Run-Off Exclusion Precludes Coverage for OIG Subpoena

The United States District Court for the Eastern District of Texas, applying Texas law, has held that a government-issued subpoena constituted a “Claim” under a directors and officers liability policy, but also determined that the policy’s “run-off exclusion” barred coverage.  Ocean’s Healthcare, L.L.C. v. Illinois Union Ins. Co., 2019 WL 1437955 (E.D. Tex. March 30, 2019).

In August 2015, the Department of Health and Human Services Office of the Inspector General (OIG) issued a subpoena to an insured behavioral health provider pursuant to its investigation into possible False Claims Act (FCA) violations committed by the provider.  The OIG subpoena demanded certain documents that were dated, created, revised, or in effect January 1, 2008 through August 27, 2015.  The provider reported the OIG subpoena to its insurer, which concluded that the subpoena did not constitute a covered “Claim.”  The provider later filed suit against the insurer for denying coverage of the OIG subpoena.

In the ensuing coverage action, the insurer argued that the OIG subpoena was not a Claim for a Wrongful Act under the policy.  The insurer asserted that a demand for document production is not a form of non-monetary relief.  The court disagreed, relying on Agilis Benefit Services, LLC v. Travelers Casualty & Surety Co. of America, 2010 WL 11595321 (E.D. Tex. Feb. 24, 2010), in which the court held that “the term ‘relief’ is ‘broad enough to include a demand for “something due,” including a demand to produce documents or appear to testify.’”  The insurer also asserted that the OIG subpoena did not identify a Wrongful Act, but rather “merely sought the production of documents in connection with an investigation into unspecified FCA violations.”  The court again disagreed, holding that the OIG subpoena alleged a Wrongful Act because, like the grand jury subpoena in Agilis, the OIG subpoena sufficiently alleged violations of a criminal statute.

In deciding to consider the allegations of the FCA complaint for purposes of application of the run-off exclusion, the court noted the necessity of resolving whether the policy imposed a duty to defend.  The insured argued that it did, and thus that Texas law imposed the “eight-corners rule,” meaning the FCA complaint was extrinsic evidence not to be considered when evaluating coverage for defense costs.  The insurer countered that the plain language of the policy imposed only a duty to advance.  The court agreed with the insurer and determined the eight-corners rule to be inapplicable.

Finally, because the court determined it could properly consider the allegations of the FCA complaint, it turned to the insurer’s argument that the policy’s run-off exclusion barred coverage for the Claim.  That exclusion provided that the insurer would not be liable for any Claim alleging a Wrongful Act “taking place, in whole or in part, subsequent to the Run-Off Date” of December 27, 2012.  The insurer asserted that the OIG subpoena’s request for documents dated after December 27, 2012 and certain allegations in the FCA complaint established that the FCA violations were alleged to have occurred after the Run-Off Date.  The court agreed, holding that the “Run-Off Exclusion, drafted in the broadest manner, precludes coverage of Wrongful Acts . . . that occur, in whole or in part, after December 27, 2012.”  As a result, the court ruled that coverage was precluded.

Wiley Executive Summary

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