Sixth Circuit: No Coverage for Defense Costs Resulting from Qui Tam Action
The United States Court of Appeals for the Sixth Circuit, applying Kentucky law, has held that a D&O insurer did not need to cover its insured’s significant legal fees that stemmed from a whistleblower lawsuit and related subpoena. Springstone, Inc. v. Hiscox Ins. Co., 2021 WL 4240779 (6th Cir. Sept. 17, 2021).
In 2016, the insured, a behavioral care provider, was sued by a whistleblower for alleged violations of the False Claims Act. A year after suit was filed (under seal), the company received a subpoena from a governmental entity as part of its investigation of the whistleblower complaint.
A few months later, the company informed its D&O insurer of the subpoena and sought coverage under that policy. The insurer denied coverage, advising that the subpoena did not constitute a “Claim” and that it did not allege a “Wrongful Act.”
Later, in 2019, the litigation was dismissed, and the complaint was unsealed, at which point the company notified its insurer of the suit. The insurer denied coverage a second time because the suit was filed before the policy incepted in 2017.
In the ensuing coverage action, the company demanded that the insurer cover its defense costs in connection with both the action and the related subpoena. The trial court determined coverage was unavailable, and the company appealed.
The Sixth Circuit affirmed the trial court’s ruling. It first addressed the company’s argument that the lawsuit constituted a Claim first made during the policy period. It held that coverage did not apply because the whistleblower complaint was filed six months before the policy incepted. In doing so, the court rejected the company’s argument that the Claim was not “first made” until the suit became unsealed, finding that this argument defied the plain meaning of the policy.
The court then ruled that coverage did not extend to the costs incurred in connection with responding to the subpoena. It affirmed the lower court’s ruling that the subpoena was not a “Claim,” and held that even if it were, there was no coverage afforded under the Policy due to an exclusion that precluded coverage for “Loss in connection with any Claim . . . seeking fines or penalties or non-monetary relief against the Company.” The court pointed out that the definition of “Loss” included defense costs.
Finally, the court also foreclosed the company’s attempt to the shoehorn the subpoena within coverage as a “civil, criminal, administrative or regulatory investigation of an Individual Insured” rather than a Claim for non-monetary relief. The court concluded that argument was misplaced because the subpoena identified the company itself, rather than an individual employee or executive, which was required to trigger coverage.