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Allied World not obligated to reimburse defense costs for potential claims

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New York-based Allied World Assurance Co. is not obligated to contemporaneously reimburse a laboratory’s defense costs for potentially covered directors & officers liability insurance claims, says a federal appeals court, in affirming a lower court ruling.

Wednesday’s ruling by the 9th U.S. Circuit Court of Appeals in San Francisco in Millennium Laboratories Inc. v. Allied World Assurance Co. (U.S.) Inc. relates to a settlement announced by the U.S. Department of Justice in 2015 that said San Diego-based Millennium Laboratories, which has since changed its name to Millennium Health L.L.C., agreed to pay $256 million to resolve alleged violations of the False Claims Act for billing Medicare, Medicaid and other federal health care programs for unnecessary medical laboratory testing business to the company.

According to a previous ruling in the case, in 2012, when Millennium bought the D&O policy at issue in the case, Millennium, which was facing lawsuits by private competitors and several whistleblowers, “understandably wanted insurance that would pay for any such lawsuits filed in the future," while Allied “wanted to make sure it was not covering the proverbial burning building.”

The latest ruling in the case by the 9th Circuit, which affirms a ruling by the U.S. District Court in Pasadena, says the policy “was an indemnity-only policy... and therefore did not require the contemporaneous advancement of Millennium’s defense costs.”

The ruling states “the language of the policy’s reimbursement provision confirms this: it required Allied World, at Millennium’s request, to ‘reimburse’ defense costs. If, as Millennium contends, the policy were a liability-type policy, then this provision would be surplusage, as the policy’s coverage provisions would already have obligated Allied World to pay Millennium’s defense costs as soon as they were incurred,” said the ruling.

“Allied World’s duty to reimburse, moreover, applied only to claims actually covered by the policy and did not extend to claims merely potentially covered,” said the ruling.

The policy “expressly disclaimed any duty to defend and instead provided the coverage of defense cost only as an ingredient of covered losses,” said the ruling, in affirming the lower court’s ruling.