A federal court in California has held that an investigation did not relate back to earlier lawsuits against the insured, nor was coverage barred by the policy’s prior or pending litigation exclusion, because the investigation was “shrouded in secrecy,” and it was therefore impossible to determine whether the investigation or allegations arose out of or were based upon the prior litigation. Millennium Labs., Inc. v. Allied World Ins. Co., 2015 WL 5772653 (S.D. Cal. Sept. 30, 2015). The court further held that the policy’s regulatory claim sublimit did not apply because the investigation involved allegations of other wrongful acts.

The insured medical diagnostics laboratory was served with several subpoenas by the U.S. Department of Justice (DOJ) regarding a wide variety of potential health care offenses, including allegations that the insured had violated HIPAA and had conspired with health care providers to submit false or fraudulent claims to federal health care programs for reimbursement. An attorney for the DOJ also sent a letter stating that the agency was conducting a joint criminal and civil investigation of the insured company and its officers. The insured submitted the subpoenas for coverage under its D&O policy. Before the inception of the policy, the insured had been named as a defendant in several qui tam and private lawsuits alleging that it had encouraged health care providers to submit false or fraudulent claims to health insurers and had provided unlawful kickbacks.

In this coverage action, the court first considered whether the DOJ investigation constituted a claim under the policy. The policy’s definition of claim included a formal civil or criminal investigation of any insured person commenced by the issuance of a subpoena. The court found that the DOJ investigation fell within this definition, even though the subpoenas were issued to the insured entity, because the DOJ’s letter explained that the investigation included the insured’s officers.

The insurer argued that there was no coverage for the DOJ investigation because it was “related” to the earlier competitor and qui tam actions, which were pending prior to the inception of the policy, and therefore was not a claim first made during the policy period. Although the court acknowledged that there might be similar allegations in the DOJ investigation and the earlier lawsuits, it found no evidence that the investigation arose out of, resulted from, or was in consequence of the same or related facts, circumstances, situations, transactions or events as the lawsuits, as required by the policy’s “related claims” definition.

Likewise, the court found that the policy’s prior or pending litigation exclusion, which excluded coverage for any claim alleging or derived from the same or essentially the same facts, or the same or related wrongful acts, as alleged in litigation pending prior to the policy period, did not bar coverage. The court concluded there was no way to determine whether there was substantial overlap between the earlier lawsuits and the DOJ investigation sufficient to trigger the exclusion because the investigation was “shrouded in secrecy” and included broad, non-specific allegations. Nor was the fact that the DOJ had requested copies of documents filed in the prior lawsuits dispositive.

Finally, the insurer argued that the policy’s $100,000 sublimit for regulatory claims should apply. The court recognized that an argument could be made that the DOJ subpoenas were a claim for regulatory wrongful acts, as defined by the policy, including the insured’s alleged fraudulent activities in connection with federal health care programs. However, the court found that the DOJ’s letter expanded the claim to include more, including breaches of duty, misstatements or misleading statements, and violations of HIPAA, which fell within the policy’s company claims coverage or HIPAA claims coverage. Accordingly, the court held that the insurer was liable for the policy’s full $5 million limit of liability.