Claims-made policies were supposed to simplify things.  In an article a few years back, insurance expert Fred Fisher noted that the idea behind such policies was to provide greater actuarial certainty for insurance companies, by ensuring that there would be no more claim activity following the end of a policy period (eliminating the “incurred but not reported” problem under occurrence-based policies).

But, of course, we humans are experts at complicating the simple.  One bedeviling issue under claims-made forms can be:  When is a “claim” actually “made”?  Specifically, when can claims be deemed “related”, so that a later claim outside the policy period is so closely tied to a prior claim inside the policy period that both are covered?  This tricky issue recently surfaced in a federal court case in Washington state involving EPLI and D&O coverage and a whistleblower claim.

Facts: Richard Klein was the CFO of a biopharma company called Omeros.  Klein claimed that Omeros unlawfully terminated him for internally reporting financial irregularities relating to a grant supervised by the National Institutes of Health.  Under a reservation of rights, Carolina Casualty defended a whistleblower lawsuit brought by Klein, and apparently spent over a million dollars in fees doing so.

During discovery in his lawsuit, Klein learned of additional facts that he felt supported a qui tam claim on behalf of the United States.  He moved to amend his complaint, asserting that Omeros had violated the federal False Claims Act.  The motion to amend was filed after Carolina Casualty’s policy period had ended.  Carolina Casualty agreed to defend Klein, again under a reservation of rights, but later filed a declaratory judgment action arguing in part that the qui tam claim was not covered.  The question was whether the qui tam claim “related back” to Klein’s original complaint, and therefore fell within the Carolina Casualty D&O policy.  That policy provided, in part, that “all claims based upon or arising out of the same Wrongful Act, or one or more series of any similar, repeated or continuous Wrongful Acts or Related Wrongful Acts, shall be considered a single claim.”

Carolina Casualty argued that the two claims were separate and distinct, in part because (A) the retaliation claim sought recovery for damage to Klein personally, while the qui tam claim sought recovery for damage to the government; and (B) the retaliation claim did not require Klein to prove that Omeros actually made false claims, while the qui tam claim did require Klein to do so.

But the Court rejected the carrier’s arguments, writing:  “This court holds that the qui tam claim and the anti-retaliation claim Mr. Klein raised in his initial complaint are based on related wrongful acts.  As the court has already noted, Mr. Klein’s initial complaint discloses his belief that Omeros made false claims.  That he chose not to pursue a qui tam claim based on that belief is immaterial, what matters is whether the qui tam claim is (in the language of the policy) ‘logically…connected’ to the anti-retaliation claim by reason of ‘any common fact, circumstance, situation, transaction, casualty, event or decision.’…Omeros’s alleged false reporting is a common event that logically connects the anti-retaliation and qui tam claims.” According to the Court, “Any common fact or event is sufficient to make two wrongful acts related.”  So, a win for the policyholder.

This ruling reminded me of two tangentially related insurance items (or concepts).

First, when determining whether the duty to defend exists, carriers aren’t supposed to depend on labels; they’re supposed to assess the substance of what’s being alleged.  As the New Jersey Supremes have written:  “Insureds expect their coverage and defense benefits to be determined by the nature of the claim against them, not by the fortuity of how the plaintiff, a third party, chooses to phrase the complaint against the insured. To allow the insurance company ‘to construct a formal fortress of the third party’s pleadings and to retreat behind its walls, thereby successfully ignoring true but unpleaded facts within its knowledge that require it, under the insurance policy, to conduct the putative insured’s defense’ would not be fair.”  SL Indus. v. Am. Motorists Ins. Co., 128 N.J. 188, 198-99 (1992) (citations omitted). 

Since Klein’s claims all stemmed from alleged financial improprieties engaged in by Omeros with respect to government work, wouldn’t Omeros reasonably expect the claims to be “related” for purposes of determining coverage?

Second, remember the protracted insurance fight over whether the World Trade Center attacks constituted one “occurrence” or “event,” or two?  As this 2004 article points out, the resolution of that issue depended upon the policy form being used, and also upon the jury deciding the issue.  Which leads me to the following question:  if the insurance company can’t obtain summary judgment on a coverage claim, doesn’t that mean that the policy can be reasonably interpreted in more than one way?  And if so, isn’t the policy by definition “ambiguous”?  (Ambiguities are supposed to be construed in the policyholder’s favor.)   The dictionary seems to say so.  But what does Webster know, anyway?

You can read the full Omeros decision by clicking here.