Markel unit may recover settlement from drug treatment firm

A Markel Corp. unit is entitled to recover the $260,000 settlement it paid on behalf of a Colorado addiction treatment center and other expenses because of the center’s fraud, said a federal appeals court Wednesday, in affirming a lower court ruling.

Aminokit Laboratories Inc., a Lone Tree, Colorado-based addiction treatment center, procured an insurance policy from Markel Corp. unit Evanston Insurance Co. that made several material misrepresentations and omissions, according to the ruling by the 10th U.S. Circuit Court of Appeals in Denver in Evanston Insurance Co. v. Aminokit Laboratories Inc.

For example, said the ruling, it failed to disclose it maintained overnight beds for its patients and claimed instead it operated its business solely between 10 a.m. and 5 p.m.

In July 2015, a former patient sued the company and its officials alleging violations of the Racketeer Influenced and Corrupt Organization Act, conspiracy claims and state law.

Evanston eventually decided to provide Aminokit with a defense subject to a reservation of rights, according to the ruling. After a mediation session resulted in a proposed $260,000 settlement in the former patient’s lawsuit, the insurer, which was threatened with a bad faith claim by Aminokit’s lawyer, also agreed to fund the settlement, while reserving the right to seek full reimbursement from Aminokit, according to the ruling.

Evanston then filed litigation over the issue in U.S. District Court in Denver, which resulted in a default judgment against Aminokit for $427,280, reflecting $286,407 for the settlement, $63,304 for defense costs and $77,569 for prejudgment interest.

The district court’s award was unanimously affirmed by a three-judge appeals court panel. All agree Evanston would not have issued the policy had Aminokit revealed the “true facts” of its operation, and the court agrees with the insurer it would  been “economically unreasonable” for it to refuse to pay the settlement because that would have placed it at risk of a bad faith lawsuit, said the panel.

“Given these considerations, we conclude that the settlement was a ‘natural and proximate consequence’ of Aminokit’s fraud,” said the opinion, in citing an earlier ruling and affirming the lower court’s decision.

Attorneys in the case had no comment or could not be reached.

In October, a federal district court refused to reconsider its ruling that Evanston had a duty to defend a telecommunications company and one of its officers in connection with a cell tower worker’s death.