Insurers on Hook for Qui Tam Defense Costs After Waiving Notice Requirement; United States District Court for the Northern District of Georgia, Atlanta Division, No. 1:18-cv-01991-SDG, SavaSeniorCare LLC v. Starr Indemnity and Liability Company and Aspen American Insurance Company


A district court in Georgia found that two insurers had waived their right to an affirmative defense based on late notice of a claim for reimbursement of costs incurred defending the insured party in multiple qui tam cases. When notified of the claim, the insurers expressly notified the plaintiff that coverage of legal defense costs was limited to $1 million and provided boilerplate language reserving their other rights under the policy. When the insured party challenged the $1 million cap, the insurers argued they had no obligation at all because the plaintiff had not timely notified them of the qui tam cases, as required by the policy. The court found the insurers had waived their right to an affirmative defense under the late notice provisions of the policy because they had not put the plaintiff on notice they intended to use it, despite sending multiple coverage letters over the course of several years. The court adopted a precedential case cited by the plaintiff in which the Georgia Supreme Court expressly stated that insurers could not deny coverage on one basis and then rely on a separate basis for denial when a coverage decision is challenged. The insurers argued they had not denied coverage but merely enforced the cap on legal defense costs, but the court reasoned that a denial of coverage in excess of $1 million was nonetheless a denial, and therefore the defendants could not now argue the claim was untimely submitted.

SavaSeniorCare moved for partial summary judgment in its lawsuit seeking reimbursement of costs incurred defending itself from a qui tam case, under the Directors and Officers Liability clauses of its insurance policies with defendants Starr Indemnity and Liability Company and Aspen American Insurance Company

The Starr policy provided that the insurer would pay for losses arising from a claim against Sava for any wrongful act, such as any actual or alleged breach of duty, neglect, error, misstatement, misleading statement, omission or act. The policy required Sava to provide timely notice of a claim as a condition of receiving coverage. The policy also defined loss as expressly excluding funds rightly returned to a federal or state government agency, as well as interest, fines, or penalties arising from the returns of such funds. However, the policy provided for reimbursement up to $1 million for defense costs arising from such claims.

Starting in 2011, Sava was named in three qui tam suits and in a consolidated action filed by the United States. The complaints alleged Sava submitted invoices for excessive or medically unnecessary services not covered by the Medicare program. The actions were not completely unsealed until October 28, 2015.

On October 30, 2015, Sava notified Starr and Aspen of the actions and requested insurance coverage for its defense costs. In January 2016, Starr issued a cover letter confirming that the company would pay defense costs up to $1 million but reiterating the company would not pay for funds returned to the government, nor penalties and interest. The letter also included boilerplate disclaimers stating that the coverage letter was not comprehensive and that Starr reserved its right to review the claim further.

In March 2016, Starr sent a second coverage letter affirming the coverage of defense costs. However, the letter noted that the first complaint was filed on August 26, 2011, and asked Sava to confirm when the company was served with the complaint. Several follow-up requests were made in April 2016 and June 2017.

On November 2, 2017, Sava sent Starr a letter, requesting that Starr reconsider and withdraw its preliminary position that Sava’s coverage for the qui tam claim was limited to $1 million, but also requesting that Starr promptly reimburse Sava for the $1 million in defense costs Starr agreed would be provided. On November 30, Starr wrote to Sava declining to reconsider its preliminary coverage analysis. In April 2018, Starr reiterated that coverage was capped at $1 million. At no point in any of the coverage letters did Starr deny coverage based on the notice provision or a late-notice defense, nor reference either of these clauses.

Aspen acknowledged Sava’s claim on November 3, 2015, but did not issue a coverage determination until January 2018. In that letter, Aspen adopted Starr’s position that coverage of legal defense costs was capped at $1 million. This letter also did not deny coverage based on the notice provision, nor reference this provision.

Sava filed this action on May 7, 2018, alleging that Starr and Aspen breached their obligations under the policies to provide defense costs to Sava in connection with the qui tam actions. The complaint asserted two causes of action: breach of contract against Starr (Count I) and declaratory judgment against Starr and Aspen (Count II).

The defendants filed counterclaims and affirmative defenses. Sava moved to dismiss the affirmative defenses to the extent they rely on the notice provision or a late-notice defense. The defendants opposed the motion, but also moved to request that the court defer ruling on Sava’s motion until after further discovery.

Sava argued the defendants waived the affirmative defense based on the notice provision when they failed to include the defense in their pre-litigation coverage letters.

The parties agreed that Georgia law applied to this case. Sava cited to an earlier case in which the Georgia Supreme Court held that an insurer had waived its right to assert a defense based on untimely notice because it did not properly alert its insured that the lack of timely notice would be a potential bar to coverage. The court established a three-part framework for how an insurer can handle a claim of coverage at the same time a lawsuit is pending against its insured. First, the insurer can defend the claim, thereby waiving its policy defenses and claims of non-coverage. Second, the insurer can deny coverage and refuse to defend, leaving policy defenses open for future litigation. Or, third, the insurer can defend under a reservation of rights.

However, the court held the insurer cannot both deny a claim outright and attempt to reserve the right to assert a different defense in the future. Further, an insurer can only reserve its rights if it “undertakes a defense while questions remain about the validity of the coverage. The court explained that a reservation of rights does not exist so that an insurer who has denied coverage may continue to investigate to come up with additional reasons on which the denial could be based if challenged. Rather, the reservation of rights exists to govern uncertainty, leaving an insurer the right to deny coverage following an investigation.

In the case cited by the plaintiff, the Georgia Supreme Court held that the insurer waived its ability to raise a defense related to an untimely notice provision in the insurance policy because it had failed to raise this defense while focusing on other exclusions. The court also faulted the insurer’s reliance on boilerplate language reserving its rights under the policy, finding this inadequate to put the insured on notice of the future defense of late notice.

The district court found this case applicable. After Sava notified Starr of the qui tam actions, Starr sent five letters expressly limiting its liability for defense costs to $1 million but never expressly raising the late notice defense. Aspen’s letters did likewise. The court reasoned that once the insurers denied coverage based exclusively on the Government Funding Sublimit of Liability provision, they forfeited the right to raise additional or alternative defenses, including the late notice defenses, which the court noted were raised for the first time more than three years after the initial coverage letter.

The insurers argued that they did not deny Sava coverage, because Starr had agreed all along to pay Sava $1 million. First, the court noted the argument was inapplicable to Aspen, whose policy provided a maximum of $10 million in excess coverage only after exhaustion of the $15 million liability limit in the Starr Policy. Because Aspen asserted that Sava’s coverage was limited to the $1 million to be paid by Starr, the court found this an unambiguous denial of insurance coverage.

Starr argued that its offer to pay $1 million under the policy, while simultaneously denying any additional payment, was not a denial of coverage but an acceptance of coverage accompanied by a reservation of rights. However, the district court noted that no Georgia court had addressed the question of whether invoking a policy’s sublimit of liability provision constitutes a “denial” of coverage for the remainder of the policy’s limits. Therefore, the court had to make an educated guess.

Given the principles set forth in the case cited above, the court concluded that invoking a policy’s sublimit of liability provision constitutes a “denial” of all other coverages for purposes of determining whether any subsequently noticed defenses have been waived. Further, even if the court assumed Starr did not deny coverage per se, it would still have found in Sava’s favor, because the insurers failed to properly reserve their rights to a late-notice defense. Georgia law provides that a reservation of rights must be unambiguous, but none of Starr’s coverage letters contained more than boilerplate language preserving the insurer’s rights.

In its third coverage letter in June 2017, Starr inquired about the date Sava learned of the claims, but the court did not construe this inquiry as unequivocally placing Sava on notice of the planned defense or informing Sava of Starr’s position. The court construed the ambiguous notice against Starr.

Starr and Aspen argued that their policies contain a duty to pay defense costs, not a duty to defend Sava, the latter of which was at issue in the case cited by the plaintiff. However, the court noted that argument had been expressly rejected by other courts in the district, and further rejected the defendants’ attempt to challenge the validity and correctness of those decisions.

Finally, the insurers argued that they lacked the necessary information to assert a late-notice defense at the time they sent their original coverage letters. In support, they pointed to the general waiver standard under Georgia law. However, the court found this argument missed the point of the previously cited precedent. That case set out three options for insurers, none of which they used. The court found they were not permitted to deny the lion-share of the policies’ coverage limits on one ground, issue a boilerplate reservation of rights, and then continue to investigate to come up with additional reasons on which the denial could be based if challenged. The court found it immaterial that they insurers believed they lacked the necessary facts to assert a late-notice defense when they sent Sava their coverage letters. The court declined to second guess a decision of the Georgia Supreme Court on a matter of Georgia law.

Because the court resolved Sava’s motion, it denied the defendants’ motion to continue as moot. The court also dismissed the defendants’ counterclaims for declaratory relief based on late notice and the affirmative defenses.