Claims Arising from Undisclosed Circumstances Barred by Exclusion in Application
The United States Court of Appeals for the Sixth Circuit, applying Ohio law, has held that a warranty exclusion barred coverage for a claim arising from circumstances that were not disclosed in an insured’s application for coverage. SHH Holdings, LLC v. Allied World Specialty Ins. Co., 65 F.4th 830 (6th Cir. Apr. 21, 2023).
In 2016, a False Claims Act qui tam action was filed under seal against an insured nursing home owner alleging that the insured provided unreasonable and unnecessary services to patients to claim extra Medicare reimbursement. The qui tam complaint also included a count alleging retaliation by the nursing home owner against employees who reported the fraudulent billing practices. The U.S. Department of Justice (DOJ) issued a Civil Investigative Demand in January 2017 requesting documents and notifying the insured that it was the subject of a pending False Claims Act investigation for fraudulent claims submission.
In 2019, the insured purchased a claims-made insurance policy. In applying for coverage, the insured represented that no insured “kn[e]w of any act, error or omission which could give rise to a claim, suit or action under any coverage part of the proposed policy.” The insured also declined a question asking the applicant to “provide full details of all inquiries, investigations, administrative charges, claims, and lawsuits filed within the last three years against [the applicant], any Subsidiary, any Executive or other entity proposed for any coverage for which [the applicant] is applying.” The application, which was incorporated into the policy, provided that any claim arising from any inquiry, investigation, administrative charge, claim, or lawsuit that should have been disclosed was excluded from the proposed coverage.
After the qui tam action was partially unsealed, the insured noticed the suit to its insurer, which denied coverage. The insured filed a coverage action, and the district court ruled in the insured’s favor after concluding that the application questions only encompassed “inquiries, investigations, administrative charges, claims and lawsuits” that relate to the liability coverage that the applicant is seeking. The court reasoned that because the insured could not and did not intend to seek coverage for the qui tam action at the time it applied for insurance, the qui tam action did not need to be disclosed.
In reversing that decision, the Sixth Circuit ruled that the plain language of the application questions required the disclosure of any “administrative charges, claims, and lawsuits” even if unrelated to the applied-for policy, which included the Civil Investigative Demand and the qui tam action. The plain language of application also required the insured to disclose any circumstances that could result in a claim, which required the disclosure of information about the termination of the employees who went on to file the qui tam action. For both of those reasons, the court ruled in favor of the insurer and held that the exclusionary wording contained in the application barred coverage for the loss.