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Vol. 5, Iss. 4
March 30, 2016

What A Difference The DOJ Makes: Court Upholds Specific Claims Exclusion


It is pretty unusual for a court to grant a motion for reconsideration. And, by definition, it is unlikely for the court to do so in a not-breaking-a-sweat fashion. But that’s what happened in Millennium Laboratories, Inc. v. Allied World Assurance Company, No. 12-2280 (S.D. Cal. Feb. 25, 2016). It wasn’t easy for the insurer to reach that point. But it was persistent -- and rewarded for it.

At issue was coverage for Millennium Laboratories, under a Directors and Officers Liability Policy issued by Allied World in late 2011. At the time that the policy was issued, Millennium was, in the court’s words, “facing problems.” The court noted that “[s]everal competitors had filed private lawsuits and several whistle-blowers had filed qui tam actions against Millennium. These lawsuits alleged that Millennium engaged in unlawful business practices, that it encouraged health care providers to submit false and/or fraudulent claims to health insurers and that it provided unlawful kickbacks to those health care providers.”

The court explained that the policy was issued with Allied World wanting to exclude actions that had culminated in lawsuits already filed (avoid insuring the proverbial burning building, in the court’s words) and Millennium wanting protection from future lawsuits. The result, the court stated, was a “[p]olicy negotiated by top-notch lawyers.”

Enter the Department of Justice. The DOJ, as part of an investigation of any illegal activities by Millennium, issued broad subpoenas, seeking a “wide range of documents and listing a wide range of potential offenses.” Millennium sought coverage from Allied in responding to the subpoenas.

Allied said no so fast, pointing to the “Specific Claims Exclusion” in the policy: “No coverage will be available for Loss from any Claim based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving” the Ameritox Action, the Aegis Action, and the Robert Cunningham Action.

In late September 2015, the court granted Millennium’s and denied Allied’s Motion for Summary Judgment. As the court explained: “At that point in time, since the DOJ investigation was shrouded in Grand Jury investigation secrecy, it was impossible to determine whether the investigation or allegations being investigated arose out of, were based upon, or were attributable to prior actions or to wholly new conduct.”

But shortly thereafter the lid came off the DOJ’s activities – revealing a previously sealed complaint filed by the DOJ against Millennium, as well as a settlement agreement. Almost a month to the day after Allied’s motion for summary judgment was denied, the insurer marched back to court, filing a motion for reconsideration.

In other words, in light of the information learned about the DOJ’s activities, the insurer sought to have the court reconsider whether the Specific Claims Exclusion applied. Was there now enough information to establish that the DOJ investigation was based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the prior suits involving Millennium?

The court set out the standard for granting a motion for reconsideration based on newly discovered evidence: “(1) the evidence was discovered after the court’s judgment was issued: (2) that even with due diligence the evidence could not have been discovered earlier; and (3) that the newly discovered evidence is of such a magnitude that had the court known of it earlier, the outcome would likely have been different.”

Without question the evidence was discovered after the court’s ruling denying Allied’s motion for summary judgment. And even with due diligence the evidence could not have been discovered earlier by Allied. After all, it had been sealed in a federal zip-lock bag. Turning to whether the newly discovered evidence was of such a magnitude that, had the court known of it earlier, the outcome would likely have been different, the answer was yes: “A quick review of the three Actions listed in the Specific Claims Exclusion and a comparison of the Settlement Agreement makes it clear that this exclusion applies. [The actions] were lawsuits filed by a Millennium competitor alleging that ‘Millennium formed a business plan to increase its market share...through an improper and illegal scheme’ including illegal kick-backs and encouraging false billings to Medicare. These are exactly the same allegations listed in the Complaint filed by the DOJ against Millennium and Settlement Agreement entered into between the parties.”

The court went on and provided specific examples to support its conclusion, as well as rejecting arguments by Millennium, that the DOJ complaint alleged “separate wrongs” from what was alleged in the actions listed in the “Specific Claims Exclusion.”

Held: “Had the Court known of the Settlement Agreement at the time it issued its Order regarding Summary Judgment Motions, its Order would have been different. At the time the Order was issued, Allied World had failed to prove that the Department of Justice investigation ‘in any way involved’ any of the actions listed in the specific claims exclusion. They have now done so.”

If at first you don’t succeed, trial trial again.



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