On April 22, 2015, in a sweeping win for health insurer Anthem Inc., the Indiana Supreme Court held that excess reinsurers on the company’s self-insured E&O insurance program must pay the company’s costs of defending and settling allegations that it had improperly failed to pay, underpaid, or delayed paying medical reimbursement claims. The Court rejected the lower courts’ rulings that the underlying claims had not arisen out of acts that had occurred “solely” in Anthem’s rendering of, or failure to render, professional services. A copy of the Court’s opinion can be found here.
At the relevant time, Anthem was self-insured for errors and omissions liability. The company purchased policies from other insurers to reinsure its E&O liabilities. Under this arrangement, Anthem was its own primary and excess insurer, with certificates of reinsurance issued on the primary and excess policies. The reinsurance certificates were “follow form,” to Anthem’s primary policy – that is, they incorporated all of the terms and conditions of the primary policy. For simplicity’s sake, I refer below to the source of the applicable insurance contract language as “the policy.”
Starting in 1998, Anthem and other health insurers were hit with lawsuits alleging that the defendant companies had engaged in a pattern of failing to pay claims in a full and timely manner, in breach of certain agreements and several state and federal statutes. Anthem eventually settled its portion of the various lawsuits without admitting and instead denying any wrongdoing. In the settlement Anthem agreed to cash payments totaling $198 million and implementation of various agreed-upon business practices.
The primary reinsurer on Anthem’ E&O reinsurance program exhausted its coverage in payment of claim-related costs. The excess reinsurers denied coverage for defense costs and settlement amounts associated with the underlying claims. Anthem filed a lawsuit against the excess reinsurers. The trial court granted summary judgment in the excess reinsurers’ favor, holding that the underlying litigation had not arisen out of acts that had occurred “solely” in Anthem’s rendering of or failure to render professional services. An intermediate appellate court affirmed the trial court’s ruling. Anthem appealed to the Indiana Supreme Court.
The policy’s insuring agreement specifies that the excess reinsurers “shall pay Loss of the Insured resulting from any Claim or Claims … against the Insured … for any Wrongful Act of the Insured … but only if such Wrongful Act … occurs solely in the rendering of or failure to render Professional Services.” The policy defines “Professional Services” as “services rendered or required to be rendered solely in the conduct of the Insured’s claims handling or adjusting.”
The policy’s fraudulent acts exclusion precludes coverage for loss arising from “any dishonest or fraudulent act or omission” but the exclusion provides further that it “shall not apply to any Claim seeking both compensatory and punitive damages based upon or arising out of allegations of both fraud and bad faith rendering of or failure to render Professional Services.”
The April 22 Opinion
On April 22, 2015, in an opinion written by Justice Brett Dickson, the Indiana Supreme Court reversed the lower court’s rulings in most respects and entered summary judgment in Anthem’s favor except with respect to Anthem’s bad faith claims against the excess reinsurers, which claims the Supreme Court remanded to the trial court for further proceedings.
The excess reinsurers had argued that the alleged misconduct that was the basis of the underlying claim was “not committed in the performance of ‘professional services,’ much less ‘solely’ in the performance of professional services” as was required by the policy. The underlying claims alleged that after promising to pay doctors in a timely manner for rendering covered, medically-necessary services in accordance with standard medical procedures, Anthem engaged in an improper, unfair, and deceptive scheme designed to systematically deny, delay and diminish payments due. Essentially, the excess reinsurers were arguing that actually or allegedly engaging in such a scheme is not the delivery of professional services, and certainly did not “solely” involve the delivery of professional services, as more was involved the scheme than merely delivering or not delivering professional services.
The Indiana Supreme Court rejected this argument. The Court said that the policy “covers not only Anthem’s actions in adjusting and paying reimbursement claims from health care providers – but also its failure to do so.” The policy’s coverage provision’s use of the word “solely” operates, the Court said, “to prescribe coverage for Anthem losses resulting from claims for any wrongful acts that occur outside its rendering of such services.”
The wrongful acts alleged in the underlying claims, the Court said, “are clearly alleged wrongful acts by Anthem in the course of its claims handling and adjusting services and thus qualify as covered Wrongful Acts occurring in the rendering or failure to render Professional Services as specified in the insuring agreement,” adding the observation that the term Wrongful Act is broadly defined by the policy. The insuring agreement is “thus intended to provide professional liability coverage for losses resulting from claims alleging a broad range of wrongful conduct.”
The Court also rejected the excess reinsurers’ argument that the relief Anthem seeks is contractual or restitutionary in character, the insurance for which would be contrary to Indiana public policy. After reciting the principle under Indiana law that provides a “very strong presumption of enforceability” of contracts that represent the freely bargained agreement of the parties, the Court said that the excess reinsurers “fail to point to a declared public policy of this State that would bar Anthem’s recovery.” The court also found that there were non-contractual and non-restitutionary claims and that all contractual claim had been dismissed from the various cases by the time of settlement.
In addition, the Court rejected the excess insurers’ argument that coverage was precluded by the policy’s fraudulent acts exclusion, first because the exclusion requires “an ultimate factual determination” that dishonest or fraudulent act had occurred, and second, because the underlying claims came within the exclusion’s provision preserving coverage for bad faith claims, which, the Court found, the underlying claims were – excepting only one portion of the underlying claims, with respect to which the Court said further proceedings were required in order to determine whether that portion of the underlying claims was the type of claim for which the coverage carveback clause preserved coverage.
Finally, the Court reversed the lower court’s entry of summary judgment in the excess reinsurer’s favor with respect to Anthem’s claims against them for bad faith. The Court said that further fact-finding was required in order to determine whether the excess reinsurer’s denial of coverage for Anthem’s claim “was unreasonable and lacking in any legitimate basis.”
One of the recurring battleground issues in trying to establish coverage under an E&O insurance policy is the question of whether the underlying claim arises out of the insured’s rendering or failing to render professional services. This issue can be a particular problem where, as here, the relevant policy provision includes a narrowing qualifier like “solely.” The problem is that the world is never that tidy. All too frequently allegations spill over into other things, and that is the reason I have always disliked the inclusion of coverage restrictive policy terms like “solely.”
At least these days, the insuring agreement of the typical insurance company E&O policy would not include the word “solely.” The irony of this situation is that it Anthem itself was responsible for the language at issue, as it issued the policy with the operative language to itself. It was Anthem that included the word solely in the primary policy’s insuring agreement. (It is of course possible that the wording was the result of the reinsurers’ requirements.) In the end, the Supreme Court found that the narrowing language was not coverage preclusive here. But that was only after two different courts had concluded that the effect of the narrowing language was sufficient to preclude coverage.
It is hard to tell from the Supreme Court opinion alone what the characteristics of the underlying allegations were that would support the argument that there were not solely about the rendering or failing to render “claims handling and loss adjusting” services. At least based on the description of the underlying claim in the Supreme Court’s opinion, it sure does seem that what the underlying claim was about was supposed wrongful acts or omissions allegedly committed in connection with Anthem’s payment or nonpayment of claims.
The argument that the relief that Anthem sought was contractual or restitutionary in nature and therefore not covered under the policy is hard to gauge. The Supreme Court’s opinion states that the $198 million settlement consisted of Anthem’s agreement to make a $5 million contribution to a charitable foundation; a $135 million payment into a common fund from which affected class members could seek payment; and $58 million in attorneys’ fees. With respect to the $135 million part, I can see the argument that this amount either represents the payment of amounts owing under the health insurance contract or the payment of amounts due but withheld. I don’t know how much substance there would be to this argument. The portion of the Court’s opinion where this issue is discussed is kind of sketchy; it basically consists of the Court saying that the relief Anthem sought is not contractual or restitutionary.
Whatever the substance and merits of the excess reinsurers’ arguments might otherwise have been, the arguments didn’t make much traction with the Indiana Supreme Court. The Court’s opinion is without a doubt a policyholder friendly opinion. It is hard to read the opinion without getting the feeling that the Court was pretty much determined to find coverage. The Court as much as said as much when it emphasized the “very strong presumption of enforceability” of contracts. This sentiment worked in Anthem’s favor in this case, but could work against it the next time it is in court trying to resist a finding of coverage under one of its own policies.
One final thought about this case. This all began back in 1998. I don’t know for sure what the timing of all of the events relative to the (re)insurance coverage dispute has been but by any measure this has been going on for while. And – it isn’t over yet. The parties will now all head back to the trial court for further proceedings. Call it a hunch, but I am guessing that after their recent mishap in the Indiana Supreme Court, the excess reinsurers will try to close this case out as quickly as they can.