1) Late Notice (part two): False Claims Act (FCA) / Whistleblower Insurance Coverage

Today, managing partner Brian Friel continues his series: The Ten Biggest Mistakes Made By Corporate Insurance Policyholders. In this video, Brian continues with examples about why late notice can be a vexing problem for corporate policyholders. As discussed in Part 1: Late Notice, providing proper notice can be one of the most complex insurance issues that corporate policyholder’s face. 

The Late Notice Trap 

In today’s post, Brian give two examples of what he calls the “notice trap,” where insurers rely on highly technical language in their policies and aggressive arguments to deny insurance claims.

False Claims Act (FCA) / Whistleblower Insurance Coverage

In the first example, we address the unique challenges faced with False Claims Act (FCA) Whistleblower actions.  Procedurally, these kinds of claims present notice challenges because, when the files a legal complaint against a company, it is done in secret.  Corporations are typically unaware that a complaint has even been filed, since the Government’s complaint is initially filed under seal.  Thus, corporate policyholders may not even be aware that the case is being pursued.  Then, when a corporate policyholder later becomes aware of the lawsuit, insurance companies frequently argue that it is too late to pursue coverage, because notice was not provided when the initial complaint was filed under seal.    

Default Judgment Late Notice 

In the second example, Brian explains how an inaccurate legal filing by a tort plaintiff resulting in the entry of a default judgment can put insurance coverage in jeopardy.  

These examples seem frustrating and nonsensical, because they are, but they highlight the complexity of notice and the importance of understanding insurance policies and insurance companies when pursuing insurance claims. 

 

For a transcript of the video, please see below

1) Late Notice (part two): False Claims Act (FCA) / Whistleblower Insurance Coverage

We have seen a case in the news, this is absolutely shocking to us in the coverage world, typically with false claims acts, which are very, very, very active right now in terms of at the federal level especially, this is where companies who do business with the U.S. Government, and it could be in the healthcare industry, it could be in the contracting industry, all sorts of different vendors, suppliers, so all these different government agencies, if there is a false claims act someone has made a charge that you as a company, or somebody in your company, is over-billing the U.S. Government. Right? Either through some Medicare reimbursement plan, or through double invoicing on some supplies that you provided to the U.S. Government, Department of Justice, Department of the Army, Department of Veteran Affairs.

It doesn’t matter, and so what we have seen here is, associated with the False Claims Act, we have what we call whistle-blower actions. And there is a lot of protection in the law for whistle-blowers, so this is somebody who works at a company, who’s servicing the U.S. Government. They, these people, they basically have witnessed or know about what they consider to be fraudulent activities of over-billing the government. Filing false claims for money payments from the government. They whistle-blow. They basically contact somebody in the government agency, they basically say, “I have information that will show, that will demonstrate that my company, or people in my company are over-charging the U.S. Government.”

The U.S. Government Department of Justice will investigate that claim, privately, under seal. The company, who’s the target, is not even aware that it’s going on. The government may even file a lawsuit against the company while it’s investigating. And that lawsuit, that complaint, is filed under seal. It never gets out publicly, the company is never made aware of it. Let’s go back to our claims-made policy. That whistle-blower notifies a government official, the government investigates, thinks there’s credible evidence, files a civil lawsuit against the company under seal. It’s under seal for three years. They finish their investigation, they determine there’s enough to go forward, and they’re going to prosecute the case. They go back to court, they unseal the complaint, make it public, and they formally serve the company. For the first time the company is aware that it’s now a defendant in a false claims act litigation.

What’s the company do? Company of course notifies it’s insurance company. Insurance company says, “Who was on the risk three years ago when the complaint was filed. That insurance company says, “I’m sorry, it’s too late. This claim was filed against you three years earlier. It’s a different insurance company you need to go after, not us.” And trust me, the early insurance company has a number of basis or reasons to exclude the claim as well. And what we find is a company is sort of stuck in the middle and there’s this big gap of coverage, and there’s nothing they can do because they’re not aware of a lawsuit. It’s a very extreme example, but it has happened on a number of occasions.

And let’s give another example of one of these, what we call notice traps with claims-made policies that we see mistakes being made all the time. This happened recently for one of our clients. We received a call. It’s a healthcare company with facilities all around the country. They have a claims-made policy that expired on December 31, 2015. Just about a year ago, 10 months ago. The problem became is that the plaintiff who had alleged abuse in one of these facilities in a southern state made all sorts of allegations, filed a complaint against an individual at that facility who’s an employee of the company, as well as the company. They filed the lawsuit in November of 2015 and then served the complaint, basically formal summons and complaint, on the employee. The employee really didn’t understand what that complaint was about. Here’s the problem, they sued the wrong company. The plaintiff sued the wrong company.

Our client was doing business in this state under a different name. It’s not a viable company, it has no assets, it’s not registered as a company, it’s not listed as a company, it’s not listed in the insurance policy, but they sued that company under the doing business as name. That never was filed and then served against the correct company name. The correct company entity. So now we’re at the end of 2015, we go into 2016. Plaintiff never gets an answer from the company to its complaint or his complaint because they were never served. It was basically a fictitious company that was served and the complaint was filed against, so the complaint just sat there for a couple months.

The plaintiff down in this southern state and his local lawyer go to the local state judge and seek what’s called a default judgement. “Your Honor, this company has not answered and we are asking the court for a default judgement. Basically a judgement of money in our favor in default because of their failure to comply with the court rules.” The judge grants it. The judgement award? $60,000,000 against our company. Without us being involved. Now the company gets first notice, this is in February 2016, of this litigation, of the complaint, of the default judgement.

They hire lawyers, we’re now in a new policy period as well. They hire lawyers, they go back to that judge and say, “Your Honor, they served, they filed the complaint against a fictitious company. It’s the wrong company, we were never sued, we were never served with summons and complaint.” And the judge says, “Okay, I understand. I’m going to take that $60,000,000 default judgement”, and he crossed out the fictitious company’s name, put in the actual company’s name, and said, “Here you go. Default judgement against your company.” Unfair, but the company was now looking at a judgement that put its financial solvency into question. They contact us as insurance lawyers, we contact the insurance company, they deny coverage. Why? Their argument is the complaint that was filed in November 2015 was the date of the filing against the company, the insured, both the individual employee and the company. And they denied this claim. The policy limits were approximately $10,000,000 to cover this.

Ultimately what happened there was a settlement with the underlying case, for much less than $60,000,000, closer to policy limits, and the carrier right now is still withdrawing or withholding any payments on the policy based on this notion that the complaint was filed in 2015. Their policy is in 2016, we’re late. And we’re arguing that point right now and may ultimately go to litigation. It’s just another example of the traps that are out there in notice and some mistakes that are being made by companies who aren’t properly monitoring these lawsuits that come into their organizations.

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