When most people think of liability insurance, they think about the insurer’s payment obligations. But policyholders have obligations under liability insurance policies, too. Among the most important policyholder obligation is the requirement to provide timely notice of claim. The failure to provide timely notice can entirely preclude coverage, as is illustrated in a ruling in a recent coverage dispute arising out of an underlying False Claims Act claim. As discussed below, there were a number of circumstances involved in the underlying claim that the policyholder argued excused or at least explained its late provision of notice. However, the court rejected these arguments and held the late notice was not excused and that coverage was precluded. The February 12, 2019 order in the case by Central District of California Judge Stephen V. Wilson can be found here.
Underlying False Claims Act Litigation and Related Proceedings
At all relevant times, PAMC, Ltd. operated a medical health facility in California. On June 14, 2013, a whistleblower filed a qui tam action under seal pursuant to the False Claims Act against PAMC and related individuals alleging that they had caused false claims to be submitted to the federal Medicare and Medicaid programs and to the California state equivalents. On June 28, 2015, the whistleblower filed a first amended complaint under seal. On December 15, 2015, the court unsealed the first amended complaint. PAMC subsequently alleged that it was unaware of the existence of the Whistleblower Action until March 14, 2016, when PAMC received a waiver of service request in connection with the first amended complaint.
In a related but separate development, on June 9, 2015, the U.S. Department of Justice sent a subpoena to PAMC requesting certain specified documents related to the whistleblower’s allegations. Among other things, the cover letter accompanying the subpoena stated that the DOJ “requests that you not disclose the existence of or compliance with the subpoena” until the DOJ “notifies you that the investigation has been completed or the court order disclosure.” The cover letter also stated that “We request that you give this Office advance notice if you plan to disclose the existence of or compliance with the subpoena.” On January 5, 2017, PAMC received a letter from the DOJ stating that the criminal investigation was complete and that the DOJ did not intend to pursue criminal charges.
On February 11, 2017, PAMC and the claimant in the Whistleblower Action (the “relator”) participated in mediation and reached a settlement. The parties filed a notice of settlement with the court on February 15, 2017. According to news reports, PAMC “agreed to pay $31.9 million to the federal government and $10 million to California for allegedly submitting false claims to Medicare and Medi-Cal, the state’s Medicaid program.” A settlement agreement was fully executed on June 27, 2017, and a joint stipulation subsequently was filed with the court.
The Insurance Dispute
PAMC secured a management liability insurance policy for the policy period February 28, 2015 to February 28, 2016. The 2015-2016 policy was extended by endorsement to March 29, 2016. The 2015-2016 policy was a renewal of a policy that had been in place for the 2014-2015 policy period. The 2015-2016 policy was itself renewed by a policy issued for the 2016-2017 policy.
On April 20, 2017 (that is, more than two months after settlement of the underlying proceeding had been negotiated), PAMC provided notice of the Subpoena and of the Whistleblower Action to its insurer. The insurer denied coverage for the matters on the grounds that PAMC had not provided timely notice of matters under the 2015-2016 policy.
PAMC took the position that because of the DOJ’s restriction on disclosing the existence of the subpoena, the underlying claim had not been first made until January 5, 2017 when the DOJ advised that its criminal investigation was complete, therefore that the applicable policy was the 2016-2017 policy, and that notice was timely under that policy.
After the insurer refused to change its position, PAMC filed a lawsuit against the insurer among other things alleging breach of contract and seeking a judicial declaration that the 2016-2017 policy applied and provided coverage for the costs the company incurred in connection with the underlying action. The insurer filed a motion to dismiss.
The Relevant Policy Language
The relevant policy language, found in each of PAMC’s insurance policies, specifies that “as a condition precedent to the obligations of the Insurer under this policy,” the policyholder must “give written notice to the Insurer of any Claim made against an Insured.” The policy provides further that the policyholder must provide notice of a claim to the insurer “as soon as practicable” after the policyholder’s risk manager or general counsel “first becomes aware of the Claim.” The policy provides further that “in all events a Claim must be reported no later than either: (i) anytime during the Policy Period or during the Discovery Period (if applicable); or (ii) within ninety (90) days after the end of the Policy Period or the Discovery Period (if applicable).”
The February 12, 2019 Order
In a February 12, 2019 order, Central District of California Judge Stephen V. Wilson, applying California law, granted the insurer’s motion to dismiss and dismissed PAMC’s complaint with prejudice.
At the outset, Judge Wilson emphasized that the policy specifies “in unequivocal terms” that the reporting requirements are a “condition precedent” to the insurer’s policy obligations, as a result of which, Judge Wilson said, “the parties clearly intended for [PAMC] to satisfy the Policy’s explicit reporting requirements for Plaintiff to be entitled to coverage for any covered claim made against Plaintiff during the Policy Period.” Specifically, the policy “unambiguously” required PAMC to report any claims of which it first becomes aware “within the applicable Policy Period plus ninety days.”
With this background, Judge Wilson said that “even assuming all of the factual allegations in the Complaint as true, [PAMC] did not satisfy the reporting requirements in the Policy regarding the Subpoena and the Whistleblower Action as a matter of law.”
In reaching this conclusion, Judge Wilson rejected PAMC’s argument that the underlying claims were first made under the 2016-2017 policy rather than under the 2015-2016 policy. In that connection, Judge Wilson noted that even assuming as PAMC contends that it was not aware of the Whistleblower Action until it received the waiver of service request on March 14, 2016, that date still falls within the policy period of the 2015-2016 policy owing to the endorsement extending the 2015-2016 policy to March 29, 2016.
Even just with respect to the DOJ’s subpoena, Judge Wilson noted that PAMC’s complaint acknowledges that it received the subpoena on June 9, 2015 which again was within the policy period of the 2015-2016 policy. Judge Wilson rejected PAMC’s argument that it was constrained by the subpoena’s cover letter’s warning against disclosure until January 5, 2017, when it received notice from the DOJ that the investigation was complete, and therefore that the claim was not first made until that date.
Judge Wilson noted that the cover letter “did not affirmatively prohibit” PAMC from disclosing the actions, but merely “requested” that PAMC refrain from disclosure and that the cover letter “expressly authorized” PAMC to seek permission to disclose the subpoena, which PAMC did not do. In any event, Judge Wilson noted, the Whistleblower Action was made public on December 15, 2015; PAMC “has not articulated a reason why the DOJ’s cover letter” relating to the subpoena “would have precluded [PAMC] from notifying [the insurer] of the existence of the Whistleblower Action after it became unsealed and publicly available. “
Finally, Judge Wilson rejected PAMC’s argument that its untimely notice was excused under the notice-prejudice rule. Judge Wilson noted that California’s courts have consistently declined to extend the notice-prejudice rule to claims-made policies, on the ground that the insurer has a right to limit the scope of the coverage it provides as set forth in plain language of the insurance policy. Judge Wilson rejected PAMC’s argument that the insurer’s denial of coverage on untimely notice grounds “amounts to an inequitable forfeiture of coverage under the parties’ bargained-for insurance contract.” PAMC, Judge Wilson said, “waited a substantial amount of time” before providing notice of the Whistleblower Act “without a substantial justification.” The Court, Judge Wilson said, “finds there is no equitable justification to excuse the enforcement of a clear condition precedent to coverage under the Policy.”
Instead of reporting the lawsuit and the subpoena to the insurer, or even seeking the DOJ’s leave to provide notice to the insurer of the subpoena, PAMC “chose to wait over four months” after receiving word from the DOJ that the criminal investigation was concluded, during which time PAMC “settled the claims against it in the Whistleblower Action without the [insurer’s] knowledge or consent.” To hold the insurer equitably liable for the settlement amount “would be far more inequitable that the ‘forfeiture’ of [PAMC’s] coverage for the Subpoena and the Whistleblower Action based on [PAMC’s] idleness and disregard for the Policy’s reporting requirements.”
As I have noted in several prior posts (for example, here), False Claims Act claims represent an uncomfortable fit with D&O insurance policies. For example, and as was the case in this situation, the fact that False Claims Act claims frequently are initially filed under seal can create complicated questions regarding the date on which the claim is first made, which in turn affects questions concerning the timeliness of notice. (Refer here for another recent claim in which these kinds of claims made issues came up within the context of a False Claims Act claims.)
PAMC’s policy contained a specific provision that could be helpful in at least some False Claims Act situations. As noted in the preceding paragraph, one problem that can arise when a claim that is filed under seal, and therefore that the defendant company might have no way of knowing about, is question of when the claim was first made and reporting obligations are triggered. In this case, PAMC’s policy helpfully specified that a claim is not first made until the risk manager or general counsel becomes aware of the claim; this would protect the company from a situation where the notice clock might otherwise be ticking in connection with a claim under seal and of which the company is completely unaware.
In the end, however, these provisions in PAMC’s policy were of little help for the simple reason that PAMC could not demonstrate that it took the actions required by the policy even after it admittedly became aware of the Whistleblower complaint and the Subpoena. It is always going to be a challenge for a policyholder trying to overcome a late notice defense when its actions can be, as was the case in Judge Wilson’s order, characterized as representing “idleness and disregard for the policy’s reporting requirements.”
Regular readers well know that I am a strong advocate for the application of the notice-prejudice rule, and its application even to claims made policies (the applicability of the rule even to be reinforced by policy language if necessary, as I recently discussed here). However, whatever might be the merits of the application of the notice-prejudice rule in other contexts, it is hard to justify its application here to preserve coverage, for the simple reason that PAMC would have a very difficult time demonstrating the absence of prejudice. PAMC not only delayed giving notice, but it did not even give notice to the insurer until more than two months after the underlying litigation had been settled. Given these circumstances, it is difficult to put PAMC’s plea for insurance coverage despite the notice delays in a sympathetic light.
This claim does underscore a point that I have often made elsewhere that while insurance companies have obligations under insurance policies, policyholders also have policy obligations. As I noted in my series about the Nuts & Bolts of D&O Insurance, “Far too many claim disputes arise when carriers take the position that policyholders have failed to fulfill one or more of these requirements. My hope is that by highlighting these requirements, more of these process related disputes might be avoided.”
One of the best ways for policyholders to maximize the availability of insurance under their policies is for the policyholders to be diligent in asserting their interests. As this case unfortunately shows, where a policyholder’s approach to protecting its interests can be described by a court as “idleness,” the outcome is unlikely to be advantageous to the policyholder.
I will say that it almost seems here like the company basically never thought about its D&O insurance until it was far too late. The idea that the company didn’t even get around to noticing its D&O insurer of the claim until more than two months after the claim had been settled suggests more than just indolence; it suggest obliviousness. It just seems like it never occurred to the company or its legal counsel that it might be a good idea to get their D&O insurer involved. Whatever happened, it does seem less like a conscious mistake and more like somebody (or many somebodys) just dropped the ball. All of which is another way of saying that the policyholders that are most likely to maximize the benefits under their insurance policies are those that are diligent in protecting their interests.