HNRK Coverage Corner

On May 29, 2024, Judge John T. Dorsey of the United States Bankruptcy Court for the District of Delaware issued a decision in Insys Liquidation Trust v. XL Specialty Ins. Co., Adv. Proc. No. 23-50484 (JTD), granting an excess D&O insurer’s motion for summary judgment under the policy’s Prior and Pending Litigation Exclusion.  The wrinkle here is that the “prior litigation” was a qui tam complaint under the False Claims Act that had been filed under seal before the policy period but was never served.  Although the insured did not know—and could not have known—about the lawsuit at the time the policy was issued, the court concluded that the PPL Exclusion barred coverage for a subsequent lawsuit arising out of the same facts.   

The False Claims Act permits a private plaintiff (a “relator”) to commence an action on behalf of the United States by filing a qui tam complaint, alleging that the defendant defrauded the federal government.  The complaint is filed under seal, and not immediately served on the defendant, so only the relator and the government know of its existence.  The statue grants the Department of Justice 60 days to investigate the matter and decide whether to intervene.  In practice, however, that deadline is often extended—in some cases for months or even years.

In this case, a former sales representative for Insys (a pharmaceutical company) filed a sealed FCA qui tam lawsuit in 2012, alleging a scheme by directors and officers of Insys to market addictive opioid products.  The government declined to intervene, and the court ultimately dismissed the qui tam complaint without prejudice on July 10, 2013.  Insys did not learn about that lawsuit until after its dismissal, which occurred after the May 2, 2013 effective date of the D&O policy.  Later, a shareholder derivative suit was filed against the directors and officers of Insys based on substantially the same alleged conduct, and that claim was submitted to the company’s D&O insurers. 

XL (an excess insurer) denied coverage under the policy's PPL Exclusion, which provided:

[N]o coverage will be available under this Policy for claims based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any fact, circumstance, situation, transaction, event or wrongful act, underlying or alleged in any prior and/or pending litigation . . . which was brought prior to May 02, 2013.

Insys argued that it was at least ambiguous whether the qui tam lawsuit constituted a litigation “brought” before the policy’s May 2, 2013 effective date, as the complaint was filed under seal and never served—and the insured, therefore, had no knowledge of the lawsuit’s existence when the policy was issued.  Ambiguities in policy language are generally construed in favor of the insured, and this is particularly so when the provision at issue is a coverage exclusion.

Judge Dorsey disagreed and granted the insurer’s motion for summary judgment, explaining:

When used in the abstract, it is commonly understood that litigation is brought when a complaint is filed.  Black’s Law Dictionary defines “bring an action” as “institute legal proceedings,” and it is common knowledge that federal legal proceedings—such as a qui tam suit under the False Claims Act—are instituted when the complaint is filed.  Under Delaware law, insurance policies must be construed in a common sense manner, and words must be given their usual, ordinary meaning.  Accordingly, I find that under the PPL exclusion, litigation is “brought” at the point in time when the complaint is filed with the court.

By focusing on the meaning of the policy language “when used in the abstract,” the court gave short shrift to the unique procedural context of FCA qui tam complaints, which are filed under seal and remain hidden from the defendant for an extended period.  It’s one thing for an insurer to exclude claims that are known to all parties before the policy is issued, but it is quite an anomaly for a sealed filing that is never served on the insured to have the effect of eliminating coverage for a subsequent lawsuit.

As it turns out, there is not much precedent on this issue.  At least two decisions (one from the Eleventh Circuit and another from a Pennsylvania trial court) align with the outcome in Insys.  See HR Acquisition I Corp. v. Twin City Fire Ins. Co., 547 F.3d 1309 (11th Cir. 2008); AmerisourceBergen Corporation v. ACE Am. Ins. Co., 100 A.3d 283 (Pa. Super. Ct. 2014).  However, at least one court has ruled that, based on “the unique procedural stature of qui tam lawsuits,” a qui tam action is not a “pending” litigation for purposes of a PPL Exclusion until the insured is served with the complaint. See My Left Foot Children’s Therapy, LLC v. Certain Underwriters at Lloyd’s London, 207 F. Supp. 3d 1168, 1172 (D. Nev. 2016), rev’d on other grounds, 731 F. App’x 659 (9th Cir. 2018).

The takeaway here:  Policyholders concerned about exposure to FCA claims should carefully examine the PPL Exclusion in their D&O policies and should consider negotiating language that would deem a claim “brought” upon service of the complaint—at least in the context of sealed filings.