The United States Circuit Court of Appeals for the Ninth Circuit, applying California law, has held that an insurer owed no duty to reimburse the insured’s costs of responding to a governmental investigation.  Millennium Labs., Inc. v. Allied World Assurance Co., Inc., 2018 WL 1179601 (9th Cir. Mar. 7, 2018).  While the court held that the investigation constituted seven “claims,” it found that each such “claim” either fell within the policy’s specific litigation or pending-or-prior litigation exclusions, or was first made after the policy incepted.

Whistleblowers filed qui tam lawsuits against the insured for unlawfully encouraging healthcare providers to submit false and/or fraudulent claims to health insurers and for providing unlawful kickbacks to those healthcare providers.  The United States Department of Justice (DOJ) then commenced an investigation of the company.  The insured settled with the DOJ and sought coverage under its D&O insurance policy for its defense costs.  The insurer denied coverage because the DOJ investigation was related to the earlier qui tam lawsuits listed in the policy’s specific litigation exclusion and/or subject to the pending-or-prior litigation exclusion.  The district court granted summary judgment to the insurer.

On appeal, the Ninth Circuit affirmed.  As an initial matter, the court rejected the insured’s argument that the insurer had an obligation to contemporaneously advance all of the insured’s defense costs.  The insurer did not have a duty to defend, only a duty to reimburse defense costs that were actually related to the defense of covered claims.  The court then determined that the DOJ investigation did not constitute a single “Claim” under the insurance policy, opining that the policy’s definition of “Claim” was primarily concerned with the “temporal certainty” of the “Claim,” and not its “scope.”  As such, the court viewed the DOJ investigation as seven separate claims, one for each of the seven alleged “wrongful acts, errors, or omissions” by the insured that the DOJ investigated.

The court found that five of the “claims” investigated by the DOJ were related to earlier lawsuits that were excluded by the policy’s specific litigation or pending-or-prior litigation exclusions.  Therefore, any defense costs arising from the investigation of these five alleged violations were excluded from coverage.  Because the insured failed to show that the DOJ had investigated the remaining two “claims” before the policy period expired, it did not carry its burden to establish coverage within the policy’s insuring agreement.