On February 12, 2019, U.S. District Court Judge Stephen V. Wilson dismissed a suit brought by Pacific Alliance Medical Center (PAMC) alleging, among other counts, breach of contract against its insurer for failure to cover the hospital’s $42 million settlement of a False Claims Act (FCA) suit or its costs to respond to a related Department of Justice (DOJ) investigation.  The court held that the hospital failed to provide notice of the claims within the period enumerated by the coverage policy.  Judge Wilson was unconvinced by the hospital’s various arguments, including that it was precluded from giving notice during that period because of non-disclosure language in the DOJ’s subpoena cover letter. 

In 2013, a relator filed a qui tam action under seal against PAMC alleging violations of the Federal and California FCAs, seeking recovery of treble damages and civil penalties.  The relator alleged that the hospital paid above-market rates to rent office space in physicians’ offices in exchange for referrals and entered into marketing agreements that provided undue benefit to physicians’ practices.  In June 2015, PAMC received a subpoena from the DOJ related to the FCA investigation.  The cover letter to the subpoena read, in part, as follows:

Because this subpoena relates to an ongoing criminal investigation, this Office requests that you not disclose the existence of or compliance with the subpoena for an indefinite period of time or until the Office notifies you that the investigation has been completed or until a court orders disclosure. Premature disclosure could impede the investigation and interfere with the enforcement of the law. We request that you give this Office advance notice if you plan to disclose the existence of or compliance with the subpoena.

The court unsealed the complaint in December 2015.  In the meantime, PAMC and the relator participated in mediation while PAMC cooperated with the DOJ investigation.  On January 5, 2017, PAMC received a letter from the DOJ stating that the criminal investigation was complete and that it did not intend to pursue criminal charges.  Shortly thereafter, PAMC and the relator reached a settlement agreement on February 11, 2017.  On April 20, 2017, PAMC provided written notice to its insurer, National Union Fire Insurance Company of Pittsburgh, PA (National Union), regarding the subpoena and the whistleblower action, seeking coverage for each of those proceedings under its policy.  National Union denied coverage under the rationale that the claims were made in the 2015-2016 coverage period, and PAMC had failed to report them during that time.  This lawsuit ensued. 

The terms of the 2015-2016 insurance policy provided coverage for all “claims first made” during the policy period or within 90 days from the end of the policy period.  The court determined that “the unambiguous language in this provision means that a claim against [PAMC] is only covered by a given year-long policy period if that claim is ‘first’ made against [PAMC] during that policy period,” noting that “first made” is when the hospital “first becomes aware of the [c]laim.”  For that reason, the court held that PAMC notified National Union of the whistleblower action and DOJ subpoena after the one-year reporting period (and ninety-day grace period) and, therefore, National Union rightfully denied coverage to PAMC under the terms of the policy.

The court rejected PAMC’s various attempts to argue either that the policy should not be interpreted rigidly or that PAMC was somehow precluded from reporting to National Union during the window of time set in the policy.  Notably, PAMC argued that it was not legally able to provide notice of the subpoena or the whistleblower action to National Union because of nondisclosure language in the DOJ’s cover letter to the subpoena.  Unconvinced, the court noted that the DOJ’s cover letter did not affirmatively prohibit PAMC from making a disclosure, and allowed PAMC to request DOJ’s permission to provide notice to National Union for purposes of seeking insurance coverage – a step that PAMC did not take. 

The court’s decision serves as a cautionary tale for hospitals.  Moreover, it reminds providers to review their insurance policy’s reporting provisions and revisit their internal reporting protocols to avoid risking a similar outcome to this case.

The court’s opinion is available here. The DOJ’s press release regarding the settlement is available here.