No Coverage Owed for Retaliation Claims Tied to Undisclosed Investigation

A federal appellate court on Friday reversed a $2.3 million award to a nursing home owner that sued its insurer, finding coverage for a whistleblower retaliation lawsuit was clearly excluded because the policyholder did not disclose that it was under investigation by the government.

A panel of the 6th Circuit Court of Appeals ruled that the US District Court in Cleveland erred when it ruled that SHH Holdings LLC did not fail to disclose relevant information to its insurer because two questions on the insurance application were ambiguous.

The panel said it didn’t matter that the specific questions asked on the application did not relate exactly to the coverage requested.

The opinion says “requiring broad disclosure makes sense in this context because the number and nature of matters recently brought against an applicant is relevant information for an insurance company assessing the potential underwriting risk, even if those matters do not tie directly to the pursued policy.”

SHH Holdings owns and operates nursing homes and receives reimbursement from Medicare. In November 2016, a whistleblower filed a False Claims Act complaint under seal alleging that SHH was providing unreasonable and unnecessary services to patients in order to claim the highest possible reimbursement.

SHH learned about the complaint in January 2017, when it received a Civil Investigation Demand from the US Justice Department. The company provided documents requested by the government and responded to interrogatories.

In April 2019, SHH applied for directors and officers and employee practices liability coverage from Allied World Specialty Insurance Co. The application for insurance contained two questions that are relevant to the case that went before the 6th Circuit.

The first question asked SHH to “provide full details of all inquiries, investigations, administrative charges, claims and lawsuits filed within the last three years against the company. SHH checked “none.

The second question asked “…whether any subsidiary, any executive or other entity proposed for coverage kn[ew] of any act, error or omission which could give rise to a claim, suit or action under any coverage part of the proposed policy.” SHH checked no.

The company purchased a claims-made policy that excluded coverage for any inquiry, administrative charge or lawsuit that existed at the time the application was filed.

The whistleblower complaint, known formally as qui tam action, was unsealed in August 2019. SHH learned for the first time that former employees had accused it of retaliating against them. A month later, the company asked Allied World to defend itself against the retaliation complaints, but not the underlying false claims action.

Allied World refused because the company had failed to disclose the Justice Department probe. SHH filed a lawsuit asking for a declaratory judgment that coverage was owed.

In the meantime, SHH negotiated a $2.2 million settlement agreement with the former employees. Separately, the company finalized a $10 million settlement with the government for the false claims it was alleged to have made.

In November 2020, the US District Court granted summary judgment to SHH on its breach-of-contract claim against Allied World, but dismissed the portion of SHH’s complaint that alleged the insurer had acted in bad faith. The judge awarded SHH $2,336,786.35, which covered the cost of the retaliation claim settlement minus a $200,000 deductible, interest and SHH’s legal costs.

Allied World appealed.

According to the panel’s opinion, the District Court sided with SHH because the judge found the policy questions to be ambiguous. The judge said if he accepted the insurer’s reasoning, SHH would have been required to disclose, for example, zoning violations or an executive’s child custody proceedings.

The 6th District panel, however, said disclosure requirements are not ambiguous simply because they are broad. Also, it is permissible for one party to impose a heavy burden on another party through a contract.

“Thus, the district court’s discussion of hypothetical disclosure obligations was not dispositive of whether Question 1 unambiguously encompassed the qui tam complaint, even if the district court was correct that the contract could not reasonably be read to cover those hypotheticals,” the opinion says.

The panel reversed the District Court’s ruling and remanded the case with direction to find in favor of Allied World.