The availability of insurance in connection with False Claims Act (FCA) and qui tam investigations and suits is a critical consideration for government contractors in nearly every industry, including the defense, construction, information technology, energy and health-care sectors. The cost to defend the company (and in some instances, its directors and officers) against FCA-related actions can be staggering. During the fouryear period from January 2009 through the end of 2012, the Department of Justice’s recoveries under the FCA exceeded $9.5 billion. A recent federal district court decision confirms the availability of coverage for actions alleging violations of the FCA and represents a significant victory for policyholders.
In Carolina Casualty Insurance Co. v. Omeros Corp., the U.S. District Court for the Western District of Washington ruled in favor of policyholder Omeros Corp. (Omeros) regarding insurance coverage under the company’s Directors & Officers (D&O) coverage and Employment Practices Liability (EPL) coverage in connection with an employee’s allegations that the company had violated the False Claims Act (FCA).1
Background
In 2009, Omeros’ former chief financial officer, Richard Klein, filed suit against the company. Klein alleged that he was wrongfully terminated after internally reporting various financial irregularities, including false reports to the National Institutes of Health (NIH) concerning a federal grant that NIH supervised. Klein had reported his concerns to Omeros’ audit committee, who retained outside counsel to investigate the allegations. Klein was subsequently terminated. In his complaint, Klein claims that his termination constituted a retaliatory act in violation of the anti-retaliation provisions of the FCA.2 In 2010, Klein amended his suit to add an additional qui tam claim in connection with the alleged violations of the FCA.
Omeros submitted the original retaliation claim and the subsequent qui tam claim to its insurer, Carolina Casualty, who had issued both D&O and EPL coverage to Omeros on a claims-made basis. Carolina Casualty initially agreed to defend Omeros on both claims subject to a reservation of rights. The defense costs incurred in connection with the retaliation claim soon exhausted the $1M limit of liability in the EPL policy, leaving only the D&O coverage to potentially respond to thequi tam claim. Rather than continue to defend and indemnify the qui tam claim under the D&O policy, Carolina Casualty filed a declaratory judgment action against Omeros and sought a summary judgment ruling that the D&O coverage did not apply to the qui tam claim.
Significantly, Carolina Casualty did not contend that the qui tam claim fell outside the scope of the D&O coverage on the merits. Instead, it raised a late notice defense. The parties did not dispute that while the original retaliation claim was noticed during the policy period, the subsequent qui tam claim was not noticed until after the expiration of the policy period. Omeros argued that the later qui tam claim nonetheless fell within the coverage period pursuant to the policy’s “relation back” clause, which provided that “[a]ll Claims based upon or arising out of the same Wrongful Act or any Related Wrongful Acts . . . shall be considered a single Claim. Each Claim shall be deemed to be first made . . . when the earliest Claim arising out of such Wrongful Act or Related Wrongful Acts is first made."3 The policy also defined “Related Wrongful Acts” to include acts “which are logically or causally connected by reason of any common fact, circumstance, situation, transaction, casualty, event, or decision."4 According to Carolina Casualty, the two claims did not constitute a related, single claim first made at the time of the original notice. Even if they did, however, Carolina Casualty argued in the alternative that an Employment Relationship Exclusion nonetheless applied to the anti-retaliation claim and could be imputed to the qui tamclaim by virtue of their treatment as one claim.5
The U.S. District Court’s Decision
The U.S. District Court for the Western District of Washington rejected each of Carolina Casualty’s arguments and denied its motion for summary judgment. The court found that the anti-retaliation claim and the qui tam claim arose from “Related Wrongful Acts,” to constitute a single claim. According to the Court, “Omeros’s alleged false reporting is a common event that logically connects the anti-retaliation and qui tam claims."6 Moreover, the court declined to accept Carolina Casualty’s attempts to distinguish the two claims, including an argument that the retaliation claim sought recovery for wrongs done to the former employee, Klein, while the qui tam claim addressed wrongs done to the United States. Looking to the plain language of the policy, the court noted that “the policy’s test for a related wrongful act is not whether there are differences between the acts, but whether there is any common fact, circumstance, situation, event or decision that logically connects the acts."7 The Court then applied the policy’s “relation back” clause and held that the qui tam claim would be considered first reported within the policy period at the time Omeros gave notice of the original anti-retaliation claim.8
The Court also rejected Carolina Casualty’s alternative argument to exclude coverage for the qui tam claim based on the Employment Relationship Exclusion. It held that the retaliation and qui tam claims should be treated as a single claim only in applying the notice provisions in the policy – not the exclusions.9 The court first determined that the policy language addressing the “relatedness” and “relation back” of claims resided in sections devoted exclusively to the provision of notice. Indeed, notice provisions that determine a datecertain for related claims made at different times are logical in claims-made coverage, which is intended to bring certainty to policyholders and insurers in the reporting of claims. Nothing in those sections of the Carolina Casualty policy, however, suggested their application to the exclusions found elsewhere in the policy. At best an ambiguity existed.10 In line with standard principles of policy construction, the court acknowledged that it must adopt any reasonable interpretation of the ambiguous provision that favors the policyholder, Omeros.11 On that basis the court concluded that the “relatedness” and “relation back” provisions join claims only for notice purposes, but not in the application of the policy’s exclusions.12 “[I]t is reasonable to construe exclusions that have nothing to do with the claims-made nature of the policy to apply individually to separate claims, even if the separate claims are considered a single claim for purposes of determining when they were made."13 By contrast, the court deemed Carolina Casualty’s interpretation unreasonable in that it would deny coverage to covered claims merely because they were accompanied by excluded claims.14 Insurer often seek to deny coverage for an entire group of claims merely because one claim may be excluded. Thus, this ruling will benefit policyholders in future, similar actions.