Companies that do business with the federal government, or whose business transactions otherwise involve payments by the government, undoubtedly understand the exposure they face to “whistleblower” or “Qui Tam” lawsuits brought by private individuals on behalf of the government alleging fraud under the False Claims Act.  But it may surprise them to know that the professional liability insurance policies they purchased to cover such claims may provide no coverage at all.  In AmerisourceBergen Corp. v. ACE Am. Ins. Co., an appellate Pennsylvania state court recently ruled that the “prior or pending litigation” policy exclusion barred coverage for defense costs incurred in a lawsuit brought under the False Claims Act (“FCA”) initiated prior to policy inception, but which was filed under seal and unknown to Amerisource until after the relevant inception date.

ACE American Insurance Company (“ACE”) issued professional liability policies to AmerisourceBergen Corp. (“Amerisource”) from May 2006 to May 2010; ACE was the primary insurer from 2007 to 2010, but was an excess insurer from 2006 to 2007.  On June 5, 2006, prior to inception of the first ACE primary policy (but after inception of its excess policy), an FCA action was filed against Amerisource.  However, under the terms of the FCA, the lawsuit was allowed to be maintained under seal for three years.

Amerisource claimed that it learned of the lawsuit in March 2008, but it was not until February 2009 that the Massachusetts federal court allowed a redacted copy of the unserved lawsuit on the public docket.  Furthermore, it was not until January 2010 that Amerisource received formal service of the lawsuit, though by then Amerisource had provided ACE formal notice of the potential claim, doing so in July 2009.  ACE denied coverage under a number of exclusions, including the exclusion for “prior pending litigation.”

In affirming the trial court’s decision denying coverage, the appellate court noted that the relevant policies are “claims made” policies – i.e., those which cover claims made during the policy period and timely reported to the insurer.  Because Amerisource made its claim for coverage in July 2009, the 2009 policy governed.  The court also explained that under this policy, the “prior or pending litigation” exclusion precluded coverage of any claim based on prior litigation “filed or commenced” on or before the earlier of (1) the effective date of the 2009 policy, or (2) the effective date of any policy issued by ACE of which the 2009 policy is a continuous “renewal” or “replacement.”  The court found that because the 2009 policy was a continuous renewal of the primary coverage policy issued effective May 1, 2007—but not of the 2006-2007 excess policy—the exclusion precluded coverage for the Massachusetts lawsuit, which was filed (albeit under seal) a year earlier, in June 2006.

The appellate court rejected Amerisource’s argument that the exclusion did not apply because the lawsuit was not served until 2010, reasoning that the exclusion prevented coverage for a lawsuit “filed” or “commenced” prior to policy inception, as opposed to one “served” on Amerisource.

This case is plainly unfair to the policyholder, as it is essentially being penalized due to the structure of the FCA, which allows complaints to be filed under seal and not served for years afterwards.  There’s no doubt that the “prior or pending litigation” exclusion should raise concern among policyholders that transact with the federal government, or whose business transactions otherwise involve payments by the government.  According to a 2009 report conducted by the Federal Judicial Center, half of the cases filed in 2008 were still sealed in late 2009, and 15% of the FCA cases filed in 2000 through 2003 were still sealed six to nine years later. The Amerisource court saw little cause for concern, however, noting that had the “prior or pending litigation” exclusion included language that it only applies to actions which have been served upon the policyholder prior to policy inception—or, at the very least, of which the policyholder was aware prior to policy inception—this unfair result would have been avoided.

The court itself, however, might have avoided this result had it applied a basic principle of policy interpretation: undefined terms in a policy that are connected with “or” are presumed to connote separate and independent concepts; they are not presumed to be synonyms.  In Amerisource, the court concluded that the terms “filed” and “commenced” in the “prior or pending litigation” exclusion were synonyms: both meant “filed with a court.”  It did so despite the fact that the policy used the term “commenced” differently elsewhere, in the definition of “claim,” in discussing service of a complaint.  Not only did the court eschew this analysis, it turned it on its head.  The exclusion did not include a service element, according to the court, as evidenced by the definition of “claim,” which demonstrated that the parties knew how to include a service requirement when they wanted.

Policyholders should pay close attention to the “prior or pending litigation” exclusion when purchasing or renewing their professional liability policies and negotiate with their insurers for language that differs from the language at issue in Amerisource.  Doing so may be the only way to avoid being penalized for failing to tender a lawsuit that they don’t even know exists.