OCEANWAY MENTAL HEALTH AGENCY INC et al v. PHILADELPHIA INDEMNITY INSURANCE COMPANY

Filing 32

DECSION AND ORDER granting 25 Defendant's Motion for Summary Judgment; denying 27 Plaintiffs' Motion for Summary Judgment By JUDGE LANCE E. WALKER. (CJD) (Main Document 32 replaced on 1/23/2019 with non-redlined version) (mlm).

UNITED STATES DISTRICT COURT
DISTRICT OF MAINE

OCEANWAY MENTAL HEALTH
AGENCY, INC., et al.,
Plaintiffs
v.
PHILADELPHIA INDEMNITY
INSURANCE COMPANY,
Defendant

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No. 2:17-CV-00424-LEW

DECISION AND ORDER
Plaintiffs Oceanway Mental Health Agency, Inc., and Oceanway Manor, Inc., bring
this diversity action to obtain a declaratory judgment that Defendant Philadelphia
Indemnity Insurance Company owes a duty to defend and indemnify Plaintiffs against
administrative proceedings initiated against Plaintiffs by the Maine Department of Health
and Human Services. Compl. (ECF No. 1). The parties have asked the Court to resolve
their dispute in the context of competing motions for summary judgment based on
stipulated facts. Pl.’s Mot. for Summ. J. (ECF No. 27); Def.’s Mot. for Summ. J. (ECF
No. 25). For reasons explained herein, Plaintiffs’ motion is denied and Defendant’s motion
is granted.
FACTS
Plaintiffs Oceanway Mental Health Agency (“OWMHA”) and Oceanway Manor
(“OWM”) are mental health services agencies that contracted with the Department of

Health and Human Services to provide mental health services to individuals qualified to
receive services through programs administered by the Department. Compl. ¶¶ 13, 16, 17,
20, 21. Pursuant to the agreement, Plaintiffs agreed to bill for services and the Department
agreed to pay for services under the auspices of the Medicaid or Mainecare program. Id.
¶¶ 14, 18; Joint Stipulation of Facts ¶¶ 1-2 (ECF No. 26).
The Underlying Medicaid Controversy
Medicaid billing procedures are demanding and subject to regulatory oversight.
Along these lines, the parties stipulate to the existence of a regulatory scheme that required
Plaintiffs to comply with several billing and record keeping requirements and authorized
the Department to monitor compliance and to impose sanctions, recover overpayments,
and apply penalties for noncompliance with Medicaid requirements. Joint Stipulation ¶¶
4-6, 12-14, 19. Additionally, if there is a credible allegation of fraud, the Department was
authorized to suspend payments pending an investigation. Id. ¶¶ 7-8. Examples of fraud
include:
“Billing for services, supplies, or equipment that were not rendered to, or
used for, MaineCare members”;
“Claiming of costs for non-covered or non-chargeable services, supplies or
equipment disguised as covered items”; and
“Material misrepresentations of dates and descriptions of services rendered,
or of the identity of the member or the individual who rendered the services.”
Id. ¶ 9 (citing MaineCare Benefits Manual 1.22-1).
In June 2016, the Department’s Program Integrity Unit conducted a site visit to
investigate Plaintiff OWMHA’s compliance based on its receipt of complaints about
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OWMHA’s billing submissions and records. Id. ¶¶ 45-47. On October 19, 2016, the
Program Integrity Unit sent a Notice of Violation to OWMHA. Id. ¶ 48 & Ex. E. The
review involved over 5,000 claims paid to OWMHA between April 1, 2015, and April 30,
2016. Id. ¶ 50. As the result of its investigation, the Program Integrity Unit found certain
violations and took remedial action against OWMHA, including imposition of a penalty
for inadequate records for some claims, as well as a requirement that OWMHA return the
entirety of certain “overpayments or payments made in error,” to the tune of $437,796.37.
Id. ¶¶ 51-53.
On November 15, 2016, the Program Integrity Unit sent a Notice of Violation to
OWM. Id. ¶ 54; Joint Stipulation Ex. F. The Unit found certain violations, including bills
submitted for services provided by employees lacking qualifications and bills submitted
for services when a member was out of the facility and not using the facility’s support
services. Id. ¶¶ 55-56. As a result of these violations, the Program Integrity Unit imposed
similar recoupment penalties as a sanction for billing violations, in the amount of
$25,614.57. Id. ¶¶ 57-58.
By letters dated October 26, 2016, the Program Integrity Unit advised OWMHA
and OWM that it would temporarily suspend all future MaineCare payments based on a
determination that there existed a credible allegation of fraud. Id. ¶¶ 59, 62 & Exs. G, H.
Then, in December 2016, the Department’s Office of MaineCare Services notified
OWMHA and OWM that it was terminating their MaineCare provider agreements. Id. ¶¶
65, 67 & Exs. I, J.

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Plaintiffs’ Request for Coverage
In or around October 2016, Plaintiffs provided notice of loss to Defendant. Id. ¶ 69.
Defendant denied the claim, stating that there was no coverage under the Policies because,
inter alia, there was no claim “involving bodily injury, property damage or personal and
advertising injury caused by an occurrence” per the insuring agreements set forth in the
CGL coverage form, and that “intentional acts by an insured are excluded as are any claims
related to breach of contract.” Defendant also stated that with respect to the professional
liability coverage form there was “no professional incident” and that certain exclusions
applied, including “exclusions related to damages that are expected and intended; damages
that arise out of a failure to collect or pay money, arising out of an insured gaining any
personal profit or advantage to which they are not legally entitled and damages arising out
of any acts, errors or omissions of a managerial or administrative nature.” Id. ¶ 70 & Exs.
K, L.
By letter dated March 29, 2017, counsel for Plaintiffs requested “reimbursement
and coverage for the costs of defending OWMHA … pursuant to the Human Services
Organization Professional Liability Coverage in the above-referenced policies.” Id. ¶ 72,
Ex. M. In October 2017, Plaintiffs filed a two-count complaint against Defendant, seeking
declaratory relief and monetary damages with respect to “claims asserted by [the
Department] in the administrative proceedings initiated against OWMHA and OWM by
Notices dated October 26, 2016.” Id. ¶ 74.

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The Coverage Forms
In April 2016, Defendant issued “commercial lines” policies to Plaintiffs with a
policy period of April 16, 2016 to April 16, 2017 (collectively the “Policy”). Id. ¶ 22. The
Policy includes a Human Services Organization Professional Liability Coverage Form. Id.
¶ 23 & Ex. C.
The “insuring agreement” under the professional liability coverage form provides
that Defendant: (a) will pay only “those sums that the insured becomes legally obligated to
pay as ‘damages’ arising out of a ‘professional incident’ in the course of performing
professional services for, or on behalf of, [the] human services organization to which this
insurance applies”; and (b) has the “duty to defend any ‘suit’ seeking those ‘damages.’”
Id.
The professional liability coverage form defines the terms appearing in quotation
marks. Thus:
“Damages” means a monetary … Judgment … Award; or … Settlement, but
does not include fines, sanctions, penalties, punitive or exemplary damages
or the multiple portion of any damages;
…
“Professional incident” means any actual or alleged negligent … Act …
Error; or … Omission in the actual rendering of professional services to
others, including counseling services, in your capacity as a human services
organization;
…
“Suit” means a civil proceeding in which ‘damages’ are claimed and to which
this insurance applies.
Id. ¶¶ 27-31.
The coverage form also sets forth certain coverage “exclusions.”
Specifically, it states:
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Id. ¶ 32.

This insurance does not apply to “damages”:
1. Expected or intended from the standpoint of the insured.
2. For any actual or alleged breach of contract or agreement. …
…
18. Arising out of an insured gaining any personal profit or advantage to
which they are not legally entitled.
…
20. Arising out of any criminal, dishonest, fraudulent or malicious act or
omission. …
…
22. Arising out of acts, errors or omissions of a managerial or administrative
nature.
…
Id. ¶ 33.
In addition to the professional liability coverage form, the Policy includes a
Commercial General Liability Coverage Form (the “CGL form”). Id. ¶ 34 & Ex. D. The
“insuring agreement” under the CGL form provides that Defendant: (a) will pay only
“those sums that the insured becomes legally obligated to pay as ‘damages’ because of
‘bodily injury’ or ‘property damage’ to which this insurance applies”; and (b) has the “duty
to defend any ‘suit’ seeking those ‘damages.’” Id. ¶ 36. The CGL form provides that the
insurance “applies to … ‘property damage’ only if … [t]he ‘property damage’ is caused by
an ‘occurrence’ ….” Id. ¶ 37. The defined terms are as follows:
“Property damage” means … “[p]hysical injury to tangible property,
including all resulting loss of use of that property” or “[l]oss of use of
tangible property that is not physically injured.”
…
“Occurrence” means an accident, including continuous or repeated exposure
to substantially the same general harmful conditions.
…

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“Suit” means a civil proceeding in which damages because of “bodily
injury”, “property damage” or “personal and advertising injury” to which this
insurance applies are alleged.
Id. ¶¶ 39-42.
The CGL form sets forth certain coverage “exclusions.” Id. ¶ 43. Specifically, the
form states:
This insurance does not apply to: ….
a. … “property damage” expected or intended from the standpoint of the
insured. …
b. … “property damage” for which the insured is obligated to pay damages
by the reason of assumption of liability in a contract or agreement. …
…
j. … “Property damage” to … [p]roperty you own … including any costs or
expenses incurred … for repair, replacement, enhancement, restoration or
maintenance of such property for any reason, including prevention of injury
to … or damage to another’s property;
…
m. … “Property damage” to … property that has not been physically injured,
arising out of … [a] delay or failure by you or anyone acting on your behalf
to perform a contract or agreement in accordance with its terms. …
…
Id. ¶ 44.
DISCUSSION
“Maine law on the duty to defend is well established. Courts apply a comparison
test between ‘two documents: the insurance policy and the underlying complaint against
the insured.’” Zurich Am. Ins. Co. v. Elec. Maine LLC, 325 F. Supp. 3d 198, 199-200 (D.
Me. 2018) (quoting Harlor v. Amica Mut. Ins. Co., 150 A.3d 793, 797 (Me. 2016)).
An insurer has a duty to defend an insured when the complaint, read broadly
in conjunction with the policy, reveals the existence of any legal or factual
basis that could potentially be developed at trial and result in an award of
damages covered by the terms of the policy. Although courts do not
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speculate about causes of action that were not stated[,] ... our rules of notice
pleading favor a broad construction of the duty to defend. The facts alleged
in the complaint need not make out a claim that specifically and
unequivocally falls within the coverage. Rather, where the events giving rise
to the complaint may be shown at trial to fall within the policy’s coverage,
an insurer must provide the policyholder with a defense. We have explained
the comparison test and its low threshold for triggering an insurer’s duty to
defend, as a test and a threshold designed to discourage mini-trials on the
issue of the duty to defend.
Harlor, 150 A.3d at 797-98 (quotation marks and citations omitted). As explained in
Harlor, I must consider whether the liabilities generated by the administrative proceedings
could be shown at trial to be covered under one or both of the coverage forms.
Additionally, if the coverage question is ambiguous, I am to resolve doubts in favor of a
duty to defend, and in considering whether language is ambiguous, I must ask whether it
“is reasonably susceptible of different interpretations or if any ordinary person in the shoes
of the insured would not understand that the policy did not cover claims such as those
brought.” Cox v. Commonwealth Land Title Ins. Co., 59 A.3d 1280, 1283 (Me. 2013).
The comparison test, as uniquely applied by Maine courts, reveals an uneven
intellectual luge ride that might lead one to conclude that, in practice, there is no limiting
principle to an insurer’s duty to defend. So long as there exists a policy and a complaint,
surely too must there be a duty to defend, found somewhere in the aether. I understand
that the rule as articulated sets this low bar by design, but for there to be a rule with any
meaning there also must be a bar. Fortunately, the epistemological conundrum somewhat
inherent in the comparison test is less a problem in cases involving coverage language that
defines key terms and exclusions that reinforce and refine the terms of coverage, in plain
language. This is such a case.
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Defendant argues the Department’s administrative proceedings against Plaintiffs do
not give rise to the sort of liability covered under either the CGL form or the professional
liability form because there is no “suit” for purposes of either coverage, there are no
“damages” and no “professional incident” for purposes of the professional liability
coverage, and there is no “property damage” or “occurrence” for purposes of the CGL
coverage. Additionally, Defendant argues coverage would in any event be ruled out by
specific exclusions, as well as by a public policy that “does not allow an entity to insure
itself against the risk of being ordered to return money or property that it wrongfully
acquired.” Def.’s Motion 15, citing, inter alia, New Life Brokerage Servs. v. Cal-Surance
Assocs., 334 F.3d 112, 114-15 (1st Cir. 2003).
The thrust of Plaintiffs’ motion for summary judgment and their opposition to
Defendant’s motion is that the underlying administrative matters trigger Defendant’s duty
to defend under the professional liability form because the Department’s notices state that
the Department imposed “a recoupment,” which Plaintiffs argue is a form of damages, Pl.’s
Mot. at 2-3, and because the Department based the imposition of the recoupment/sanction
on, inter alia, shortcomings in Plaintiffs’ delivery of services, Pl.’s Opposition at 3-4.
A.

CGL Coverage
Plaintiffs have abandoned any claim to coverage under the CGL coverage form.

Moreover, it is plain that the administrative action undertaken by the Department does not
expose Plaintiffs to liability based on an occurrence of personal injury or property damage,
a basic prerequisite to coverage under the CGL coverage form.
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B.

Professional Liability Coverage
Coverage under the professional liability form is triggered by a suit for damages

arising out of a professional incident in the course of performing professional services. My
discussion focuses on the term damages, which is essential to Plaintiffs’ claim. According
to Plaintiffs, because the Department stated in its notices that its sanctions required a
“recoupment” of payments made to Plaintiffs, the underlying liability involves “damages.”
Plaintiffs cite School Union No. 37 v. United National Insurance Company, 617 F.3d 554,
563 (1st Cir. 2010), in which the First Circuit held that “compensatory equitable relief in
the form of reimbursement,” is a specie of damages. Id. at 3.
In School Union the term damages was not defined in the policy – an Educator’s
Liability Policy – and the policy also expressly covered another form of compensatory
remedy generally understood to be equitable in nature (backpay). Id. at 562. In light of
these facts, the First Circuit reasoned that the scope of the damages term was ambiguous
and that the insurance company must indemnify the school union against a family’s claim
under the Individuals with Disabilities Education Act for reimbursement of the expenses
of private education that should have been born by the school union. Id. at 562-63.
Here, in contrast, the damages term is defined to not include fines, sanctions, and
penalties. While an ordinary person might wonder, in the absence of a definition, whether
the scope of the term “damages” includes “recoupment,” he or she would readily
understand that the administrative proceedings seeking recoupment against Plaintiffs
involve “fines, sanctions, and penalties” based on alleged violations of Medicaid billing
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standards. Moreover, the definition is reinforced with exclusionary language that clearly
encompasses Plaintiffs’ “liability” to the Department: i.e., the exclusion of coverage for
damages for any actual or alleged breach of contract or agreement, or arising out of acts,
errors or omissions of a managerial or administrative nature.
Thus, Plaintiffs’ attempt to bring the administrative proceedings within the defined
meaning of the term damages fails. Because this is dispositive of Plaintiffs’ claim, I do not
address the parties’ other arguments concerning the scope of coverage under the
professional liability coverage form, or the public policy argument.
CONCLUSION
Defendant’s Motion for Summary Judgment (ECF No. 25) is GRANTED.
Plaintiffs’ Motion for Summary Judgment (ECF No. 27) is DENIED.

SO ORDERED.
Dated this 23rd day of January, 2019.
/s/ LANCE E. WALKER
U.S. DISTRICT JUDGE

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