In numerous posts over the years (most recently here), I have noted that qui tam actions under the False Claims Act fit awkwardly with the typical D&O Insurance policy terms and conditions. Many of the related coverage problems arise from the fact that applicable procedures require a qui tam claimant to file his or her complaint under seal and to withhold service of process while the government decides whether or not it will intervene in the case. The upshot is that there sometimes can be a very long time lag between filing and service. This can make it challenging, for example, to determine when the claim was first made. It can also cause problems under the prior and pending litigation exclusion, as was the case in a recent bankruptcy-related proceeding.

As discussed below, the bankruptcy court judge granted a D&O insurer’s summary judgment motion, agreeing with the insurer that, by operation of the policy’s prior and pending litigation exclusion, coverage was precluded for a subsequent derivative suit that was based on the same operative facts as an earlier filed but not served qui tam lawsuit. As discussed below, as far as I am concerned, the upshot of this case (and other cases like it) is that the key policy terms should be modified so that the policy wording fits better with the qui tam procedures. A copy of the May 29, 2024, opinion in the Insys Therapeutics bankruptcy proceeding can be found here.

Background

In 2012, Insys Therapeutics, a pharmaceutical company, was sued in a qui tam action under the False Claims Act. The qui tam action was filed under seal and was dismissed before it was served on the directors and officers of Insys. At the time Insys purchased the D&O insurance at issue in the subsequent coverage action, the company was unaware of the existence of the qui tam action.

In 2016, the company’s directors and officers were sued in a shareholder derivative lawsuit. Both the qui tam action and the derivative action involved the same allegedly fraudulent scheme to market addictive opioid products. Insys submitted the derivative lawsuit to its D&O insurer as a claim under the policy. The insurer denied coverage for the claim in reliance on the policy’s Prior and Pending Litigation exclusion, which precluded coverage for actions “brought” prior to May 02, 2012. The insurer contended that the qui tam action, involving the same allegations, had been brought prior to May 02, 2013.

In 2019, Insys filed for bankruptcy. The trustee for the litigation trust in bankruptcy filed a coverage lawsuit in the bankruptcy proceeding seeking to recover defense expenses the estate had incurred in defending against the derivative suit. The insurer moved for summary judgment based on the Prior and Pending Litigation exclusion. The litigation trustee filed a cross-motion for summary judgment arguing first that the “unique procedural characteristics” of qui tam suits call for different treatment under the Prior and Pending Litigation exclusion, and second that the word “brought” in the exclusion is ambiguous in this context.

The Prior and Pending Litigation exclusion provides as follows:

In consideration of the premium charged, no coverage shall be available under this Policy for claims based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any fact circumstance, situation, transaction, event or wrongful act, underlying or alleged in any prior and/or pending litigation, or administrative or regulatory proceeding or arbitration was brought prior to May 02, 2013.

The May 29, 2024, Order

In a brief May 29, 2024, order, District of Delaware Bankruptcy Court Judge John T. Dorsey, applying Delaware law, granted the insurer’s motion for summary judgment, and denied the litigation trustee’s cross-motion, holding that coverage for the derivative suit defense fees was precluded by the policy’s Prior and Pending Litigation exclusion.

In reaching this conclusion, Judge Dorsey first rejected the litigation trustee’s argument that, in the context of a qui tam lawsuit, the word “brought” in the exclusion reasonably could be interpreted to mean both filed and served on the defendant. The court said that it is “commonly understood” that a litigation is “brought” when “a complaint is filed.” Delaware law, Judge Dorsey said, requires that insurance policies must be construed in a “common sense manner.” Accordingly, he found that under the Prior and Pending Litigation exclusion, litigation is “brought” when the complaint is filed with the court – which, in this case, was before the Prior and Pending Litigation date.

Judge Dorsey also rejected the litigation trustee’s argument that due to the “unique procedural characteristics” of the qui tam action, the action should be treated differently under the exclusion’s language. In so ruling, Judge Dorsey specifically cited and quoted with approval from the Pennsylvania Superior Court’s 2014 appellate opinion in the AmerisourceBergen Corp. case, in which a court held that a Prior and Pending litigation exclusion precluded coverage under an E&O policy for a subsequent claim based on similar facts as an earlier filed qui tam action. (I discussed the AmerisourceBergen decision at length in a blog post at the time, here.) Judge Dorsey concluded his analysis of this issue by saying that “Neither the arguments advanced by the Trustee, nor the relevant case law, indicate that the Qui Tam Action in this case should be treated any differently than other civil actions.”

Discussion

The litigation trustee may not have prevailed on the argument, but there is no doubt whatsoever that qui tam actions do indeed have “unique procedural characteristics.” And not only do qui tam actions have unique procedural characteristics, but these characteristics are such that over and over again they result in the preclusion of D&O insurance coverage for subsequent claims, owing to nothing other than the distinctive way that qui tam actions unfold.

 It may well be that, as Judge Dorsey said, under this policy and indeed under most conventional D&O insurance policies as written, there is no reason that qui tam actions should be treated differently than other civil actions. However, that does not mean that the policies themselves should not be written differently so as to treat qui tam actions differently and in a way that takes the unique procedural characteristics of qui tam actions into account.

There is one quick way to clean up this recurring problem involving qui tam actions, and that would be to amend the Prior and Pending Litigation exclusion to provide that for purposes of qui tam actions, the claim is “brought” (or “commenced” or whatever the operative word is in the exclusion) when the action is served, not when it is filed. Alternatively, the exclusion could be amended to specify that the exclusion does not apply to qui tam action complaints that were filed but not served before the prior litigation date.

For me, a particularly compelling solution here would be to line up the language between the Prior and Pending Litigation exclusion and the standard Definition of Claim, so that both require service of process. For me, this alternative has the appeal of having the policy’s various clauses operate consistently – as it is now, the inconsistency between the Prior and Pending Litigation exclusion, which does not require service of process, and the Definition of Claim, which does require service of process, is a jarring inconsistency that not only is dissonant but it produces harsh, unsatisfying outcomes like the one here.

As I said at the outset, qui tam actions fit awkwardly with the standard D&O insurance policy language. As an industry, we can just acknowledge that the standard policy language does not operate well in the context of qui tam actions, and that it is time to do something about it. I have proposed some possible solutions above. I hope that if others have suggestions they will add it to the dialog. The fact is this problem has been around for years. It should not be the case that there regularly are these situations where the D&O policy just doesn’t work well.

Special thanks to a loyal reader for providing me with a copy of Judge Dorsey’s opinion.