United States: A Cautionary Tale For Companies With Potential False Claims Act Exposure

Last Updated: September 30 2014
Article by Heidi A. Lawson and Daniel S. Harary

A False Claims Act suit can be a company's worst nightmare, as it may potentially result in large settlements and awards on account of the statute's trebled damages provision. However, the nightmare for AmerisourceBergen was compounded by the fact that the company's insurer, ACE, denied coverage for the claim based on the "prior or pending litigation exclusion." Even worse, a Pennsylvania appellate court upheld ACE's disclaimer based upon the exclusion. The impact of this recent ruling is very unsettling for many companies who may not know about a qui tam suit for several years after it is filed, which is typically the case in the qui tam context, where the complaint is filed under seal to allow the government to investigate the relator's claims. In the underlying qui tam suit against AmerisourceBergen, the Plaintiff alleged that the company conspired with providers to submit false Medicare claims relating to the anemia drug Aranesp. According to court records, the 2006 complaint was kept under seal for three years. AmerisourceBergen claimed it learned about the action in 2008. AmerisourceBergen notified ACE of the complaint, but, in 2010, ACE denied coverage under the 2009-10 policy. After the trial court's 2011 ruling in favor of ACE, AmerisourceBergen appealed. The company claimed that the prior-litigation exclusion did not apply because the Plaintiff "merely filed her complaint under seal in June 2006 but did not serve it on AmerisourceBergen until midway through the 2009-10 policy period," and AmerisourceBergen had no way of knowing that such a proceeding even existed. In evaluating AmerisourceBergen's argument that the exclusion only applies to the "service" rather than the "filing" of a complaint, the court analyzed the text of the exclusion, which excluded any claim:

alleging, based on, arising out of, or attributable to any prior or pending litigation, claims, demands, arbitration, administrative or regulatory proceeding or investigation filed or commenced on or before the earlier of the effective date of this policy or the effective date of any policy issued by [ACE] of which this policy is a continuous renewal or a replacement, or alleging or derived from the same or substantially the same fact, circumstance or situation underlying or alleged therein.

Based upon this language, the court concluded that AmerisourceBergen's lack of knowledge or awareness of the complaint's filing was irrelevant to whether or not the "prior or pending litigation" exclusion applied to preclude coverage. As the court stated,

we think it is clear that litigation is "filed" or "commenced" against an entity when it names that entity as a defendant, is filed with a court, and is docketed and given a case number. Nothing in the ordinary meaning of these terms requires service of original process or unsealing of the complaint in order for an action to be "filed" or "commenced."

The court therefore ruled that the sealed "filing" of the complaint (rather than the effectuation of service upon the insured) triggered the exclusion. Because the qui tam complaint, filed in 2006, predated the 2007 policy, of which the 2009 policy was a "continuous renewal or replacement," the insurer properly denied coverage.

Although this decision arguably leads to an unfair result, the court, employing a literal reading of policy, arguably rendered a reasonable construction of the "prior or pending litigation" exclusion. We note that the language contained therein is fairly representative of how many, if not most, "prior or pending litigation" exclusions are drafted under both E&O and D&O policies. Because most FCA complaints are filed years before they are unsealed, based upon the AmerisourceBergen reasoning, coverage would be excluded in nearly all cases, so long as the policy includes a "prior or pending litigation" exclusion. This decision therefore underscores why companies should pay close attention to their "prior or pending litigation" exclusion to make sure it only excludes those claims of which they have actual notice, which is a term that could be easily negotiated prior to the policy's inception or renewal.

The decision is also a reminder that all policies should be carefully reviewed for coverage under the False Claims Act, with particular attention to the definitions of "Claim" and "Loss" and any applicable exclusions. With litigation under the False Claims Act on the rise, it is wise for a company to consider getting a legal review of its existing coverage to identify any gaps and, to the extent possible, close those gaps. Whenever a policy is being renewed, or a new insurer is stepping in to take the place of a previous insurer, the "prior or pending litigation" exclusion can be one of the many policy provisions that a company can trip over, the same way AmerisourceBergen did here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Heidi A. Lawson
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