A federal appeals court has overturned a lower court ruling and held that an adult care home operator is entitled to coverage in connection with a False Claims Act lawsuit.

In 2016, a plaintiff filed a False Claims Act lawsuit against Hickory, North Carolina-based Affinity Living Group LLC, according to Tuesday’s ruling by the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, in Affinity Living Group, LLC; Charles E. Trefzger, Jr. v. Starstone Specialty Insurance Co. et al. A False Claims Act lawsuit is one in which a private party brings an action on the government’s behalf and can receive a share of the recovery if successful.

Affinity sought coverage for the litigation under a policy issued by Chicago-based StarStone, which was previously known as Torus Specialty Insurance Group Co

StarStone denied coverage, and Affinity filed suit in U.S. District Court in Greensboro, North Carolina, which ruled in the insurer’s favor.

The ruling was overturned by a unanimous three-judge appeals court panel. StarStone’s policy covers “damages resulting from a claim arising out of a medical incident,” the ruling said. 

“But the false-claims-act complaint seeks damages for submitting false Medicaid reimbursement claims for resident services Affinity never provided,” and StarStone “rightly argues that billing Medicaid for reimbursement is not in itself a ‘medical incident,’” the ruling said.

However, the term “’arising out of’ falls within a provision extending coverage and so must be interpreted broadly to require only some ‘causal connection’ between the conduct defined in the policy and the injury for which coverage is sought,” the ruling said.

 “So while the alleged false billing was not itself a ‘medical professional service,’ the failure to ‘render medical professional services’ bears a causal relationship to the billing. … Thus, under North Carolina’s caselaw, the false-claims-act action falls within the coverage provision in the StarStone Insurance policy,” the ruling said, in overturning the lower court decision and remanding the case for further proceedings.

The decision was 2-1, with the dissenting opinion focusing on whether the appeals court had jurisdiction to hear the case.

Affinity attorney Carl A. Salisbury, with Bramnick, Rodriguez, Grabas, Arnold & Mangan LLC  in Scotch Plain, New Jersey, said in a statement, “The majority was carefully faithful to the rules regarding the interpretation of insurance policies under North Carolina law, and it correctly analyzed the language of the StarStone policy to find that the fraudulent billing allegations in the underlying complaint were causally related to the allegation that there was a failure to provide covered medical services. 

“While this appeal was pending, the underlying False Claims Act action was dismissed with prejudice, finding that Affinity did not violate the Act. Therefore, the remaining issue in the coverage case is whether StarStone must reimburse Affinity for the costs of defending the underlying False Claims Act action. The 4th Circuit’s decision has resolved that issue in favor of Affinity.”

StarStone’s attorney did not respond to a request for comment.