Kaiser Foundation Health Plan v. National Union Fire Insurance Company of…

Background

Kaiser Foundation Health Plan and Kaiser Foundation Health Plan of Colorado, collectively called Kaiser in the opinion, were sued by the United States and qui tam relators under the False Claims Act. The underlying litigation alleged that Kaiser altered medical records to add incorrect diagnoses and increase payments received through the Medicare Advantage program.

Kaiser settled the litigation. The main settlement required payment of $556 million plus interest and relators’ attorneys’ fees, and a related agreement required payment of $25 million plus interest. The opinion describes the total as $581 million, plus interest and fees. The main settlement identified $278 million as “restitution” and another $278 million as unlabeled, along with interest and attorneys’ fees.

Kaiser sought coverage from its primary insurer, National Union Fire Insurance Company of Pittsburgh, PA, referred to as AIG in the opinion, and from excess insurers. The insurers denied coverage, relying primarily on the policy’s Return of Funds exclusion. Kaiser filed this lawsuit and moved for partial summary judgment on selected contract-interpretation issues.

Policy provisions and scope of the motion

The policy provided coverage for the “Loss” of an insured organization arising from a claim alleging a wrongful act. “Loss” included damages, settlements, judgments, and defense costs, but excluded civil or criminal fines or penalties, certain other amounts, matters that may be uninsurable under applicable law, and the return of governmental funds or related interest, fines, or penalties.

The policy also specifically included punitive, exemplary, and multiplied damages within the definition of Loss, subject to other policy terms and exclusions. An endorsement stated that Loss did not include the return of governmental funds or related interest, fines, or penalties, while providing limited coverage for defense costs connected with claims seeking the return of those funds.

Kaiser did not ask the court to decide whether any particular portion of the settlement was actually a covered loss, whether the settlement included multiplied damages, whether the claim was first made during the policy period, whether allocation among entities was required, or whether other exclusions applied. The motion instead sought narrow rulings about the policy’s definitions and the Return of Funds exclusion.

Rule 56(d) requests

Federal Rule of Civil Procedure 56(d) allows a court to defer or deny summary judgment, permit additional discovery, or issue another appropriate order when a nonmoving party shows by declaration that it cannot yet present facts needed to oppose the motion.

AIG sought discovery about when Kaiser first became aware of the underlying claims and about the nature of the settlement payment. The excess insurers raised those issues and also sought discovery about allocation among entities and possible public-policy limits on insuring certain conduct.

The court held that the requested discovery was not needed to decide the narrow contract-interpretation questions presented by Kaiser. It denied AIG’s Rule 56(d) motion and denied the excess insurers’ Rule 56(d) motion.

Summary-judgment rulings

The court granted Kaiser partial summary judgment that:

- Kaiser was an insured organization under the AIG policy; - the settlement arose from a claim; - the False Claims Act litigation alleged wrongful acts by Kaiser; and - the settlement satisfied the initial definition of Loss as a settlement.

The court expressly did not decide whether other exclusions in the Loss definition applied.

Return of Funds exclusion

The court interpreted the policy under California contract law. It concluded that “return of funds” ordinarily means restitution—the return to the government of money that was wrongfully received. Multiplied damages are amounts above and distinct from the money obtained and returned, so they do not themselves fall within that phrase.

The court also concluded that multiplied damages are not “interest” and are distinct from “fines” and “penalties.” The policy separately listed fines, penalties, and multiplied damages, which supported giving those terms different meanings. The court further reasoned that any ambiguity in an exclusion must be interpreted narrowly against the insurer, particularly where the policy expressly included multiplied damages within Loss.

The court therefore held that the Return of Funds exclusion did not, as a matter of law, preclude coverage for portions of Kaiser’s settlement attributable to multiplied damages. This was only a contract-interpretation ruling. The court did not determine whether the settlement actually contained such amounts or whether those amounts would be covered after applying other exclusions or defenses, including possible public-policy limits or the insurers’ argument that the claim was first made before the policy period.

Disposition

Kaiser’s motion for partial summary judgment was granted on the listed issues. The insurers’ Rule 56(d) motions were denied.