A recent decision by a federal court in the Eastern District of New York illustrates how directors and officers (“D&O”) policies can provide valuable insurance coverage for defense costs and potential liabilities arising from False Claims Act (“FCA”) litigation. In Northern Metropolitan Foundation for Healthcare, Inc. v. RSUI Indemnity Company, Case No. 20-CV-2224 (EK) (JAM) (E.D.N.Y. Sept. 24, 2024), the insured—an owner and operator of adult healthcare centers in Brooklyn, New York—sought coverage under a D&O policy for defense costs for a relator’s qui tam action alleging that the insured defrauded the federal and New York state governments in submitting claims for reimbursement. The government chose not to intervene and the qui tam lawsuit was ultimately dismissed. The D&O policy at issue contained a Government Funding Defense Expense Coverage (“Government Funding”) provision excluding “the return of funds which were received from any federal, state, or local government agency” from the policy’s definition of “Loss,” and limiting coverage for “any Claim arising out of the return, or request to return, such funds.”
The insurer argued that the Government Funding provision barred coverage for the underlying qui tam action on the ground that the FCA causes of action included a “request to return. . . funds.” The district court disagreed, ruling that the ordinary meaning of “return”—to put original owner of property back in its prior position—did not apply to the underlying qui tam action because: (1) FCA damages are compensatory and punitive in nature; and (2) the relators who brought the action never possessed the money that they were seeking in their complaint, so the claim could not arise from a request to return funds. In reaching this conclusion, the district court held that its interpretation was the only reasonable interpretation of the language in question, but it went on to state that even if the Government Funding provision were ambiguous, it would not preclude coverage because any ambiguity must be construed in favor of the insured in accordance with basic insurance policy interpretation principles. Based on this analysis, the court confirmed that coverage for defense costs incurred in the underlying FCA qui tam action was not limited by the Government Funding provision.
On October 15, 2024, the insurer filed a notice of appeal to the Second Circuit. However, the district court’s decision appears to be in line with other well-reasoned decisions holding that FCA damages are compensatory in nature, and therefore not excluded under D&O policies. For example, the court’s reasoning was consistent with the Seventh Circuit’s recent detailed analysis of the insurability of FCA related losses in Astellas US Holding, Inc. v. Federal Insurance Company, No. 21-3075, 2023 WL 3221737 (7th Cir. May 3, 2023), where that court held that the remedies available under the FCA were compensatory in nature, even in situations where the government may label a portion of an underlying FCA settlement agreement as restitution.
This pro-policyholder decision in Northern Metropolitan comes at a time when the Department of Justice (“DOJ”) has ramped up FCA enforcement efforts against healthcare providers, which further underscores the importance for healthcare companies and other companies that may face FCA exposure to consider whether they have adequate insurance in place to mitigate potential FCA-related losses. Policies that may respond to FCA investigations and lawsuits may include D&O, Errors & Omissions (“E&O”), and Employment Practices Liability (“EPL”), among other lines of coverage. While some insurers may argue that FCA-related exposures are uninsurable as a matter of law, decisions like Astellas and Northern Metropolitan prove otherwise. Healthcare providers should work with experienced coverage counsel and their brokers to examine their policies before annual renewals to ensure they have the best coverage terms in place to protect themselves against the risk of expensive government investigations and FCA litigation.