PA Court Holds Coverage is Barred Under Professional Liability Policy for False Claim Act Lawsuit Costs

by Cozen O'Connor

On July 16, 2013, the Pennsylvania Court of Common Pleas (Philadelphia County) granted summary judgment in favor of ACE American Insurance Company, holding that costs arising from False Claims Act Litigation were excluded under a professional liability policy.

The False Claims Act Litigation Against AmerisourceBergen

In 2006, a “relator” (commonly referred to as "whistleblower") brought an action in the U.S. District Court for the District of Massachusetts under the False Claims Act on behalf of the United States government and several states. The complaint, initially filed under seal, alleged a nationwide scheme involving Medicaid and Medicare reimbursement for a drug, Aranesp, which was promoted by AmerisourceBergen on behalf of its alleged co-conspirator Amgen, Inc., the manufacturer of Aranesp. The complaint alleged that certain AmerisourceBergen affiliates had caused the submission of numerous false Medicare claims by offering kickbacks to health care providers, as well as conspiring with Amgen to encourage submission of claims based upon an inflated acquisition price.

AmerisourceBergen contended that it received a copy of the complaint by accessing it in February 2009 on the federal court’s electronic docketing system. According to the court, AmerisourceBergen was not served in the action until January 2010, when a waiver of service form it executed was filed with the district court. AmerisourceBergen defended the action, incurring an alleged $18 million in defense costs and fees, before settling.

Timing of the Making of the Claim

While AmerisourceBergen had obtained a copy of the complaint against it prior to inception of the ACE American policy, the court concluded no “claim” was made until AmerisourceBergen was served in January 2010, within the period of the ACE American policy. The policy’s definition of claim provided that a claim included both (1) a “demand against any Insured for monetary or non-monetary damages” as well as (2) a “civil proceeding against any Insured … commenced by service of a complaint or similar pleading …” The court concluded that because the claim was embodied by a civil complaint, it was governed solely by the second prong of the Claim definition, and thus not “made” until served upon AmerisourceBergen.

The Prior/Pending Proceedings Exclusion Applied to Bar Coverage

Nevertheless, the court held that coverage was barred pursuant to the Prior/Pending Proceedings Exclusion. That exclusion barred, among other things, claims arising from “… prior or pending litigation filed or commenced on or before the earlier of the effective date of this Policy or the effective date of any Policy issued by the Insurer of which this Policy is a continuous renewal or a replacement …”

The court first decided the “effective date” for the exclusion, rejecting AmerisourceBergen’s argument that “continuous renewals” could be traced back to an excess policy that had incepted prior to commencement of the False Claims Act Litigation. Adopting ACE’s position, the court concluded that the first primary policy, issued in 2007, established the trigger date for the exclusion. The court was persuaded, in particular, by the fact that the 2007 policy application made clear it was the initial application, whereas the 2008 application was the first to state it was a “renewal” application.

Given that the original False Claims Act complaint had been filed prior to inception of the first ACE American primary policy, the court held that the exclusion applied. It concluded that, although AmerisourceBergen was not served until 2010, the litigation had commenced against it in 2006.

The “False, Deceptive or Unfair Business Practices” Exclusion Barred Coverage

In addition, the court held that the exclusion for “False, Deceptive or Unfair Business Practices” precluded coverage. The court observed, “each count in the Massachusetts Litigation alleges that AmerisourceBergen is liable under the False Claims Act, on the premise of false or deceptive practices resulting in Medicare Fraud.” The court rejected AmerisourceBergen’s contention that it had not itself allegedly engaged in fraud and so the exclusion should not apply, noting that AmerisourceBergen was alleged to have conspired in fraud with its co-defendant Amgen.

Court Holds that Absence of Coverage Automatically Precludes Bad Faith

Lastly, the court dismissed AmerisourceBergen’s claim for bad faith and punitive damages, concluding that such claims could not survive the court’s determination that the policy did not afford coverage. In doing so, the court declined to hold that bad faith liability may exist independently of the ultimate coverage determination

Richard Mason of Cozen O’Connor was lead counsel for ACE American Insurance Company.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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