caliIn an interesting September 30, 2015 opinion, Southern District of California Cynthia Bashant, applying California law, held that a series of HIPAA-related subpoenas that the U.S. Department of Justice served on Millennium Laboratories were not interrelated with prior qui tam lawsuits that had been filed against the company, and held further that coverage under Millennium’s D&O insurance policy for the company’s costs of responding to the subpoenas was not limited by the policy’s $100,000 sublimit for Regulatory Claims. A copy of Judge Bashant’s opinion can be found here.



Before December 1, 2011, Millennium had been named as a defendant in several qui tam and private lawsuits alleging that the company had encouraged health care providers to submit false or fraudulent claims to health insurers and by providing unlawful kickbacks.


In 2012 and 2013, Millennium was served with a series of Department of Justice HIPAA subpoenas. The subpoenas listed a wide variety of potential health care law offenses, along with broad documentary requests. The DoJ also sent the company a letter saying that the agency was “conducting a joint criminal and civil investigation” of Millennium, “and its officers, employees and agents.” The letter said further that the company and its officials “may have violated various federal criminal statutes, including but not limited to fraudulent claims to the U.S., [and] health care fraud offenses … in connection with billing false or fraudulent claims to federal health care providers.”


Millennium submitted the subpoenas to its D&O insurer as a claim under the policy. The insurer had issued a Healthcare Organizations Directors and Officers Liability Policy for the policy period of December 1, 2011 to December 1, 2012. The carrier took the position that the subpoenas represented a regulatory claim subject to the policy’s $100,000 sublimit for Regulatory Claims. The carrier sent Millennium a $100,000 payment, subject to a reservation of all of its right under the policy. Millennium, which incurred over $5 million responding to the subpoenas, filed a lawsuit against the insurer seeking coverage for all of the costs it incurred in responding to the subpoenas and also alleging bad faith.


The parties filed cross-motions for summary judgment. The insurer contended that the subpoenas were interrelated with the earlier qui tam lawsuits and therefore were deemed made at the time the earlier lawsuits were filed, prior to the policy period of its policy. The carrier argued that in any event the amounts available under the policy for Millennium in connection with its response to the subpoenas were limited to the $100,000 Regulatory Claims sublimit.


The policy stated that “Related Claims” shall be “deemed to be a single Claim made on the date on which the earliest Claim with such Related Claim was first made.” The policy defined “Related Claims” as “all Claims for Wrongful Acts based upon, arising out of, directly or indirectly resulting from, or in consequence of, the same or related facts, circumstances, situations, transactions or events.”


The policy’s “Regulatory Claims Coverage,” which was subject to a $100,000 sublimit, provides coverage for “Loss arising from a Claim … for a Regulatory Wrongful Act.” The policy defines Regulatory Wrongful Act as an:

  1. act, error, omission, misstatement, misconduct, fraud, reckless disregard or negligence committed by an Insured in the performance or failure to perform any of the following activities in the Medicaid, Medicare, Federal Employee Health Benefit or Tricare Programs:
    • procedure coding;
    • bill claim, cost report or data submission; or
    • the calculation of managed care payments;
  2. offer, acceptance or payment by any Insured in exchange for patient referrals, in violation of any state, local or federal law; or
  3. offer, acceptance of payment by an Insured in violation of any state, local or federal antikickback law.


The September 30, 2015 Ruling

In her September 30, 2015 opinion, Judge Bashant granted Millennium’s motion for summary judgment and denied the insurer’s motion, ruling that the policy covered Millennium’s costs of responding to the subpoenas up to the policy’s full $5 million policy limit.


After first determining that the subpoenas represented a Claim within the meaning of the policy, Judge Bashant then determined that the subpoenas were not Related Claims with the prior qui tam lawsuits, and therefore were not deemed first made at the time the first of the qui tam lawsuits was filed.


In reaching this conclusion, she said that “there is no evidence before the court that the current DoJ investigation arises out of, results from, or is the consequence of the same or related facts, circumstances, situations, transactions or events” as do the qui tam lawsuits. While “there may be similar allegations” between the earlier lawsuits and the DoJ investigation, “that does not mean the investigation arises out of the earlier allegations.”


There is, Judge Bashant said, “no way to determine whether there is substantial overlap between the earlier lawsuits and the investigation.” The fact that the DoJ had requested documents from the prior lawsuits “is not dispositive.” The investigation is “shrouded in secrecy,” and the allegations under investigation “are listed broadly without specificity.” It is “impossible to tell whether the investigation or allegations being investigated arise out of, are based upon, or are attributable to the prior actions.”


Judge Bashant also rejected the insurer’s argument that coverage under the policy for the company’s costs of responding to the subpoenas was limited to the $100,000 sublimit for regulatory claims. She noted that “although an argument can be made that the DOJ subpoena is a claim for a regulatory wrongful act,” the DOJ’s letter “appears to expand the claim to include more than just a regulatory wrongful act, including breaches of duty, misstatements or misleading statements, and violations of HIPAA.” Noting that “insurance coverage is interpreted broadly to afford the greatest possible protection for the insured,” Judge Bashant concluded that the policy’s full $5 million policy limit applied to Millennium’s costs associated with responding to the subpoenas.


Finally, Judge Bashant denied the insurer’s motion for summary judgment with respect to Millennium’s bad faith claims, holding that a jury issue exists on the question of whether the insurer’s limitation of its initial payment to $100,000 was “unreasonable and in bad faith.”



As I have noted in prior posts (most recently here), relatedness issues under D&O insurance policies can be quite vexing, usually because of the problem of determining what degree of similarity or overlap is required in order for two claims to be related within the meaning of an insurance policy. Usually that is a very fact-specific determination, one that often becomes an eye-of-the-beholder issue. Here, however, the problem was not whether or not the two sets of claim involved a sufficient degree of factual overlap; rather, the problem was that because of the “secrecy” surrounding the DOJ investigation, there was simply not enough information to determine whether or not the two sets of claims were interrelated. Because she simply lacked sufficient information to make the determination, Judge Bashant concluded that the two sets of claims were not interrelated.


Her determination about the inapplicability of the Regulatory Claims sublimit is also quite interesting. The determination obviously was quite significant for the insurer, because the determination increased the insurer’s liability by $4,900,000.  Judge Bashant didn’t exactly say the matters under investigation in the subpoenas did not come within the policy’s definition of “Regulatory Wrongful Acts”; rather, she said that, according to the DOJ’s description, the investigation involved a broader range of matters, which Judge Bashant determined to mean that the investigation involved more that just matters that fell within the definition of Regulatory Wrongful Acts. Because the investigation involved more that just Regulatory Wrongful Acts, the policy’s coverage could not be limited to the Regulatory Claims sublimit.


In reaching her conclusion with respect to the inapplicability of the Regulatory Claims sublimit, Judge Bashant said something that was important to her decision and that I think is important in general when it comes to insurance coverage questions. She said that “insurance coverage is interpreted broadly to afford the greatest possible protection to the insured.” The practical consequence of this principle as applied in this case was that because the circumstances involved were not a perfect fit with the restrictive terms on which the insurer sought to rely, the restrictive terms were held to be inapplicable.


While Judge Bashant’s summarization of this principle is by no means original, it does represent a succinct summary of the basis on which policy coverage should be determined. The principle is not only a useful guideline for courts to use in determining insurance coverage; it also represents a useful guide that insurers could and arguably should use in making coverage determinations under their policies. One might assert that insurers using these principles in making its coverage determinations would be less likely to find themselves facing jury determinations on the question whether their coverage determinations were reasonable or in bad faith.


More About Interrelatedness Issues: Those readers interested in interrelatedness issues and who are particularly interested in cases in which a court concludes that — because a set of claims filed during the policy period were interrelated with claims made prior to the policy —  a professional liability insurance policy does not provide coverage for the subsequent claims will want to take a look at Southern District of Florida Judge Marcia G. Cooke’s September 30, 2015 decision (here) in a coverage case involving auto insurer Direct General Insurance Company – and not just because her opinion begins with the distinctive statement that “as the African proverb states, when two elephants fight, it is the grass that gets trampled.”


Direct General sought coverage from its professional liability insurance carriers for a portion of the amounts the company paid in settlement of class action claims and individual claims asserting that the auto insurer had not properly made payments under its Personal Injury Protection (PIP) benefits portion of auto insurance policies it had issued to consumers. The company’s professional liability insurers denied coverage for these amounts, arguing that the claims for which Direct General sought coverage were related to earlier, pre-policy demands that Direct General had received with respect to its PIP benefits payments. Direct General argued that the pre-policy demands were merely “garden-variety” demands for PIP payments of the kind that the company routinely received and that those demands are not Claims under the policy and therefore the subsequent lawsuits are not Related Claims. Direct General also argued that the pre-policy demands were not interrelated with the later lawsuits because the earlier demands did not involve the same legal theory on which the later lawsuits were based.


The policy defined “Related Claims” as “ all Claims for Wrongful Acts based on or directly or indirectly arising out of or resulting from the same or related facts … series of facts, circumstances, situations, transactions, or events.”


In her September 30, 2015 opinion, Judge Cooke, applying Tennessee law, held that the prior demands were claims within the meaning of the policy and that the subsequent lawsuits were related to the prior demands, and further that the subsequent lawsuits were deemed first made at the time of the prior demands, which was prior to the applicable policy period. Accordingly she granted the insurer’s motion for summary judgment.


In reaching this conclusion, Judge Cooke rejected Direct General’s argument that the prior demands and the subsequent lawsuits were not interrelated because the prior demands did not assert the same legal theory as the subsequent lawsuits. Judge Cooke emphasized the breadth of the policy’s definition of Related Claims, and noted further that the among the pre-policy period demands was a demand letter involving the same claimant, same medical provider, same accident and same services as involved in a later lawsuit complaint. Because the initial demand represented a claim under the policy, the Related Claims that came after it are “deemed to have been made at the same time as the earlier, pre-policy Claim.” Accordingly, because “all of the claims collectively are deemed on Claim made prior to the inception of the Policy period,” there “is no coverage under the Policy.”


Special thanks to a loyal reader for sending a copy of the Judge Cooke’s opinion in the Direct General case.


Readers interested in my further musings about interrelatedness issues should refer here.