OCTOBER 2013 BAD FAITH CASES: COVERAGE FOR QUI TAM ACTION DENIED UNDER “PRIOR OR PENDING LITIGATION” EXCLUSION; INSURED NEED NOT BE SERVED WITH COMPLAINT FOR EXCLUSION TO APPLY (Philadelphia Commerce Court)
Plaintiff brought suit against the insurer alleging the insurer denied plaintiff’s professional liability claim in bad faith. Plaintiff provides pharmaceutical manufacturers with drug distribution services, clinical education, marketing, and business resources for their clients.
On May 1, 2007, the insurer issued plaintiff a claims-made professional liability policy, which was renewed on the same date the following two years, to provide plaintiff with coverage for its business endeavors in the pharmaceutical industry.
In December of 2009, plaintiff was served with a qui tam action alleging it provided kickbacks to doctors for prescribing certain drugs sold by plaintiff at inflated prices, allowing plaintiff to recover illegitimate amounts from Medicare. The qui tam action was filed and docketed on June 5, 2006. After being provided notice of the claim, the insurer issued a reservation of rights letter.
On April 5, 2010, the insurer denied coverage due to lack of timely notification and exclusions for claims arising out of “prior or pending litigation,” “false, deceptive, or unfair business practices,” and an “inaccurate description of the price of goods.” Plaintiff then filed a bad faith suit against the insurer.
After establishing a claim had taken place during the policy period, triggering coverage, the court turned to the allegedly applicable exclusions. First, the court determined litigation only needed to be filed, not served, to be fall within the “prior or pending litigation” exclusion. Therefore, even though plaintiff wasn’t served with the qui tam action until 2009, the action was “pending” under the policy as of the date of filing in 2006.
The application of this exclusion was sufficient to deny coverage in and of itself; however, the court went on to find the exclusion for claims arising from or alleging “false, deceptive or unfair business practices or any violation of consumer protection laws” also applied because the action was brought under the False Claims Act, intended to penalize false or deceptive practices leading to Medicare fraud. The “inaccurate description of the price of goods” exclusion, however, did not apply.
Since the insurer properly denied coverage under the policy, plaintiff was unable to demonstrate the insurer did not have a reasonable basis for denying benefits under the insurance policy, the claim failed as a matter of law and the insurer was granted summary judgment.