The United States District Court for the Northern District of Ohio, applying Ohio law, has held that coverage for a retaliation claim under a claims-made directors and officers, employment practices, and fiduciary liability insurance policy was not barred by the insured’s failure to disclose a prior False Claims Act investigation on the application. SHH Holdings v. Allied World Specialty Ins. Co., 2020 WL 7385384 (N.D. Ohio Dec. 16, 2020).

Two years before applying for the insurance policy, the insured received a Civil Investigative Demand from the Department of Justice (DOJ), which informed it of a pending False Claims Act (FCA) investigation for fraudulent Medicare billing. The insured settled the FCA investigation for $10 million. During the policy period, the FCA lawsuit was partially unsealed, revealing claims of employee retaliation. The insurer denied coverage for the retaliation claims based on the insured’s failure to disclose the investigation in the policy application. The insured defended the suit, settled the employee retaliation claims for $2.2 million, and coverage litigation followed.

The court held that Question 1 of the Application, requesting details of all investigations and lawsuits filed within the last three years, did not require disclosure of the DOJ investigation because it required only identification of investigations “proposed for any coverage” for which the applicant was applying. The court reasoned that, because the insured did not intend for coverage to apply to the FCA allegations, and was instead applying for employment practices liability insurance, it reasonably read Question 1 not to require disclosure of the FCA investigation.

Application Question 2 asked whether the insured knew of any act, error, or omission which could give rise to a claim under any coverage part of the proposed policy. The court again agreed with the insured that this did not require disclosure because the insured did not intend to seek FCA claims coverage, and the application was completed before the insured knew that employees had filed accompanying retaliation claims.

The court held that the corresponding policy application exclusion did not preclude coverage because the exclusion expressly incorporated Question 1 and 2’s requirements, neither of which required disclosure of the DOJ investigation.

The court rejected the insured’s claim of bad faith against the insurer, finding that the insurer’s declination of coverage, while incorrect, was not unreasonable.