Insurance policies are notoriously dull to talk about but crucial to the operation, and even the survival, of a business. Every business needs to effectively communicate with insurance companies to protect their employees and their company. A recent decision by the U.S. District Court in Los Angeles, PAMC, Ltd. v. National Union Fire Ins. Co., Case No. 2:18-cv-06001-SVW-AS (C.D. Cal. Feb. 12, 2019), serves as the perfect example of how ignoring this "dull task" can turn into a potentially devastating liability.
PAMC, LTD, an insured hospital, recently learned this lesson after it settled a $42 million whistleblower lawsuit without consulting its insurance company first. Now, the hospital will pay a hefty price tag due to "late reporting."
The background on PAMC
The situation began in 2013 when Paul Chan named PAMC and other defendants in a whistleblower action. The qui tam suit focused on damages and penalties for the defendants' submission of false claims to Medicare and Medicaid programs.
PAMC received a subpoena on June 9, 2015, from the Department of Justice (DOJ), which requested various documents and asked the hospital not to disclose the investigation surrounding the qui tam suit until further notice. PAMC then kept the lawsuit under wraps from June 2015 until April 2017 when it reported the suit to its insurance company, National Union Fire Insurance Company, three months after settling with Chan for $42 million at the conclusion of the qui tam investigation.
The insurance complaint begins
National Union denied PAMC's claims because the insurance, which is "claims made and reported" coverage, explicitly limits coverage to claims first made and reported to the carrier within the then-current policy period. In this case, PAMC should have reported the qui tam action during the 2015-2016 period to qualify for coverage.
PAMC argued the late report was justified since the DOJ advised PAMC not to disclose the investigation until it was complete. PAMC filed a separate complaint for "breach of contract" against National Union due to the coverage's denial.
Ultimately, the California court dismissed the complaint because the policy language coverage required PAMC to report any claims as soon as they are aware within the policy period plus 90 days. The judge also refused any possibility of excuse for the late reporting because had been several opportunities for PAMC to report the suit to National Union.
Implications of late reporting
The closing statement from the judge states that holding National Union liable for the settlement would be more unfair because PAMC disregarded the reporting requirements. He noted that PAMC failed to ask the DOJ for permission to report the claim to its insurer. The reporting requirements of "claims made and reported" policies are generally strictly enforced, unlike policy "conditions" in other types of coverage that require notice "as soon as practicable." The latter type of clause is most often enforced to deny coverage only if the insurer can prove it was prejudiced by the policyholder's delay. But most policies issued to businesses and professional practices, covering directors' and officers,' professional or media liability, and even some general liability policies, are written on a "claims made" basis.
Under those policies particularly, it's vital for companies and business owners to pay close attention to claim reporting requirements and fulfill the requirements that insurance companies establish. If they choose to disregard these types of clearly expressed reporting requirements, except under extraordinary circumstances, they may well be on their own for the costs of defending and settling the claim or, at best, have to spend very substantial attorney's fees litigating coverage with the carrier.