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Office Depot wins one round in coverage fight with AIG

Posted On: May. 22, 2018 1:40 PM CST

Office Depot wins one round in coverage fight with AIG

(Corrected. An earlier version of this story misstated the extent of the appeals court ruling)

A federal appeals court has overturned a lower court ruling in favor of American International Group Inc. that California law precludes coverage in a $68.5 million whistleblower case.

The case, which involved Office Depot Inc.’s alleged overcharging of various California government entities, was remanded to the lower court to consider other defenses argued by AIG.

The whistleblower suit, which was originally filed in state court in March 2009 under the California False Claims Act, charged that Office Depot had violated the law by overcharging more than 1,000 government entities for office supplies under at least five independent factual theories, all of which involved covered “wrongful acts” under policies issued by AIG Specialty Insurance Co., a unit of New York-based American International Group Inc., according to the complaint filed in U.S. District Court in Pasadena, California, in Office Depot Inc. v. AIG Specialty Insurance Co., formerly known as American International Specialty Lines Insurance Co.

Nineteen of the California political subdivisions on whose behalf the whistleblower originally sued intervened in the lawsuit, which led to a settlement consisting of payment to the plaintiffs totaling $68.5 million plus $9 million in plaintiffs’ attorneys’ fees.

After AIG denied coverage, Boca Raton, Florida-based Office Depot filed suit against the insurer, charging breach of contract for failing to defend and indemnify the company.  

In June 2016, the District Court granted AIG summary judgment on the charges alleging breaches of AIG’s duty to defend and indemnify Office Depot, but refused to dismiss a good faith and fair dealing charge.

On appeal, a three-judge appeals court panel unanimously overturned the lower court’s ruling. 

The act “requires only ‘reckless(ness)’ regarding the truth or falsity of the information in the claim, and does not require ‘(p)roof of specific intent to defraud,’” said the ruling. 

Therefore, the California False Claims Act claims “do not necessarily involve the ‘willful conduct required for preclusion’ under the insurance code, said the ruling, in reversing the lower court, and remanding the case for further proceedings.

“We leave for the district court to consider in the first instance AIG’s alternative arguments based on the scope of coverage and exclusions in the insurance policy,” the ruling said.

A federal appeals court held last week that an AIG unit was obligated to provide only a total of $5 million in products/completed-operations coverage under its policy with a ski resort builder, not per project, in ruling in its favor in a coverage dispute with a Chubb Ltd. unit.