Today I want to talk about Directors and Officers’ Liability Insurance (D&O), which becomes extremely important if a relator alleges your hospital or health care company billed Medicare or Medicaid for false claims. False claims accusations in qui tam lawsuits have become more frequent, and if you get accused of violating the FCA, you have to defend yourself, which isn’t cheap. Does your D&O insurance cover the cost of attorneys’ fees for your defense? That was the question in the North Manor case that was decided September 23, 2024. Metro. Found. for Healthcare, Inc. v. RSUI Indem. Co., No. 20-CV-2224(EK)(JAM), 2024 WL 4266007, at *1 (E.D.N.Y. Sept. 23, 2024). If any of the readers of this blog possess a D&O, keep reading.
This story began in 2016 when a group of former employees (the “relators”) filed a qui tam lawsuit against Northern Manor, accusing the company of engaging in discriminatory practices against its non-Russian clients in the operation of its adult day health care facilities. Qui tam suits, often brought by whistleblowers, allow individuals to sue on behalf of the government when they believe the government has been defrauded.
In this case, the relators claimed that Northern Manor submitted false claims for Medicaid and Medicare reimbursements, but failed to disclose its discriminatory practices, violating federal and state laws. The relators argued that the government would not have paid Northern’s claims had it known about these discriminatory actions. As part of their legal claims, the relators sought substantial damages, including treble damages (three times the actual amount of the government’s loss), penalties of $11,000 for each false claim, and attorney’s fees.
The federal and state governments declined to intervene in the case, which meant the relators would have to pursue the claims on their own. Despite the relators presenting their case at trial, the court ultimately dismissed the claims under Rule 52(c), concluding that the relators failed to establish the materiality element of their False Claims Act claims. This dismissal was later upheld by the Second Circuit in 2022, marking the end of the qui tam case.
The Insurance Coverage Dispute: Northern Manor vs. RSUI
Northern Manor successfully defended itself against the qui tam action; however, Northern Manor sought coverage for its defense costs under its D&O policy, which it held through RSUI Indemnity. D&O insurance typically covers the legal costs and damages incurred by directors and officers in defending against claims of mismanagement, fraud, or other forms of misconduct.
However, RSUI refused to cover Northern’s defense expenses, arguing that a special endorsement in the policy related to “Government Funding” claims applied. The policy’s endorsement stated that it would not cover the “return of funds received from any federal, state, or local governmental agency” as part of its definition of “Loss.”
This raised a critical question: Did the relators’ qui tam claims arise from a “request to return” government funds?
The key issue at the heart of the insurance dispute was the interpretation of the policy language. Specifically, did the qui tam claims, which sought damages for alleged fraud, fall under the policy’s provisions for “Government Funding” claims? RSUI argued that because the relators sought damages that were calculated based on “the United States’ damages”—essentially, the amount that the government lost due to Northern’s alleged fraudulent conduct—the claim was akin to a “request to return” government funds.
However, Northern Manor countered that the qui tam lawsuit wasn’t focused on returning funds, but rather on seeking penalties, treble damages, and the relators’ share of any recovery. The relators were not claiming to return the actual funds to the government; they were pursuing financial penalties and damages related to fraud. Northern also pointed out that the government itself had declined to intervene in the case, further distancing the qui tam suit from the idea of returning funds.
The court noted that the term “return” typically refers to putting something back in its original position, and in the context of the FCA, the damages sought are often more than just the return of funds—they are intended to be compensatory, punitive, and deterrent. As the Supreme Court has noted, the treble damages under the FCA are both compensatory and punitive in nature. This distinction suggested that the qui tam action wasn’t merely about returning funds to the government, but about punishing fraudulent behavior and deterring future violations.
The Court’s Ruling: A Victory for Northern Manor
After considering the arguments and the relevant case law, the court ruled in favor of Northern Manor. The court concluded that the language of the policy’s “Government Funding” endorsement did not unambiguously apply to the qui tam claims brought by the relators. The claims were not about returning government funds, but rather about seeking damages for alleged fraud, penalties, and other financial consequences.
In support of its ruling, the court pointed to a Supreme Court precedent that viewed FCA claims as being more than a request for the return of funds. The court also noted that ambiguity in insurance policy language should be resolved in favor of the insured party, which in this case was Northern Manor. Therefore, the court ruled that RSUI was obligated to cover Northern’s defense costs in the underlying qui tam action.
This case underscores the importance of clear and unambiguous language in insurance policies. When policy terms are open to interpretation, courts may side with the insured, as they did here with Northern Manor. You should check your D&O policy to determine whether you are covered if accused of violating the FCA.