(Article from Insurance Law Alert, May 2023)
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Holding
Reversing an Ohio district court decision, the Sixth Circuit ruled that statements made in an insurance application triggered an exclusion that barred coverage for all underlying claims. SHH Holdings, LLC v. Allied World Specialty Ins. Co., 2023 U.S. App. LEXIS 9570 (6th Cir. Apr. 21, 2023).
Background
In 2016, a qui tam action was filed under seal, alleging that SHH violated the False Claims Act by providing unnecessary services to patients for the purpose of claiming higher Medicare reimbursement. The complaint also alleged that SHH retaliated against employees for internally reporting the allegedly fraudulent billing practices.
In 2017, the Department of Justice issued a Civil Investigation Demand to SHH, informing it that it was the subject of a False Claims Act investigation regarding fraudulent billing practices and also requesting information about certain employee terminations, including those of the relators of the qui tam action.
In 2019, SHH submitted an insurance application to Allied. Question 1 asked SHH to “provide full details of all inquiries, investigations, administrative charges, claims, and lawsuits filed within the last three (3) years against [SHH], any Subsidiary, any Executive, or other entity proposed for any coverage for which [SHH] is applying.” SHH checked “none.” Question 2 asked whether “[SHH], any Subsidiary, any Executive, or other entity proposed for coverage knew of any act, error or omission which could give rise to a claim, suit or action under any coverage part of the proposed policy.” SHH checked “no.” Finally, the application included an “Application Exclusion,” which stated that anything within the scope of Questions 1 and 2 would be excluded from the proposed coverage. Allied ultimately issued a policy in effect from 2019-2020.
In 2019, the qui tam action was partially unsealed and SHH received a copy of the complaint. It sought coverage for the costs of defending the retaliation allegations. Allied denied coverage, citing Questions 1 and 2 and the Application Exclusion. In ensuing litigation, an Ohio district court granted SHH’s summary judgment motion. The Sixth Circuit reversed.
Decision
The Sixth Circuit’s decision turned on interpretation of Questions 1 and 2—and whether they called for disclosure of the Civil Investigation Demand. The district court had concluded that those Questions encompassed only “inquiries, investigations, administrative charges, claims and lawsuits” relevant to the liability coverage that the applicant was seeking—meaning “an inquiry or investigation that could implicate the eventual liability coverage.” The district court then reasoned that the Questions did not encompass the fraudulent billing claims because SHH could not and did not intend to seek coverage for them and “did not encompass the retaliation claims because SHH did not have notice of the qui tam complaint at the time of the application.”
Rejecting this reasoning, the Sixth Circuit ruled that the Questions were unambiguous and encompassed any inquiries for any investigations against SHH, not just inquires or investigations for which SHH could seek coverage under the policy at issue. The Sixth Circuit explained that the phrase “proposed for any coverage” applied to “any Subsidiary, any Executive or other entity”—and thus encompasses any inquiry or investigation targeting an insured entity, regardless of whether such inquiries would be subject to actual coverage. The court further held that it did not matter for the purposes of coverage whether SHH knew about the qui tam retaliation claim at the time of the application because the Application Exclusion required only that a claim fall within the scope of Questions 1 and 2 and exist at the time of the application.
Comments
A notable element of the Sixth Circuit’s decision was its refusal to find ambiguity in the Questions based on hypothetical fact patterns. The district court had reasoned that interpreting Question 1 to include any inquiry or investigation against an insured entity, even if unrelated to the applied-for policy, would create “strange results,” and would impose a duty to disclose “unrelated and irrelevant matters,” such as a local zoning citation or an executive’s child custody proceedings. Rejecting this reasoning, the Sixth Circuit stated: “we are not persuaded that Question 1’s scope is ambiguous simply because it sweeps broadly.” Further, the Sixth Circuit explained that “a contract can be unambiguous when applied to some facts but not others.”