Under which claims made D&O insurance policy is there coverage for a claim that was filed under seal years ago but not served on the policyholder until the policy period of the current policy? If you find the answer “no policy” as unsatisfying as I do, read on. In a September 15, 2014 opinion (here), a three-judge panel of the Superior Court of Pennsylvania affirmed the trial court’s grant of summary judgment holding that Amerisource Bergen’s D&O insurance policy’s prior and pending litigation exclusion precluded coverage for a False Claims Act lawsuit that was filed under seal in 2006 but not served on the company until 2010. In the discussion section below I try to sort out what happened here.
On June 5, 2006, Kassie Westmorland filed a False Claims Act lawsuit against Amerisource Bergen and Amgen. The action alleged that the defendants had submitted false Medicare claims relating to a particular drug. Pursuant to the standard procedure for this type of action, the lawsuit was filed under seal, in order to permit the U.S. government to determine whether or not it would take up the suit. Amerisource did not learn of the existence of the matter until March 2008, when Amgen informed Amerisource that Amgen was under investigation. In February 2009, the Department of Justice informed Amerisource and Amgen that it was reviewing the allegations. In February 2009, the federal court permitted a redacted copy of the complaint on the court’s electronic docket. In January 2010, Amerisource received service of process of the lawsuit.
In July 2009 – that is, after the redacted complaint was available on the court docket but before Amerisouce had been served with the complaint – Amerisouce provided its primary D&O insurer with formal notice of a potential claim. The insurer had been the primary insurer on Amerisource’s D&O insurance program for the policy years 2007-08, 2008-09, and 2009-10. For the policy year 2006-07, the insurer had been in an excess position in Amerisource’s D&O insurance program and a different insurer had been in the primary position.
The insurer denied coverage to Amerisource under the 2009-10 primary policy and refused to pay Amerisource’s expenses incurred in defending the False Claims Act action. Amerisouce filed an action in Pennsylvania state court against its primary D&O insurer alleging breach of contract and bad faith. On July 16, 2013, the trial court granted the insurer’s motion for summary judgment, on the ground that both Exclusion L (“prior and pending litigation”) and Exclusion Y (“false, deceptive or unfair business practices”) precluded coverage. Amerisource appealed.
The 2009-10 policy defines the term “Claim,” in relevant part as a “civil proceeding against [Amerisource] seeking monetary damages … commenced by the service of a complaint or similar pleading” or a “written demand against [Amerisouce] for monetary damages.”
Exclusion L to the policy, the “Prior or Pending Litigation” exclusion, excludes any Claim
alleging, based on, arising our of, attributable to any prior or pending litigation, claims, demands, arbitration, administrative or regulatory proceeding or investigation filed or commenced on or before the earlier of the effective date of this policy or the effective date of any policy issued by [the Insurer] of which this policy is a continuous renewal or a replacement, or alleging or derived from the same or substantially the same fact, circumstance or situation underlying or alleged therein.
September 15 Opinion
In a September 15, 2014 Opinion written by Judge Patricia Jenkins for a three-judge panel, the Superior Court of Pennsylvania affirmed the trial court’s ruling, holding that coverage was precluded under exclusion L.
The court began is analysis by citing with approval from an earlier federal district court opinion in which that court, explaining the purpose and operation of claims made insurance policies which provide coverage only for claims first made during the policy period, said that “claims made policies generally include a number of endorsements and exclusions intended to limit [the] front end risk by cutting off liability for claims ready, but not yet made, at the start of the policy period.” The appellate court noted that Exclusion L, the prior and pending litigation exclusion, in Amerisource’s D&O insurance policy is “one such exclusion intended to limit [the Insurer’s] front and risk for claims ready, but not yet made, at the start of the policy period.”
The appellate court rejected Amerisouce’s argument that the exclusion had not been triggered because, even though the lawsuit had been filed in 2006, the company was not served with the complaint until January 2010. The court said that, in order to be triggered, the exclusion requires only that the prior litigation has been “filed” or “commenced.” The court said that “we think it is clear that 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 those terms requires service of original process or unsealing of the complaint in order for an action to be ‘filed’ or ‘commenced.’”
The appellate court also drew a comparison between the policy’s definition of “Claim,” which expressly references the requirement for the service of a complaint, and Exclusion L, which does not. The court said that “the explicit requirement in [the definition of “Claim”] demonstrates that the parties knew how to include a service requirement when they so desired.” The court added that “the absence of a service requirement from exclusion L demonstrates that the parties did not intend for ‘filing’ or ‘commencement’ of litigation in exclusion L to depend upon service of process.”
The appellate court also rejected Amerisouce’s argument that the exclusion does not apply because the 2009-10 primary policy was part of a series of insurance policies that extend back to May 1, 2006, thus predating the June 2006 lawsuit. The court disagreed with Amerisouce’s contention that the claimant had filed or commenced her lawsuit on or after “the earlier of the effective date of the [2009-10 policy] or of any policy issued by [the Insurer] of which the [2009-10 policy] is a continuous renewal or a replacement.” The court said that the 2009-10 policy was a continuous renewal policy of the first of the primary policies it had issued in the 2007-08 policy period. The 2009-10 policy, the court said, was neither a continuous renewal policy nor a replacement of the carrier’s 2006-07 excess policy, as the 2009-10 policy did not “replace” the 2006-07 policy. The court noted that the language in the exclusion was written in the disjunctive, so it did not apply to a series of policies that included a combination of renewals and replacements.
Finally, because the appellate court found that exclusion L applies to preclude coverage, it did not need to review whether or not exclusion Y (“false, deceptive or unfair business practices”) applies.
In thinking about the outcome of this case, it is probably worth keeping in mind that there might not have been coverage here even if Amerisource had been able to clear the prior and pending litigation exclusion hurdle. The appellate court did not reach the question of whether or not the deceptive trade practices exclusion applied, but the trial court had concluded that the exclusion also precluded coverage for this claim. So in the end there simply may not have been coverage for this claim under the D&O insurance policy in place when the claim was finally made.
Just the same, there is something particularly unsatisfying about the outcome of this case. Within the meaning of the claims made insurance policy itself, the “Claim” – in the form of the False Claims Act lawsuit – was not “made” against Amerisouce until it was served on the company in January 2010. Amerisouce had apprised the insurer of the potential claim shortly after the company itself had learned of the lawsuit. It couldn’t have provided notice before that, because it simply didn’t know of the details of the lawsuit’s existence. It is very hard not to regard this as a situation where the insurer avoided coverage because the policyholder got ambushed by a concealed lawsuit.
I suppose one way to look at this is that the prior and pending litigation exclusion operates to parcel out the risk that there might be a lawsuit out there that was already underway before the policy commenced but that nobody yet knows about. It could be argued that, as demonstrated in this case, the exclusion is set up so the risk that there might be a lawsuit out there falls on the policyholder and not the insurer.
In trying to pinpoint what is wrong with what happened here, it occurs to me that there is sort of a threshold theoretical problem with the application of the prior or pending litigation exclusion to the false claims act lawsuit. The prior and pending litigation exclusion is meant to address separate litigation, not the lawsuit for which coverage is sought. This just isn’t the sort of situation to which the prior and pending litigation exclusion was meant to apply.
I can think of several possible solutions. The first is that the prior and pending litigation exclusion could be amended to provide that the exclusion does not apply to False Claims Act complaints that were filed but not served prior to the effective date of the policy. The potential shortcoming of this solution is that there may be other types of lawsuits, beyond just False Claims Act claims, where the sequence of events that occurred here might also unfold.
So maybe the best way to avoid this problem would be to line up the language between the prior and pending litigation exclusion and the definition of claim, so that both require service of process. Of course carriers might not be willing to go so far, the standard prior and pending litigation exclusion is deliberately written broadly, so that carriers can restrict what the court here called the “front end” risk.
One thing occurs to me in thinking about the “front end risk” analysis that is the theoretical justification for the inclusion of a prior and pending litigation exclusion on a policy like this one. That is, a carrier arguably has a legitimate concern about “front end” risk when claim made coverage first incepts. But in subsequent policy years, the legitimacy of that concern diminishes –which is obviously the reason for the inclusion in the exclusion of the language about the earlier date of prior policy of which this policy is the continuous renewal.
While the “continuous renewal” language helps, what might make more sense is to say that at some point the prior and pending litigation exclusion should come off the policy altogether. Where a policyholder has had a continuous program of claims made insurance coverage in place over a period of time, the “front end risk” ceases to provide the theoretical justification for the inclusion of the prior and pending litigation exclusion, and it could be argued that the prior and pending litigation exclusion should no longer be a part of the policy.
I recognize that views about this situation may differ, and I welcome readers’ comments about this claim, particularly those on the carrier side who may take a different view of the policy exclusion and how it was applied here.
Very special thanks to Arthur Washington of the Mendes & Mount law firm for sending me a copy of this decision. (Mendes & Mount was not involved in the case.) I hasten to add that the views expressed in this blog post are exclusively my own.
UPDATE: A reliable source advises that this claim involved an E&O policy, not a D&O policy.
Insurance Panel Discussion in New York on October 15: H.S. Grace & Company, Inc. is sponsoring a complimentary Insurance Update Breakfast event at the Princeton Club in New York City on October 15, 2014. My good friend Joe Monteleone of the Rivkin Radler law firm will be moderating a panel focused on Shareholder Derivative Litigation followed by a session discussing Representations and Warranties insurance. The event sponsor expects to receive 1.5 CLE credits in New York, which are also recognized in New Jersey. For more information about this event, please refer here.