Fourth Circuit: FCA Suit Alleging False Medicaid Reimbursement Claims “Arises out of a Medical Incident” under North Carolina Law

Applying North Carolina law, the United States Court of Appeals for the Fourth Circuit has held that a False Claims Act (“FCA”) suit against an insured for allegedly submitting false Medicaid reimbursement claims fell within an errors and omissions policy’s coverage grant for “damages resulting from a claim arising out of a medical incident.” Affinity Living Grp., LLC v. StarStone Specialty Ins. Co., 2020 WL 2630845 (4th Cir. May 26, 2020).

The insured adult care company was sued in an FCA action for allegedly submitting false Medicaid reimbursement claims for personal-care services that the company never provided. The company’s insurer denied coverage for the FCA suit, and the company sued. The district court held that the policy did not provide coverage for the FCA suit.

In the ensuing appeal, the insured argued that the FCA suit was covered under the policy’s insuring agreement for “damages resulting from a claim arising out of a medical incident” because “medical incident” included failing to render personal-care services. The insurer, however, argued that the FCA suit was not covered because it arose out of the insured’s alleged false billing for personal-care services, and billing itself does not constitute a “medical incident.”

The appellate court agreed with the insured that the FCA suit arose out of a medical incident under North Carolina law. The appellate court held that when “arising out of” appears in a policy provision extending coverage, it must be interpreted broadly to require only some “causal connection” between the conduct defined in the policy and the injury for which coverage is sought. It further explained that there is no connection if the injury “was directly caused by some independent act or intervening cause wholly disassociated from, independent of, and remote from” the conduct defined in the policy.

The court held that the insured’s alleged false billing for personal-care services was not “wholly disassociated from” the personal-care services themselves because “but for the failure to provide the services, no claim for damages exists.” In other words, while the alleged false billing was not a “medical professional service,” the failure to “render medical professional services” had a causal relationship to the billing. The court accordingly determined that the FCA suit was a covered “claim arising out of a medical incident.”