Commercial Liability Insurers Face Growing Number of False Claims Cases


Policyholder attorney Geoffrey B. Fehling, along with Hunton Andrews Kurth in Washington DC, noted two court rulings this year that rejected the insurer’s arguments that payments made to settle fraud allegations were not insurable.

Fehling said the US Department of Justice announced in January that it had initiated more False Claims Acts this year than any year since 1994. He said policyholders should be confident they can turn around. to their insurers to defend them.

Geoffroy Fehling

“The alleged fraud is very different from the actual fraud,” he said in an interview.

The Delaware Superior Court ruled on July 14 that Ace American and other insurers who issued directors and officers liability insurance policies and employment practices were responsible for the $ 18 million cost. Defense and Resolution of a whistleblower complaint against Guaranteed Rate Inc. This lawsuit alleged that the underwriting company had failed to meet quality control requirements for government guaranteed mortgages.

U.S. District Court Judge Franklin U. Valderrama in Chicago ruled on October 8 that Federal Insurance Co. was required to pay the $ 10 million policy limit to Astellas Pharma as compensation for the $ 100 million settlement of the drug manufacturer with the Ministry of Justice. Federal prosecutors have accused the company of violating the False Claims Act by increasing sales of a drug used to treat prostate cancer by referring patients to charities that pay their Medicare copayments. Federal rules prohibit drug companies from offering incentives to stimulate sales.

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The ruling noted that $ 50 million from the settlement agreement was labeled as restitution. If this amount had been identified as a remission of profits, the claim would have been uninsurable.

Fehling noted that in both decisions, policyholders were charged with illegal acts but that there was no final decision. Judge Valderrama found no authority to support Federal’s argument that since Astellas agreed to pay double the amount of the government’s alleged losses, payment of the settlement amounted to punitive damages, which cannot be covered by insurance. The False Claims Act allows penalties of up to three times the amount of actual damages.

Valderrama rejected the claim that Astellas’ payment was an uninsurable “ill-gotten gains reimbursement”.

“Illinois law recognizes a distinction between legal remedy for ‘damages’ and ‘restitution’ of unfair earnings,” the judge’s order said.

Valderrama granted summary judgment in favor of Astellas. The drug company is seeking additional $ 10 million in coverage from two other insurers.

Tax deductible

The Justice Department did not consistently identify settlement payments as restitution before the passage of the Tax Cut and Jobs Act, enacted by President Donald Trump in 2017.

Historically, the Internal Revenue Code prohibited taxpayers from deducting any payment to the government for fines or penalties. The 2017 legislation, however, allows deductions for amounts paid as restitution for damage or injury caused by a potential violation of the law, or paid to comply with the law, provided they are identified as “restitution”. in the agreement, according to an article by the law firm Gibson Dunn.

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Jonathan phillips

After the law was passed, the Internal Revenue Service asked the Department of Justice to amend its standard settlement form for False Claims Act violations to identify any amount of payment that constitutes “restitution” for civil damages, said Jonathan M. Phillips, Gibson Dunn. partner in Washington DC that defends organizations against False Claims Act claims.

The amount identified as restitution is entirely at the discretion of prosecutors; the defendant has no other contribution than to provide documents, according to the shareholder of Greenberg Traurig, Marvin Kirsner, a specialist in tax law.

“There must be some supporting evidence that the payment was, in fact, made as restitution to make a whole victim,” Kirsner said in an email. “I have informed colleagues who have stated that government lawyers are very sensitive to this issue and will not simply agree to identify settlement payments as restitution unless the documents can establish that the payment is , in fact, for restitution purposes. “

The change in the tax code, however, provides defense lawyers with an incentive to ensure that any bogus claims settlement clearly identifies all amounts that are paid as restitution, Kirsner said. The Illinois and Delaware rulings may give policyholders another reason to avoid any settlement agreement that identifies amounts paid as “restitution.”

Busy lawyers

The number of government actions under the False Claims Act has increased over the years. In 2001, there were approximately 400 prosecutions; in 2020, there were more than 900, according to statistics from the Department of Justice. The vast majority of actions are usually initiated by whistleblowers, who can receive 15-30% of the amount recovered.

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The amount recovered does not necessarily follow the number of False Claims Act shares. The Justice Department recovered $ 2.2 billion in 2020, the lowest amount recovered since 2008, even though it initiated a record number of actions.

But 2020 was unusual in another way: The government launched 250 actions under the False Claims Act, almost double the typical number filed each year.

Phillips, counsel for Gibson Dunn, said increased government spending during the COVID-19 pandemic, such as the Paycheck Protection Act and government grants to hospitals to treat infected patients, will result in probably more prosecutions under the false claims law. The increase in government spending pushed by the Biden administration may also increase the number of shares.

Phillips said the advent of litigation finance companies has led to an increase in the caliber of legal professionals who pursue whistleblower claims. Investor funding gives law firms the ability to fund in-depth investigations, he said.

He said the federal government has also learned to better analyze its databases to look for leads.

“They see it as information that is already in their hands, so why not use it,” he said.

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