Qui Tam Under False Claims Act Triggers Professional Liability Policy Exclusion For Claims "Brought By Or On Behalf Of" The Federal Government

On April 30, 2015, the First Department issued a decision in Certain Underwriters at Lloyd’s v. Huron Consulting Group, Inc., 2015 NY Slip Op. 03608, holding that a private qui tam under the False Claims Act constitutes an action "on behalf of" the federal government for purposes of a coverage exclusion under a professional liability policy.

In Certain Underwriters at Lloyd's, a professional liability insurer brought a declaratory judgment action, seeking a declaration that it had no duty to provide a defense to its insured, a defendant in a False Claims Act qui tam alleging excessive Medicare and Medicaid billing. The insurer relied on a policy exclusion precluding coverage for any "Damage, Penalties or Claim in connection with or resulting from any claim . . . [b]rought by or on behalf of . . . any federal, state, local or foreign governmental entity." Justice Scarpulla of the New York County Commercial Division found this exclusion inapplicable, and granted summary judgment to the insured, reasoning that the exclusion did not apply to qui tam actions brought by private parties in which the government does not intervene. The First Department disagreed, explaining:

The motion court incorrectly determined that the "Exclusion N" was inapplicable because the underlying qui tam lawsuit was brought by a private party, not a governmental entity operating in an official or regulatory capacity. An action brought under the False Claims Act may be commenced in one of two ways. First, the federal government itself may bring a civil action against a defendant (31 USC § 3730[a]). Second, as is the case here, a private person, or "relator" may bring a qui tam action "for the person and for the United States Government," against the defendant, "in the name of the Government". Under such circumstances, the government may elect to intervene, and if it
recovers a judgment, the relator receives a percentage of the award. If the government declines to intervene, as in the case here, the relator may pursue the action and may receive as much as 30 percent of any judgment rendered.

While relators indisputably have a stake in the outcome of False Claims Act qui tam cases that they initiate, the Government remains the real party in interest in any such action. . . .

Moreover, in considering the issue of relator standing, the Supreme Court of the United States has determined that a relator's interest in a qui tam suit is one as the partial assignee of the claims of the United States, but it has observed that the injury, and therefore, the right to bring the claim belongs to the United States. In short, while the False Claims Act permits relators to control the False Claims Act litigation, the claim itself belongs to the United States.

Because the United States is the real party in interest in a qui tam action under the False Claims Act, the "Exclusion N" bars coverage for the underlying action.

(Some citations omitted.)