In a long and convoluted opinion befitting the long and convoluted case in which it was entered, Judge David Grine of the Pennsylvania (Centre Country) Court of Common Pleas, applying Pennsylvania law, entered summary judgment for an excess D&O insurer, holding that the excess insurer’s payment obligation had not been triggered due to the insolvency of an underlying excess insurer and because covered defense expenses and settlement amounts were less than the amount of the underlying insurance.
In a nearly two-decade saga growing out of a specialty medical service provider’s alleged over-billing, the Court rejected the plaintiff directors and officers’ argument that settlement amounts funded by the sale of related medical practices — that were neither subsidiaries of the named insured nor additional named insureds under the policy — should be taken into account in determining whether the amount of the plaintiffs’ loss reached the excess insurer’s limit.
A copy of the Court’s June 30, 2014 opinion can be found here.
EquiMed was a specialty medical services company providing services to radiation oncologists. In 1996, EquiMed was named for the first time as a defendant in an existing qui tam action that had first begun in 1995. There were numerous other defendants in the action, which involved alleged over-billing. In 1998, the U.S. government intervened in the qui tam action. In late 1999 and early 2000, the various defendants reached an agreement to settle the qui tam action, but in February 2000, an involuntary bankruptcy petition was filed against EquiMed. Further settlement negotiations ensued. The ultimate settlement of the qui tam action involved a series of payments by or on behalf of a number of different parties, including a number of medical practice groups that were neither subsidiaries of EquiMed nor additional named insureds under the relevant D&O insurance program.
At the time that the qui tam action was amended to include EquiMed as an additional defendant, EquiMed had a program of D&O insurance that consisted of a $5 million layer of primary insurance, a $5 million first layer of excess insurance, and a $10 million second layer of excess insurance. The first excess layer was provided by Reliance National, which was declared insolvent and went into liquidation on October 3, 2001.
EquiMed submitted the qui tam action to its D&O insurers as a claim. The D&O insurers denied coverage for the claim based on their policies’ respective prior and pending litigation exclusions, in reliance on the fact that the qui tam action had initially been filed before the prior and pending litigation date. In May 1999, EquiMed filed a coverage lawsuit against the primary insurer and against Reliance National seeking an injunction to force the insurers to pay its defense cost in the qui tam litigation. The second level excess insurer was not a party to this prior coverage lawsuit. The court in the prior coverage lawsuit held that the primary insurer’s prior and pending litigation exclusion did not preclude coverage for the defense costs incurred in the qui tam action.
Three former directors and officers of EquiMed subsequently filed a separate insurance coverage action against the second level excess insurer, seeking reimbursement for the defense expenses and settlement amounts that had not been paid by the primary insurer. The plaintiffs asserted claims for breach of contract and for bad faith. The parties moved for summary judgment.
The second level excess insurer’s policy specified that coverage under its policy did not attach until all of the underlying insurance “has been exhausted solely as a result of actual payment or payment in fact of losses of all applicable Underlying Insurance limits.”
The June 30 Opinion
In arguing that its payment obligation had not been triggered, the second level excess insurer (hereafter the excess insurer) made two arguments: first, the excess insurer argued that due to Reliance National’s insolvency, the underlying limits had not been exhausted by payment of loss; and second, and in any event, that the amounts the insureds incurred by way of defense and settlement were less than the $10 million, the amount of the underlying insurance. The Court agreed with both of these arguments.
First, based on the Second Circuit’s June 2013 opinion in Ali v. Federal Insurance Company (about which refer here), the facts of which the Court said were “almost identical to the case at bar,” the Court agreed that, due to Reliance National’s insolvency, the excess insurer’s payment obligation had not been triggered. In Ali, the Second Circuit held that excess D&O insurance is not triggered even if losses exceed the amount of the underlying insurance, where the underlying amounts have not been paid due to the insolvency of underlying insurers. The Court said that it is “persuaded that the holding in Ali should apply to the case at bar.”
The Court also agreed with the excess insurer that the plaintiffs “are unable to show the required $10 million actual loss, and as a result, Defendants’ duty to indemnify on the claim was never triggered.” The record showed that the primary insurer had paid a total of $4.4 million in defense and indemnity. The excess insurer argued that this amount was the extent of the plaintiffs’ total loss. The plaintiffs, in turn, argued that various other amounts contributed to the qui tam action settlement should be attributed to the plaintiffs for purposes of calculating their actual loss.
The Court rejected the plaintiffs’ arguments to incorporate these additional amounts. First, the Court, citing with approval an opinion from a New York appellate court, held that the payment of a settlement amount in a qui tam action “established unjust enrichment for the purposes of the public policy against insuring against the risk of being ordered to return money or property that has been wrongfully acquired.”
Second, the Court rejected the plaintiffs’ argument that their total loss included amounts contributed toward the qui tam settlements based on the sale of various medical practices that were 100% owned by one of the plaintiffs, Dr. Douglass Colkit. These medical practices were not subsidiaries of EquiMed and were not named insureds in the D&O insurance policies. However, the various medical practices had been defendants in their own name in the qui tam action. Dr. Colkit had argued that he had been forced to sell the practices in order to fund the settlement. However, the Court ruled that the “payment of funds resulting from their liquidation to the qui tam settlement should be attributed to themselves as defendants, not to the Plaintiffs.”
Third, the Court rejected the argument that amounts of government medical payments the U.S. government had withheld as part of the qui tam settlement were attributable to the plaintiffs. These amounts were “owed to the medical practices, which were themselves defendants in the qui tam action and subsequent settlement,” and are therefore “rightfully attributed to the entities themselves.”
Even certain additional unreimbursed defense expenses, even if taken into account and combined with the $4.4 million paid by the primary insurer “falls short, by almost half, of the amount required to trigger a duty for Defendants to indemnify plaintiffs under the Policy.”
The Court also found that, while certain of the plaintiffs’ allegations stated a claim for bad faith, the plaintiffs’ bad faith claims were time-barred.
It is astonishing to me that there are still cases out there working their way through the system that are affected by the insolvency and liquidation of Reliance National, which went bust in 2001. The Reliance insolvency seems like so much ancient history. If nothing else, this case is a reminder that the most important criterion in choosing an insurer is financial solvency. When an insurer becomes insolvent and goes into liquidation, the mess can be enormous and it can take years to clean up, as this case shows.
The Court’s holding that the due to the insolvency of the underlying insurer the excess insurer’s payment obligations were not triggered is consistent with the Second Circuit’s holding in the Ali case, which also involved a gap in coverage created by the insolvency of Reliance. In light of the Court’s adoption of the Second Circuit’s holding in Ali, the other parts of the Court’s analysis that the excess insurer’s payment obligations had not been triggered arguably are superfluous. But the Court’s conclusion that the plaintiffs’ losses did not amount to $10 million has some interesting components.
The Court’s holding, made in reliance on a prior New York case, that the settlement of a qui tam action represents the disgorgement of an ill-gotten gain of which it would be against public policy to insure is interesting. The plaintiffs had argued, understandably enough, that because the qui tam action had been settled, there had been no findings of fact that the gains were ill-gotten or improper. The Court cited the New York case for the proposition that the settlement “was essentially equivalent to a determination, reached through agreement of the parties, that the plaintiffs had been unjustly enriched” and that the plaintiffs “made restitution by way of settlement.”
I am sure I am not the only one that finds this not entirely convincing. Parties settle cases for all kinds reasons – for example, a party might settle a qui tam action because one of its excess D&O insurers went insolvent and the other excess insurer was denying coverage and the only way for the party to avoid ruinous defense expenses was to settle the case. Settlements typically represent only the compromise of disputed claims. In the absence of express admissions, the Court’s conclusion that the settlement is “essentially equivalent to a determination” and that the amounts paid in settlement represented “restitution” seems to me to be speculative.
I can certainly see how the Court concluded that the amounts paid in settlement upon sale of the unrelated medical practices represented a settlement of those separate medical practices’ potential liabilities in the qui tam action. However, I can also see Dr. Colkit’s argument that he sold the medical practices, as he might sell any other asset, in order to realize sufficient funds to settle his own potential liability. There may have been more in the record in this case, but I couldn’t find anything in the Court’s opinion to substantiate conclusively that the proceeds of the medical practices’ sale were paid in settlement of the medical practices’ potential liabilities and not paid in settlement of Dr. Colkit’s potential liabilities, other than the Court’s observation that the medical practices had been named as defendants in the qui tam action.
In any event, it may be that this long-running story has finally reached its end. However, the plaintiffs have the option of appealing. Given the history of this case, the possibility that there may yet be further proceedings in this case seems likely.
Special thanks to a loyal reader for sending me a copy of this opinion.