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Vol. 9 - Issue 4
May 31, 2020


Surprising Decision: Insurer Loses “Professional Services” Decision That It Should Have Won

Some Insurers Should Re-Think Their Policy Language 


I do a lot of work involving professional liability policies and whether an insured’s conduct, giving rise to a loss, was a requisite professional service necessary to trigger coverage (or to come within a CGL policy’s professional services exclusion).  I think I have a good feel for this issue.  That’s why I was surprised to by Fourth Circuit’s decision in Affinity Living Group, LLC v. Starstone Specialty Insurance Company, No. 18-2376 (4th Cir. Mar. 26, 2020).  The insurer had winning facts.  But that wasn’t enough.

Affinity Living Group, an operator of adult care homes, was sued for allegedly violating the False Claims Act for submitting Medicaid reimbursement claims for services that they never provided. Affinity sought coverage for the suit from StarStone under a professional liability policy.  StarStone denied coverage.  Coverage litigation ensued and the North Carolina District Court ruled in favor of StarStone.  The Fourth Circuit, following a lengthy jurisdiction analysis, reversed.  

The StarStone policy at issue covers “damages resulting from a claim arising out of a ‘medical incident.’”  A “medical incident” is an “act, error or omission in rendering or failure to render medical professional services [i.e., ‘the health care services or the treatment of a patient’].”

I would have expected to see Affinity lose this case for the reason that the False Claims Act complaint sought damages for submitting false Medicaid reimbursement claims for services that Affinity never provided.  But the policy’s coverage is for providing health care services or treatment to a patient.  And that’s just not what the FCA complaint was about.  

But StarStone’s policy language handed Affinity a lifeline.  Specifically, the policy provided coverage for “damages resulting from a claim arising out of a ‘medical incident.’”

Following an analysis of North Carolina law, on the meaning of “arising out of,” the court concluded that coverage was owed:

“Here, the term ‘arising out of’ falls within a provision extending coverage and so must be interpreted broadly to require only some ‘causal connection’ between the conduct defined in the policy and the injury for which coverage is sought.  There is no connection if the injury ‘was directly caused by some independent act or intervening cause wholly dissociated from, independent of, and remote from’ the conduct defined in the policy.

StarStone contends that billing for personal-care services is ‘wholly disassociated from, independent of, and remote from’ the personal-care services. Here, the false-claims-act complaint alleges that Affinity billed Medicaid for personal-care services that were not performed. This allegedly false billing does not arise in a vacuum. The personal-care-services billing is false, and thus gives rise to a claim for damages, because Affinity failed to provide the personal-care services to its residents.  In other words, but for the failure to provide the services, no claim for damages exists.

The ‘failure to render’ services is a covered ‘medical incident’ under the policy.  And that alleged failure made the Medicaid claims false, giving rise to potential damages in the false-claims-act suit. So while the alleged false billing was not itself a ‘medical professional service,’ the failure to ‘render medical professional services’ bears a causal relationship to the billing.  Thus, under North Carolina’s case law, the false-claims-act action falls within the coverage provision in the StarStone insurance policy.”

False Claims Act claims, and other claims involving the billing aspects of the provision of healthcare services, are clearly not intended to be covered under a healthcare professional liability policy designed to cover patient treatment.  Nonetheless, such billing-related claims are not unusual and efforts are often made to find coverage under patient-based policies.  It may be time for insurers to make their intent clearer, through the use of exclusions, rather than dance around what’s a medical incident and what’s professional health care services and associated causation issues. 


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