Three Separate Policy Exclusions and Wrongful Acts Outside the Policy Period Bar Coverage for California False Claims Act Lawsuit

The United States District Court for the Central District of California, applying California law, has held that there is no coverage for a False Claims Act settlement where the insured company’s alleged wrongful acts took place outside the policy period and were independently barred from coverage by a contract exclusion, prior acts exclusion and regulatory exclusion. Office Depot Inc. v. AIG Specialty Insurance Co. No. 2:15-cv-02416 (C.D. Cal. June 21, 2019).

In 2009, a former employee filed a whistleblower suit alleging violations of the California False Claims Act (CFCA). The lawsuit alleged overbilling between 2001 and 2011 under two contracts the company had with state and local public entities. The company ultimately settled the lawsuit for $77.5 million.

The company tendered the lawsuit to its insurer, which denied coverage on multiple grounds.  After the company sued its insurer, the district court initially held that California Insurance Code § 533 precluded coverage for the settlement. The Ninth Circuit reversed and remanded for consideration of the insurer’s other coverage defenses.

On remand, the district court first held that the lawsuit did not fall within the policies’ insuring agreement, which provided coverage for claims for wrongful acts that “first occur” during the policy period. The court rejected the company’s contention that coverage should attach if “some” of the wrongful acts first occurred during the policy period.  The court also disagreed that the “first occurred” requirement was satisfied based on a permissive duty-to-defend standard, where a defense obligation would exist as long as liability could “potentially” be premised on a wrongful act that first occurred during the policy period.

The court also held that three separate exclusions barred coverage under the policies. First, the policies contained a contract exclusion for claims “arising out of or resulting, directly or indirectly, from any liability or obligation under any contract or agreement or out of any breach of contract.” Because the core allegation in the lawsuit was that the company overcharged on government contracts, none of the lawsuit’s claims could have been raised absent the underlying contracts.  The court further held that the broad preamble allowed for the exclusion of claims not strictly contractual, including the CFCA and fraud claims against the insured.

Second, the prior acts exclusion barred coverage for claims “alleging, arising out of or resulting, directly or indirectly, from any wrongful act, related wrongful acts or series of continuous or repeated wrongful acts where the first such wrongful act first occurred prior to the inception of or subsequent to the termination of the policy period.” The court found that the evidence, including the company’s own characterization of the lawsuit, made clear that all the company’s wrongful acts over the ten-year contract period were related and thus barred from coverage.

Third, the policies barred coverage for any claim against the company that was “brought by or on behalf of the Federal Trade Commission (FTC), Department of Health and Human Services (HHS), Office of Civil Rights (OCR), Federal Communications Commission (FCC) or any other federal, state or local government agency, or foreign government agency.” The policy did not define “state or local government agency.”  However, the court looked to the statutory qui tam provision in the California Government Code, which provides that a qui tam plaintiff may bring his action either for the State of California or for a “political subdivision.” The court further noted that the term “political subdivision” is expressly listed in the California Government Code’s definition of “local government agency.”  Thus, the court agreed with the insurer that, by definition, a qui tam lawsuit under the CFCA was necessarily brought by or on behalf of a state government agency.


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