Fees Incurred as Consequence of Joint Venture Agreement Not Covered; Joint Venture Not Named Insured
The insured and its subsidiaries, as well as several other hospitals, had entered into a joint venture agreement for the delivery of health care services. The agreement provided for the sharing of governance structure, clinical planning strategies, and financial risks; however, the joint venture was not itself a separate legal entity.
The claim arose when the joint venture was served with investigative subpoenas and interrogatories by state and federal agencies in connection with investigations into whether the activities of the joint venture and member hospitals had violated state and federal antitrust statutes.
The insured incurred substantial fees in responding to the subpoenas, and sought coverage under a not-for-profit insurance policy issued to it and its subsidiaries, contending that the subpoena and interrogatories were “claims” within the meaning of the policy. The policy provided coverage for “claims” against an “insured” for “wrongful acts.” A “claim” was defined as “a formal administrative or regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document.” A “wrongful act” was defined to a violation of the Sherman Antitrust Act or similar federal or state law. The carrier had denied coverage for the fees.
The court never reached the issue whether the investigative subpoenas constituted “claims” under the policy, concluding instead that there was no coverage because the joint venture was not itself a named insured on the policy. The court reasoned that because the joint venture was the designated recipient of the subpoena, and was the target of the investigation, the attorney’s fees and costs were incurred by the insured indirectly and “’solely by virtue of an independently imposed contractual obligation contained’ in the joint venture agreement to pay a share of the fees proportionate to its ownership interest.”
Can the court’s holding be reconciled with its findings? The court found that the subpoena sought material relevant to the activities of not only the joint venture, but the joint activities of the hospitals within the joint venture, including the inured. Moreover, the court found that the interrogatories defined joint venture broadly to include the insured. Finally, the court observed that the joint venture was not a separate legal entity.
It appears from these findings that the insured was as much a target of the investigation as the joint venture, and that the insured’s potential liability for violations of antitrust statutes was at least co-extensive with that of the venture. Therefore, the attorney’s fees and costs incurred by the insured in responding to the subpoena would have directly benefited the insured, not just the joint venture. Referring to the insuring agreement, these findings support the conclusion that a “claim” was made against the “insured” for “wrongful acts,” for which coverage was afforded under the policy.
The more interesting question, the answer to which might have justified the court's holding, is whether the investigative subpoenas and interrogatories were "claims," i.e., whether they constituted formal administrative or regulatory proceedings. This question was not addressed by the court.
