An appeals court has overturned an insurer’s successful dismissal of an insurance coverage lawsuit arising from the insurer’s refusal to defend a North Carolina assisted living operator in a False Claims Act lawsuit alleging more than $60 million in damages. The court held that that the insurer improperly denied coverage under the operator’s professional liability policy (covering “damages resulting from a claim arising out of a medical incident”) because the alleged improper billing had a causal connection to the operator’s failure to render medical professional services and, therefore, “arose out of” a covered medical incident.
Affinity Living Group was sued for allegedly submitting false Medicaid reimbursement claims for services for residents of Affinity’s adult-care homes that the claimant asserted were never provided. Affinity submitted an insurance claim under a professional liability policy issued by StarStone Specialty Insurance Company. StarStone denied the claim, arguing that the false-claims-act allegations did not fit within the policy’s coverage for “damages resulting from a claim arising out of a medical incident.” Affinity filed a coverage lawsuit against StarStone, seeking a declaratory judgment that the policy provided coverage and that StarStone breached the policy in wrongfully denying Affinity’s claim. The district court upheld the denial and dismissed the declaratory judgment and contact claims.
On appeal, the parties agreed that rendering or failing to render personal-care services qualifies as a “medical incident.” Affinity argued that the false-claims-act claims “arise out of a medical incident” because they seek damages for Medicaid reimbursement, and even though submitting reimbursement claims is not a “medical incident,” the claims nevertheless arise out of the alleged failure to render personal care services at issue in the false-claims-act litigation. The Fourth Circuit agreed with Affinity.
Surveying a number of North Carolina cases, the court concluded that the phrase “arising out of” must be interpreted differently depending on the context of how it is used in the policy. When used in a provision extending coverage, the term “arising out of” must be interpreted broadly to require only a “causal connection.” In contrast, when used in a provision excluding coverage, the phrase must be interpreted more narrowly to require proximate causation. Because the term in the Affinity policy “falls within a provision extending coverage,” the court reasoned, it must be interpreted broadly to require only a causal connection between the conduct defined in the policy and the injury for which coverage is sought.
In practice, a policyholder fails to satisfy this low burden only if the injury “was directly caused by some independent act or intervening cause wholly dissociated from, independent of, and remote from” the conduct defined in the policy. The “false billing” allegations at issue in the false-claims-act litigation, the court explained, do not “arise in a vacuum.” Rather, because the alleged failure to render professional services gave rise to the false-claims-act allegations about false Medicaid billing, the failure to render those services bears a causal relationship to the billing, even where the false billing itself is not a “medical incident.” Therefore, the court held that the false-claims-act lawsuit falls within the coverage provision in the policy, reversed the dismissal, and sent the case back to the district court.
The Affinity decision highlights two important issues. The first is that policyholders should pay close attention to the causation language in professional liability, directors and officers, and other policies to evaluate the scope of coverage for alleged misconduct that only relates to or arises from the covered acts or omissions listed in the policy. As demonstrated in the Affinity decision, depending on the specific causation trigger, an insurer may be obligated to provide coverage for claims involving acts that do not fall squarely within the conduct defined in the policy. Second, the case underscores the importance of evaluating the meaning of terms depending on context of how they are used in the policy, including whether the terms are used to extend coverage (in which case they should be interpreted broadly in favor of coverage) or to exclude coverage (in which case they should be interpreted narrowly). Both of these issues are heavily dependent on the specific policy language and applicable state law governing the dispute. The full case name is Affinity Living Group, LLC v. StarStone Specialty Insurance Co., et. al, No. 18-2376 (4th Cir. May 26, 2020).