Insurance Litigation Lawyer & Attorney : National Insurance Law Forum : Insurance Coverage, Bad Faith Litigation

Under Colorado law, the court was required to consider only the four corners of the underlying complaint in determining the duty to defend. “If the complaint ‘alleges any facts that might fall within the coverage of the policy,’ then the insurer has a duty to defend the insured.” LEXIS p. 12 (quoting Hecla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1089 (Colo. 1991)). The court found that the relevant coverage provisions under the general liability policies for all three insurers involved were roughly the same, providing coverage “where the insured causes injury by negligently (1) providing nursing or medical services or treatment; or (2) generally, providing professional services.” LEXIS p. 12.

O’Hara made primarily two arguments in support of its theory for professional services coverage: (1) “that the misconduct alleged by the government arose from O’Hara’s negligent design and implementation of health care practices ― namely, its failure to provide professionally adequate nursing or medical services.,” and (2) “that its billing practices pursuant to the Medicare and Medicaid provider agreements also constitute professional services covered by the policies.” LEXIS p. 10. The court found neither argument persuasive. As to the first argument, the court found that “The government’s injury was not caused by O’Hara’s failure to provide professional services, but instead resulted from O’Hara’s submission of false and fraudulent claims for reimbursement,” and that “the problem was not the actual level of services provided to O’Hara’s patients, but rather that O’Hara billed for services it did not provide ― namely, enhanced services.” Id. at 13-14.

Addressing the insured’s second argument, that its billing practices constituted professional services covered by the policies, the court found that the various policies used the terms “any service . . . of a professional nature,” “professional services,” and “professional health care services,” none of which were defined in the policies. The court then applied the following definition of professional services, which it found was most frequently relied on by the courts:
A ‘professional’ act or service is one arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill, and the labor or skill involved is predominantly mental or intellectual, rather than physical or manual.

LEXIS p. 22 (quoting Marx v. Hartford Acc. & Indem. Co., 183 Neb. 12, 157 N.W. 2d 870, 871-72 (Neb. 1968)). The court then found that “Although processing Medicare and Medicaid claims may be difficult and time consuming, the activity does not characterize a ‘professional service.’” LEXIS p. 23 The court further stated that “O’Hara’s billing practices are incidental to its business as an operator of a nursing facility. O’Hara’s failure to file accurate reimbursement claims with the government is not a failure to provide services in its professional capacity.” LEXIS p. 26.

In essence, the court rejected the insured’s multiple creative attempts to recharacterize allegations of fraudulent billing practices as the negligent provision of professional services within a general liability policy, and ruled that the insurers had no duty to defend or indemnify O’Hara. (Contrast the Washington Supreme Court’s decision in Woo v. Fireman’s Fund Ins. Co., 161 Wn.2d 43, 57, 164 P.3d 454 (2007), where the Court found that, for purposes of the duty to defend, the insertion of boar tusk flippers into an unconscious patient’s mouth and the taking of humiliating pictures “conceivably fell within the policy’s broad definition of the practice of dentistry.”)

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.