The Fourth Circuit vacated and remanded a district court’s dismissal of a lawsuit asserting breach of contract claims against an insurance provider who denied coverage of the costs of defending its insured party against a qui tam suit. The insurance company argued the policy covered liability for medical incidents, not allegations of billing fraud, while the appellant argued the allegedly fraudulently claims arose from the provision of services. The court sided with the insured, finding that North Carolina law broadly interpreted the term “arising out of” to require only a causal connection when used in a provision extending coverage. Because the policy covered the insured in relation to the rendering of services or failure to render services, the court found the policy could cover the costs of the qui tam complaint, which alleged the residential healthcare facility billed Medicaid for services that were never provided.
Affinity Living Group LLC and Chares Trefzger Jr. sued StarStone Specialty Insurance Company under its professional liability policy, arguing the defendant had a duty to defend and indemnify Affinity in an underlying qui tam action. The district court dismissed the case and Affinity appealed.
Affinity and Trefzger were sued for allegedly submitting Medicaid reimbursement claims for services that they never provided. Affinity sought coverage for the suit under its insurance policy with StarStone, but StarStone denied coverage because the lawsuit’s claims did not fall within the policy’s coverage for damages resulting from a claim arising out of a medical incident.
Affinity sued, but the distract court agreed the policy did not cover the qui tam action and granted summary judgment against Affinity on its declaratory-judgment claim. Because the court concluded that the insurance policy did not cover the false claims action, it logically dismissed the breach-of-contract claim. After Affinity stipulated that it would drop its remaining claims, it sought to appeal.
First, the court considered its jurisdiction, Because the district court dismissed only two counts against StarStone, the court inquired whether there had a been a final decision that ending the litigation altogether. While the parties stipulated to the dismissal of the other two counts, the dismissal was without prejudice, and therefore the court pondered whether the stipulation was a pretext to manufacture jurisdiction for an appeal of an otherwise non-appealable interlocutory order.
The court cited several precedent cases where other courts found pretext. However, the court found this case distinguishable based on the nature of the order. In the cited cases, the issues the parties sought to appeal did not turn on the merits of the legal claims they asserted, but on issues such as a class determination or mode of dispute settlement. However, in this case, it is necessary for Affinity to prevail on counts 1 and 2 before it can prevail on counts 3 and 4 on the merits. Without a contractual duty to provide coverage, StarStone cannot breach the covenant of good faith and fair dealing. Similarly, should the federal FCA claims fail, Affinity would not likely prevail on its state claims. The court noted that the stipulation stated that counts 2 and 4 could not be revived absent Affinity’s success on appeal, and therefore held that the voluntary dismissal without prejudice of claims rendered legally deficient by the district court’s prior ruling created a final judgment and established jurisdiction.
Next, the court turned to the merits. The dispute centered on the policy’s coverage of “damages resulting from a claim arising out of a medical incident.” Affinity argued that the qui tam action’s damages arose out of a medical incident, defined as an “act, error or omission in [Affinity’s] rendering or failure to render medical professional services [i.e., ‘the health care services or the treatment of a patient’].” The parties agreed that rendering, or failing to render, personal-care services qualified as a medical incident.
However, the court noted the qui tam complaint did not seek damages for rendering or failing to render personal care services, but for submitting false claims for reimbursement to Medicaid when in fact the services were not provided. StarStone argued that billing Medicaid for reimbursement is not itself a medical incident. Affinity argued that Medicaid claims do arise out of a medical incident, noting that the policy itself does not define the phrase “arising out of.”
The court held it must apply North Carolina law to interpret the meaning of “arising out of” in StarStone’s policy. The court found that North Carolina courts interpret the phrase broadly to include only a causal connection when used in a provision extending coverage but interpret the phrase more narrowly to require proximate causation when used in a provision excluding coverage.
In this case, the court held the term “arising out of” fell 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. The court explained there would be no connection if the injury was directly caused by some independent act wholly dissociated from the conduct defined in the policy.
While StarStone argued that billing for services is an action independent of the act of providing the services, the court found the qui tam complaint did not arise in a vacuum, but was based on whether or not Affinity had rendered the services. 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 failure made the Medicaid claims false, which gave rise to the potential liability. Because the failure to provide services was connected to the billing, the court held that North Carolina law provided that the false claims action fell within the policy’s coverage.
Accordingly, the court vacated the district court’s order granting StarStone’s motion for judgment on the pleadings and vacated the order denying Affinity’s motion for partial summary judgment. The court remanded the matter for further proceedings.
