MFA COMPLIANCE 2016: UNDERSTANDING INSURANCE AND LIABILITY: A FOCUS ON D&O, CYBERSECURITY AND POLICY REVIEWS

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1 MFA COMPLIANCE 2016: UNDERSTANDING INSURANCE AND LIABILITY: A FOCUS ON D&O, CYBERSECURITY AND POLICY REVIEWS Presented by: Lynda A. Bennett Chair, Insurance Recovery Group LOWENSTEIN SANDLER LLP lbennett@lowenstein.com

2 Agenda False Claims Act ( FCA ) Overview Insurance Coverage for FCA Violations Potentially Applicable Insurance Policies Key Coverage Issues Insurance Coverage for Other Statutory Violations / Statutory Damages Page 2

3 False Claims Act Aimed at uncovering false or fraudulent claims seeking payments from the Federal Government Civil and Criminal Provisions Civil: 31 U.S.C. 3219, et seq. Criminal: 18 U.S.C. 287 States have their own versions. e.g., N.J.S.A. 2A:32C-1 The FCA is violated if a person knowingly submits a false claim to the Government Knowingly defined as actual knowledge, deliberate ignorance of the truth, or reckless disregard of the truth or falsity of information Page 3

4 False Claims Act Enforcement: Qui Tam Actions Private individuals relators can bring lawsuits under the FCA, on behalf of the Government Current employees Former employees Competitors Anyone with knowledge that the Government is being defrauded Page 4

5 False Claims Act Enforcement: Qui Tam Actions The relator files the lawsuit under seal, serves the Federal Government with the complaint, and provides key evidence to the Government The Government decides whether to intervene in the lawsuit and take control Subpoenas / Tolling Agreements If the Government does not intervene, the relator can pursue the action on his/her own Sometimes lengthy delay between complaint filing and unsealing Page 5

6 Examples of False Claims Act Lawsuits Healthcare / Pharmaceutical False Claims Involves federal healthcare programs (e.g., Medicare, Medicaid) Off label marketing / promotion Illegal kickbacks Extravagant meals, gifts; vacations; concerts; sporting events tickets; payments to attend conferences Overbilling by medical providers Page 6

7 Examples of False Claims Act Lawsuits Research False Claims Falsifying data Falsifying grant applications Conflicts of interests by principal investigators Using grant money for personal expenses, unrelated research Page 7

8 False Claims Act: Damages & Expenses Civil penalties Treble the amount of the Government s damages Settlements Subpoena response & investigation costs Costs to defend the Qui Tam lawsuit Page 8

9 False Claims Act / Qui Tam Lawsuits: What Policies Are In Play? Directors & Officers Insurance Covers directors/officers and sometimes companies for wrongful acts Employment Practices Liability Insurance Covers companies and directors/officers for wrongful employment acts (e.g., whistleblower retaliation) Professional Liability (aka E&O ) Insurance Covers companies for wrongful acts committed in connection with the rendering of professional services Page 9

10 False Claims Act / Qui Tam Lawsuits: Key Insurance Issues Has a Claim requiring notice to the insurer been asserted? Is the Qui Tam Lawsuit a Related Claim? Do the allegations of fraud and illegal profits preclude coverage? Can the policyholder recover Defense Costs? What constitutes Loss under the Policy? Page 10

11 A Claim requiring notice to the Insurer? Applicable insurance policies are typically claims made and reported policies Before the Qui Tam Lawsuit is unsealed: Written / oral communications from DOJ Confirm oral communications in writing Investigatory subpoenas Do they identify the target? Requests to toll statute of limitations Start the Defense Cost meter early. Responding to these demands is hardly voluntary Page 11

12 A Claim requiring notice to the Insurer? Are those initial communications, subpoenas, and requests to toll Claims under the insurance policy? It depends: Some Policies have a narrow definition of Claim : A written demand for monetary or non-monetary relief A civil proceeding commenced by the service of a complaint or similar proceeding Policies also may define Claim to include: A written request to toll or waive a statute of limitations Subpoenas and investigative demands Commencement by the Government of an investigation of a wrongful act Page 12

13 A Claim requiring notice to the Insurer? Pre-Claim Inquiry Request by a governmental/regulatory body for an Insured to appear for an interview or produce documents Notice of Circumstances ( NOC ) Policy provision that allows Insured to provide pre-claim notice of circumstances that might give rise to a claim If a formal claim is made later on, it will be deemed reported under the Policy in effect when the notice of circumstances was provided Battle over costs incurred between NOC and Claim Page 13

14 Related Claims Policies define Related Claims as, for example: [A]ll claims arising from, or in consequence of the same or related facts, circumstances, situations, transactions or events or the same or related series of facts, circumstances, situations, transactions, or events Why Related Claims matters: It can be a hook for coverage Insurers may deny a notice of a claim as late Insurers may try to avoid paying subpoena compliance costs But relators often file a separate whistleblower / retaliation claim that relates to the qui tam lawsuit and subsequent DOJ investigation See Eisai, Inc. v. Zurich American Ins. Co., No , 2014 U.S. Dist. Lexis (D.N.J. July 1, 2014) (Insurer that covered an earlier whistleblower claim under an EPL policy also had to cover the qui tam lawsuit when it was later revealed) See Carolina Cas. Ins. Co. v. Omeros Corp., 2013 U.S. Dist. Lexis (W.D. Wash. Mar. 12, 2013) (rejecting insurer s late notice defense when later filed qui tam related to earlier-reported retaliation claim) Page 14

15 Loss Definition Policies define Loss as, for example: Damages, settlements, judgments, Defense Costs Punitive, exemplary, and multiplied damages (if permitted under the applicable law that most favors coverage) The definition often excludes: Civil or criminal fines or penalties Matters uninsurable under the law pursuant to which the policy is construed Insurers contend FCA damages are disgorgement/restitution, which are uninsurable in some states as a matter of public policy Loss definition could also exclude multiplied damages e.g., treble damages Page 15

16 Loss Definition Settlements constructed with the DOJ reflect an understanding of Loss exclusions See Gallup, Inc. v. Greenwich Ins. Co., 2015 WL (Del. Super. Feb. 25, 2015) Qui tam settlement was covered because settlement was within Loss definition [T]he settlement agreement did not contain any admission of wrongdoing As the drafter of the Policy, [insurer] could have precluded coverage of all settlements but it did not Insurer s argument that settlement was excluded as disgorgement/restitution also failed: Requiring a final adjudication for the fraud/ill-gotten gains exclusion shows not merely that the parties contemplated the possibility of coverage for restitution, but that they agreed coverage would exist unless the restitution was imposed by a final adjudication If the Court were to find that the Settlement is for restitution, the Fraud/Ill-Gotten Gains Exclusion requires that there be a final adjudication Page 16

17 Allegations of Fraud and Illegal Gains The Conduct Exclusions: No coverage for claims for: Remuneration, profit or other advantage to which the Insured was not legally entitled or Deliberate criminal or deliberate fraudulent fact by the Insured. if such conduct established by any final non-appealable adjudication. Without a final adjudication, policyholders are entitled to coverage for: Defense Costs (But beware of Insurer s recoupment attempt in the event of a final non-appealable adjudication) Settlements Page 17

18 Other Exclusions/Limitations Insurers Rely On Billing Errors Exclusion Can be a standalone exclusion or excluded from the professional services definition in E&O policy Government entity action exclusions May include carve out for defense costs or specific government actions (e.g., HIPAA) Contractual Liability Exclusion Sub-limits Page 18

19 Other Statutory Violations: Coverage for Statutory Damages Fair Credit Reporting Act, 15 U.S.C Requires accuracy in credit reporting and background checks Private plaintiffs often prospective employees file class actions against employers and reporting agencies for inaccurate background checks resulting in an adverse employment decision Remedy for willful violations: Actual damages or statutory damages of not less than $100 and not more than $1,000 Page 19

20 Other Statutory Violations: Coverage for Statutory Damages Telephone Consumers Protection Act, 47 U.S.C. 227 Restricts and regulates telephone solicitors (e.g., telemarketing), automated dialing systems, and text messaging Remedy: Actual damages or statutory damages of $500 per violation (or $1,500 for willful violations) CAN-SPAM Act, 15 U.S.C. 103 Regulates sending of commercial s must be identified as solicitation, provide opt-out options, contain a legitimate return address Page 20

21 Other Statutory Violations: Coverage for Statutory Damages E&O Insurance Policies, for example, define Damages as: any compensatory sum and includes a judgment, award or settlement. Damages do not include: fines, penalties, forfeitures or sanctions Insurers try to exclude coverage for FCRA or TCPA claims seeking statutory damages claiming the relief requested constitutes fines or penalties Page 21

22 Other Statutory Violations: Coverage for Statutory Damages Federal case law interpreting FCRA statutory damages hold they are compensatory : FCRA separately provides for actual or statutory damages, but not both They are a substitute and useful alternative for actual damages (which are difficult to quantify) FCRA separately provides for punitive damages on top of actual or statutory damages See Bateman v. Am. Multi-Cinema, Inc., 623 F.3d 708, 718 (9th Cir. 2010); Harris v. Mexican Specialty Foods, Inc., 564 F.3d 1301, 1313 (11th Cir. 2009) In the insurance context, courts find FCRA statutory damages meet the damages definition. See Navigators Ins. Co. v. Sterling Infosystems, Inc., 2015 WL (N.Y. Sup. Ct. July 28, 2015) (FCRA statutory damages function primary as compensation. ) Courts are mixed on purpose of TCPA statutory damages. Compare Columbia Cas. Co. v. HIAR Holdings, LLC, 411 S.W.3d 258, (Mo. 2013) (TCPA statutory damages represents a liquidated sum for uncertain and hard to quantify damages ) with Kaplan v. Democrat & Chronicle, 292 N.Y.S.2d 799, (4th Dep t 1999) (TCPA statutory damages are imposed as punishment. ) Page 22