The False Claims Act continues to make headlines. The DOJ introduced earlier this yr that its fiscal-year recoveries—throughout 351 settlements and judgments—exceeded $2.2 billion, which was the second-highest variety of settlements recorded in a single yr. Extra just lately, the US Supreme Court docket heard oral argument and is poised to difficulty a choice in a closely-watched FCA case that might seriously change the stability of energy between the federal government and business.
Given this heightened regulatory and judicial scrutiny, it’s no shock that insurance coverage for FCA exposures additionally continues to develop. Simply this month, the Seventh Circuit affirmed an Illinois federal court docket’s ruling that an insurer should pay $10 million to pay for its portion of a drugmaker’s settlement with the US Division of Justice, hopefully ending the yearslong battle for protection.
In 2012, Astellas, a pharmaceutical firm, launched a brand new drug to deal with metastatic prostate most cancers. That drug was solely partially lined by Medicare. After the launch, Astellas donated $27 million to 2 organizations and inspired the organizations to supply co-pay help. This association caught the eye of regulators on the DOJ as a result of federal anti-kickback statutes prohibit pharmaceutical corporations from providing any cash to induce Medicare beneficiaries to buy that firm’s medication.
In 2016, the DOJ issued a subpoena to Astellas, starting its investigation into alleged federal healthcare offenses. And in 2017, the DOJ adopted up with a extra detailed civil investigative demand. In 2019, Astellas ended the dispute with the federal government by getting into right into a settlement the place it agreed to pay $150 million. The $150 million fee was labeled as “restitution to the USA” for tax causes.
After that, Astellas turned to its insurers to cowl parts of the settlement. Unsurprisingly, the insurance coverage corporations, together with Federal Insurance coverage Firm, refused to pay. Protection litigation adopted.
As we’ve mentioned beforehand, Federal denied protection on the grounds that the settlement was uninsurable restitution or disgorgement and was excluded underneath the corporate’s D&O legal responsibility coverage. The events moved for abstract judgment, and the district court docket dominated in Astellas’ favor, holding that Federal had failed to satisfy its excessive burden of proving that the losses at difficulty have been clearly excluded.
The Seventh Circuit just lately affirmed the district court docket’s ruling. Just like the district court docket, the Seventh Circuit reiterated that Illinois regulation locations the burden on the insurer to indicate {that a} settlement fee is uninsurable restitution. It additionally concluded that Federal was unable to satisfy the excessive burden.
Federal argued that settlement was an uninsurable restitutionary fee underneath Illinois regulation. Whereas Illinois regulation prohibits insurance coverage protection for losses which are “restitutionary in character,” the court docket acknowledged that the circumstances distinguish between compensatory and restitutionary funds. It defined that to ensure that the settlement fee right here to be deemed uninsurable, Federal needed to present that the fee disgorged both one thing that belonged of proper to the federal authorities or revenue that Astellas constructed from the alleged scheme. And, right here, Federal was unable to make such a exhibiting. As an alternative, the info confirmed that the settlement fee was lined underneath the insurance coverage coverage. The truth that the settlement was labeled as “restitution” didn’t sway the court docket.
Takeaways:
The Seventh Circuit’s choice has a number of takeaways for policyholders.
First, it reinforces the tough burden insurers face to show {that a} loss is uninsurable restitution, particularly within the context of settlement agreements. Because the court docket put it:
On this insurance coverage dispute, we’d like not determine whether or not Astellas may have received a hypothetical movement for abstract judgment on False Claims Act and Anti-Kickback Statute claims if the federal government had really filed any. Nor do we have to determine whether or not the federal government may have received a movement for abstract judgment. The purpose right here is that the events agreed to settle these potential claims fairly than litigate them to a ultimate judgment. Either side would have had some proof favoring its place, and either side most well-liked to conform to the settlement fairly than litigate. On this insurance coverage dispute, the burden is on Federal to indicate that the settlement was (solely) restitutionary in nature, and it has not provided proof adequate to indicate that.
Second, it exhibits that an insurer can’t depend on labels alone to determine {that a} settlement is restitutionary in nature or in any other case uninsured. A part of Astellas’ settlement was labeled explicitly as “restitution to the USA.” Nonetheless, the Seventh Circuit dismissed the insurer’s reliance on the label explaining that labels typically aren’t controlling and that the label in query was even much less important as a result of the events’ communications confirmed that it was solely used for tax functions.
Final, the choice is an effective reminder to policyholders to carefully analyze insurer positions towards the coverage language and never settle for an insurer’s most well-liked interpretation or views of protection if they aren’t supported by the language of the coverage it drafted and offered. As we’ve mentioned earlier than, D&O insurance policies can present protection for settlements arising from authorities investigations and settlements. Skilled protection counsel will help policyholders perceive how a D&O coverage might reply to related claims.
