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

Last Monday, a three-judge panel of the Fifth Circuit considered one of the implications of the Texas Supreme Court’s landmark decision last year in Lamar Homes, Inc. v. Mid-Continent Cas. Co., 22 S.W.3d 1 (Tex. 2007), in its decision in National Union Fire Ins. Co. of Pittsburgh, Pa. v. Puget Plastics Corp. --- F.3d ----, 2008 WL 2487054 (5th Cir. 2008).  In doing so, the Fifth Circuit considered a deceptively simple question: could an insured’s "knowing" violation of the Texas Deceptive Trade Practices Act still be an “occurrence” under a commercial umbrella policy?  In this case, the panel considered National Union’s claim it had no duty to indemnify its insured after the jury in the underlying tort case awarded the claimant $36 million against the insured after having found a “knowing” violation of the Texas Deceptive Trade Practices Act.  In the subsequent coverage case, National Union argued the insured’s actions, which the jury in the underlying suit found to be “knowing,” could not be an “occurrence” under the general liability policy because it could not constitute an “accident.”  Relying on Lamar Homes, the Fifth Circuit stated the “knowing” finding by the jury in the underlying lawsuit did not control the coverage issue because “knowing” in the context of the DTPA only meant “deliberate.”  And, as applied to the case at bar, the Fifth Circuit interpreted the Texas Supreme Court's recent holding Lamar Homes as holding that a “deliberate” act could still be an “occurrence” unless the injury was "highly probable" or the insured "intended or expected the harm that was suffered."  As such, the Fifth Circuit rejected National Union’s argument that a “knowing” violation of the DTPA could never constitute an “occurrence.”  The panel went on to instruct that the coverage lawsuit should include and seek to resolve issues that were not expressly adjudicated in the underlying lawsuit, such as whether the injury caused by the insured was "highly probable, expected or intended."

 

Lamar Homes was bad enough for the insurance industry, but this is getting ridiculous.  The Texas Supreme Court's treatment of the "occurrence" issue in Lamar Homes was in a totally different context than the one addressed by the Fifth Circuit in this case.  The statutory definition of "knowing" under the Texas DTPA puts the conduct on par with an intentional tort in order for it to be properly characterized as "knowing" conduct under the DTPA.  Under the statute, it's a necessary predicate to recover treble damages (the DTPA's own version of punitive damages.)  So, it's the antithesis of an insurable "occurrence."   The Fifth Circuit's decision further highlights the need of liability carriers in Texas to bring declaratory judgment actions when underlying tort cases involving their insureds generate material coverage questions,   Unfortunately, the Fifth Circuit's recent decision in Puget Plastics means that (at least in the federal courts) the resolution of the underlying tort case is just the beginning of the coverage case even when the underlying jury finds the insured's conduct to have been committed "knowingly."  

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In Zurich American Ins. Co. et al. v. O’Hara Regional Center for Rehabilitation, et al., 2008 U.S. App. LEXIS 12913 (10th Cir., June 18, 2008), the Tenth Circuit addressed the question of whether general liability insurance policies trigger a duty to defend false billing claims. The insured, O’Hara Regional Center for Rehabilitation (“O’Hara”) is a long-term care facility in Denver that was licensed by the State of Colorado to provide specialized nursing home care, and provided such care pursuant to agreements with the United States and the State of Colorado under the Medicare and Medicaid programs. After concluding that O’Hara submitted inflated invoices for patient services, the government sued O’Hara under the False Claims Act and state common law, alleging O’Hara “knowingly presented or caused to be presented claims for payment to the Medicare and Medicaid programs, for care, goods or services not rendered, that were inadequate or worthless, or that were rendered in violation of applicable statutes, regulations and guidelines with a nexus to payment.” The government further alleged that O’Hara “‘systematically and routinely understaffed [the facility]’ in violation of the provider agreements.” LEXIS p. 5. O’Hara tendered defense of the suit to its three liability carriers. Two accepted the defense under a reservation of rights, while the third simply denied coverage. 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.”)

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Several days ago, the Fifth Circuit Court of Appeals evaluated a primary liability carrier’s tender of its policy limits to its insured for covered claims and whether such a tender triggered an excess insurer's liability coverage when the insured allocated the primary limits across several years of losses.  In Service Corp. Int’l v. Great Am. Ins. Co. of New York, 2008 WL 280900 (5th Cir. February 1, 2008), a funeral services company (SCI), with cemeteries throughout the United States, was sued by individual and class action plaintiffs for grave desecrations and improper burials at two specific cemeteries.  Some, but not all, of the events giving rise to the lawsuits occurred between the policy period in question.  SCI was covered by a $25 million primary liability insurance policy and a $50 million excess liability policy.

As the lawsuits were pending against SCI, the primary carrier determined that its covered claims would likely exceed its policy limit for the policy period. The carrier then tendered $25 million to SCI in exchange for an indemnity and hold harmless agreement.  The lawsuits settled for $100 million, but only $13.75 million was allocated by the insured to claims arising during the policy period of the excess carrier in this suit.  The rest were allocated to other years of losses.  

SCI requested coverage from an excess liability carrier, but coverage was denied.  The excess carrier argued because only $13.75 million was allocated to the policy period (and not the complete $25 million limit which had been tendered), the excess layer of coverage had not been triggered.  In response, SCI filed suit against the excess carrier.  The federal district court granted summary judgment in favor of the excess carrier.

On appeal, the Fifth Circuit noted the excess policy incorporated the primary policy’s definition of “loss,” which was “those sums actually paid in the settlement or satisfaction of a claim which the insured is legally obligated to pay as damages of injuries or offense.”  The Fifth Circuit then concluded the parties intended any loss to be measured by the sums used for payment of covered claims during the policy period, not simply by the aggregate sums paid by the insureds.  As such, the insured’s own allocation was used by the Court to determine the excess liability policy had never been triggered.

This is a potentially significant decision particularly for claims in those jurisdictions governed by the Fifth Circuit including Texas, Louisiana and Mississippi.  Because policyholder allocations are common in coverage cases arising out of toxic tort cases and other mass torts, this holding gives excess liability carriers more protections than other courts have extended in recent years.  It remains to be seen how the judicial pronouncements in this case will apply to other efforts to artificially allocate prior primary settlements by policyholders, but it is certainly a step in the right direction.

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