February 11, 2015 Top Story

Insurance Policy's Litigation Exclusion Bars Coverage for Sealed Litigation

Insurance coverage barred despite three year delay in serving complaint on defendants

Pamela Sakowicz Menaker

Professional liability insurance coverage is precluded even when the insured is not served with an underlying sealed lawsuit during the policy period and has no formal notice of a potential claim, according to a Pennsylvania decision in AmerisourceBergen Corporation v. ACE American Insurance.

AmerisourceBergen (Amerisource) and Amgen were named defendants in a False Claims Act (FCA) suit filed in Massachusetts federal court in 2006, alleging that the two companies conspired with medical providers to submit false Medicare claims. The FCA suit was sealed for three years. In 2009, after the Department of Justice served Amerisource with a confidential subpoena concerning the FCA action and a redacted copy of the complaint, the company tendered a notice of claim to its insurer ACE. ACE denied coverage on the basis of several exclusions in the policy.

Amerisource sued its insurer in Pennsylvania state court alleging breach of contract and bad faith for failure to insure. The trial court granted the insurer’s motion for summary judgment, holding that an exclusion for “prior or pending litigation,” precluded coverage. On appeal, the Superior Court of Pennsylvania affirmed, finding that the prior and pending litigation policy exclusion applied, but it did not decide the issue regarding the false, deceptive, or unfair business practices policy exclusion.

FCA Suit Proceeds for Three Years without Notice to Insured

Amerisource notified ACE, its primary insurer for the years 2007–2010, of a potential claim on July 8, 2009. The defendants were not served with the FCA complaint until 2010. Nevertheless, ACE—also the company’s excess carrier from 2006–2007 when the underlying lawsuit was initially filed under seal—denied coverage. Amerisource contended the 2007 through 2010 policies were continuous renewals or replacements of the 2006 policy.

Barbara-Ann M. Costello, New York, NY, cochair of the Professionals’ Officers’ and Directors’ Liability Committee of the ABA Business Law Section and a member of the Tort Trial and Insurance Practice Section, who primarily represents insurance companies, opines, however, that those are two different types of risks—primary versus excess coverage.

Policy Exclusion Does Not Require Service of Complaint 

The Pennsylvania appellate court concluded that the prior and pending litigation policy exclusion was triggered because “litigation is ‘filed’ or ‘commenced’ against an entity when it names that entity as a defendant, is filed with a court, and is docketed and given a case number. Nothing in the ordinary meaning of these terms requires service of original process or unsealing of the complaint in order for an action to be ‘filed’ or ‘commenced.’” The court relied on the plain meaning of the language in the policy, says Costello. “It’s a standard exclusion in claims made policies,” she notes.

The policy’s definition of “claim,” however, expressly requires the service of a complaint. The court reasoned that “[t]he explicit requirement in [the definition of ‘claim’] demonstrates that the parties knew how to include a service requirement when they so desired.” The court found that “the absence of a service requirement from exclusion L (“prior or pending litigation”) demonstrates that the parties did not intend for ‘filing’ or ‘commencement’ of litigation in exclusion L to depend upon service of process.”

“What the court missed is the fact that under exclusion L dealing with any prior claim, the definition of claim is what is critical here and not the fact that there is prior or pending litigation,” observes Neil B. Posner, Chicago, IL, member of the ABA Section of Litigation’s Insurance Coverage Litigation Committee as well as the ABA Center for Professional Responsibility. “The fact that the claim was filed against Amerisource in secret goes to the inequitable nature of the decision as to whether there was a claim at all,” notes Posner. “In most policies, a claim is defined as a written demand of a lawsuit or when service is received by the insured in a written request when the policy of the insurer is in effect,” according to Posner, “but the court here did not reference that.”

Bar Reacts to Controversial Decision 

Attorneys for insureds argue that a “claim” was not made against Amerisource until served in January 2010. Although a lawsuit may have been pending, the insureds argue that nobody knew about it, but the court held that risk falls upon the policyholder. “I think it’s a reasonable interpretation of the policy and of the parties at the time of contracting,” opines Costello. Here, the Pennsylvania court relied on H.R. Acquisition I Corp. v. Twin City Fire Insurance Co., a decision of the U.S. Court of Appeals for the 11th Circuit, where the court found that “the time of service is irrelevant,” which “implicitly refutes Amerisource’s contention that the qui tam action filed under seal in June 2006 was not ‘prior litigation’ under exclusion L of the 2009–10 policy.”

“The court got it wrong,” counters Posner. “At the very least,” he posits, “the issue of when the insured knew a claim had been made against it should not have been determined on a motion for summary judgment.” The insureds gave the insurer notice of facts likely to result in a claim, but did not give notice of the claim, because the insured was unaware of the “claim” because the government held it under seal.

Advice to Lawyers

Insurance lawyers advise that the simple solution is to include language in the insurance contract clearly covering prior or pending litigation and defining what constitutes a “claim.” Insurers also should be concerned, says Posner, “because this policy neither clearly defines what a claim is nor identifies who should cover it.” If coverage is broader, “insurers can simply charge accordingly for whatever risks are being insured,” Posner suggests.

“An option for insureds concerned about unknown litigation is to negotiate a modified prior or pending litigation exclusion backdated to a specific date negotiated by the carrier and the insured,” Costello suggests. “While this will increase the premium for some insureds, particularly in industries susceptible to FCA claims, the increased costs may be worth it,” Costello notes.

Pamela Sakowicz Menaker contributing editor for Litigation News.

Keywords: prior and pending litigation, insurance, coverage, sealed litigation, D&O liability, exclusions

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