holding in Ali, which expressly applied both New York and Pennsylvania law. The court rejected the plaintiffs’ argument that the entire qui tam settlement constituted covered loss for two reasons. First, the court held in a matter of first impression under Pennsylvania law that the settlement was due to the plaintiffs’ fraudulent billing in violation of the False Claims Act and as such was uninsurable as a matter of law. Second, the plaintiffs argued the sale of medical professional corporations 100% owned by the insured director that were sold to fund, in part, the settlement counted as covered loss, but the court disagreed, finding that since all the corporations (save one) were themselves defendants in the qui tam action their sale and payment toward the settlement was on their own behalf and did not count towards in-fill of the insolvent Reliance layer.

The court also held the plaintiffs’ bad faith claim was time barred.

To review the decision, click here.


Contact

To learn more about this decision and its impact on your business, please contact:

James Sandnes
(212) 820-7760
jsandnes@skarzynski.com

Aron M. Zimmerman
(212) 820-7769
azimmerman@skarzynski.com