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A health care company is not entitled to coverage for retaliation claims under its Allied World Specialty Insurance Co. policy due to an exclusion, even though it was unaware of the claims when it obtained the policy, a federal appeals court ruled Friday in overturning a lower court ruling.
In November 2016, a False Claims Act whistleblower action was filed under seal in Virginia against Beachwood, Ohio-based SHH Holdings LLC, its subsidiaries and several nursing facilities it owned or with which it contracted, according to the ruling by the 6th U.S. Circuit Court of Appeals in Cincinnati in SHH Holdings LLC v. Allied World Specialty Insurance Co. Charges in the complaint included retaliation.
In January 2017, SHH received a civil investigation demand for various documents and a response to interrogatories from the U.S. Department of Justice, informing it that it was the subject of a pending FCA investigation for allegedly fraudulent claims-submission practices.
The company did not learn at the time, however, about the retaliation allegations.
Almost two years later, in April 2019, SHH submitted an insurance application to Allied World seeking directors and officers liability, employment practices liability and fiduciary liability coverages.
In answer to a question in the “application exclusion” section of its application whether it knew of any act, error or omissions that could give rise to a claim, it replied “No,” and it was issued coverage.
The company learned about the retaliation allegations in August 2019. SHH notified Allied World of the whistleblower action and sought coverage, which the insurer denied.
The whistleblower action was settled with the whistleblowers for $2.2 million in March 2002, while SHH reached a $10 million settlement with the government for the claims-submissions violations in April 2020.
In the ensuing coverage litigation, the U.S. District Court in Cleveland concluded the policy did not exclude the retaliation claims from coverage and awarded the company $2.3 million.
On appeal, a three-judge appeals court panel, overturned the lower court’s ruling.
“SHH knew that it took adverse employment actions against the relators, and the (DOJ’s Civil Investigation Demand) requested information about recent terminations of SHH employees, including the relators.
“These facts resulted in a claim under the policy, suggesting they were serious enough to warrant disclosure,” the ruling said, in reversing the district court’s grant of summary judgment on the breach of contract and declaratory claim and its attorneys fees award to SHH, and remanding the case to the district court to enter judgment in Allied World’s favor.
Attorneys in the case did not respond to requests for comment.