AFFININTY LIVING GROUP, LLC, ET AL. V. STARSTONE SPECIALTY INSURANCE COMPANY, ET AL.
Filing
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MEMORANDUM OPINION AND ORDER signed by JUDGE CATHERINE C. EAGLES on 9/25/2018. Homeland's motion for judgment on the pleadings, (Doc. 30 ), is GRANTED, and to the extent Affinity's motion for partial summary judgment, (Doc. 29 ), is directed against Homeland, it is DENIED. (Daniel, J)
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
AFFINITY LIVING GROUP, LLC,
and CHARLES E. TREFZGER, JR.,
Plaintiffs,
v.
STARSTONE SPECIALTY
INSURANCE COMPANY, and
HOMELAND INSURANCE
COMPANY OF NEW YORK,
Defendants.
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1:18-CV-35
MEMORANDUM OPINION AND ORDER
Catherine C. Eagles, District Judge.
The plaintiffs Affinity Living Group and Charles Trefzger are defendants in a qui
tam lawsuit pending in the Eastern District of North Carolina. They filed this case
seeking to compel their professional liability insurer, defendant Homeland Insurance, to
defend and indemnify Affinity in the qui tam suit. Because Affinity’s policy with
Homeland unambiguously excludes coverage for the underlying qui tam suit, the Court
will grant Homeland’s motion for judgment on the pleadings.
I.
The Undisputed Facts
a. The Gugenheim Suit
In the summer of 2016, Stephen Gugenheim filed a qui tam suit against a number
of North Carolina adult care homes, naming Charles E. Trefzger as “owner and Membermanager” and Affinity as one of the “managing entities.” Doc. 32-1 at 5, p. 8 ¶ 6, p. 25
¶ 67.1 Mr. Gugenheim filed his complaint on behalf of the United States and the State of
North Carolina pursuant to the False Claims Act, 31 U.S.C. § 3729(a)(1), and a similar
North Carolina statute, N.C. Gen. Stat. § 1-607(a). Doc. 32-1 at p. 6 ¶ 1. Mr.
Gugenheim alleges that the defendants were alter egos of each other, id. at p. 28 ¶ 80, and
that they acted in concert to submit false claims for Medicaid reimbursements for
personal care services that were not actually provided to residents of their adult care
homes. See, e.g., id. at p. 7 ¶ 2. He further asserts that the defendants acted with
knowledge or deliberate ignorance of the falsity of these Medicaid claims. Id. at p. 7 ¶ 2,
pp. 47–49 ¶¶ 164–172. The suit seeks treble damages and penalties for each false
statement. Id. at p. 8 ¶ 11.
b. The Insurance Policies and Coverage Denials
Affinity carries separate insurance policies through Homeland Insurance and
StarStone Specialty Insurance Company, both of which provide indemnification and
defense against certain claims arising out of services rendered at Affinity’s adult care
facilities. Doc. 22-1 (Affinity’s policy with Homeland); Doc. 19-1 (Affinity’s policy
with StarStone). Affinity’s policy with Homeland is the first line of defense, Doc. 22-1 at
11, whereas the StarStone policy is an “umbrella” plan that applies only if the Homeland
policy is exhausted on, or is inapplicable to, a covered claim. See Doc. 19-1 at 15, 25.
1
All citations in this opinion to documents filed with the Court refer to the Middle District
docket number and pagination assigned by the CM-ECF system appearing on the bottom of the
page. Where paragraph numbers or other internal references in a cited document allow for a
more specific citation, those are included as well.
2
After receiving notice of the qui tam lawsuit, Affinity notified its primary insurer,
Homeland. Doc. 32-1 at p. 64 ¶ 31. Citing various policy exclusions, Homeland denied
coverage for the suit. Id. at 145–46. Affinity’s effort to obtain coverage from its
umbrella carrier, StarStone, was also unsuccessful. See id. at 160, 168–70.
In response to these denials, Affinity and Mr. Trefzger filed this suit against
Homeland and StarStone. Doc. 11. The plaintiffs seek a declaratory judgment that their
insurance policies obligate Homeland and StarStone to indemnify and defend against the
Gugenheim suit and to reimburse plaintiffs for defense costs already incurred. Doc. 32 at
22–23. The plaintiffs also seek damages for breach of contract. Doc. 11 at ¶¶ 163–65.
The parties agree that there are no disputed facts and that the case is appropriate
for resolution based on consideration of the Gugenheim complaint and the policy. Each
side has filed a dispositive motion.2 This Order addresses coverage under the Homeland
policy; coverage under the StarStone policy will be resolved by separate order.
c. Material Terms in Affinity’s Policy with Homeland
The Homeland policy covers “any Loss that the Insured is legally obligated to pay
as a result of any covered Claim for a Professional Services Wrongful Act.” Doc. 22-1
at 11 § I(A) (emphasis in original indicating terms that are defined in the policy). The
2
The plaintiffs have moved for summary judgment. Doc. 32. Defendant Homeland has
moved for judgment on the pleadings, Doc. 31, which would appropriately allow for
consideration of the undisputed copies of the Gugenheim complaint and the insurance policy,
which form the basis of Affinity’s complaint. See Blankenship v. Manchin, 471 F.3d 523, 526
n.1 (4th Cir. 2006) (considering an article attached to defendant’s 12(b)(6) motion because it was
“clearly integral to, and was relied upon” in plaintiff’s complaint and plaintiff did not dispute its
authenticity).
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duty to defend extends to any claim that is covered by, inter alia, the indemnity
provision. Id. at 12.3
The Homeland policy contains a number of exclusions from coverage. See
generally, Doc. 22-1 at p. 21 § III. Two of those exclusions are relevant here:
[T]his Policy does not apply to, and the underwriter will not pay Loss or
Defenses Expenses, for any Claim based upon, arising out of, directly or
indirectly resulting from, in consequence of, or in any way involving any
actual or alleged:
(4) Dishonest, fraudulent, criminal or intentionally malicious act, error or
omission by an Insured; . . . or the gaining of any profit, remuneration
or advantage by an Insured to which such Insured was not legally
entitled, including, but not limited to, health care fraud . . . [or]
***
(16) Claim made by or on behalf of any federal, state or local governmental
or regulatory agency or entity, including but not limited to any Claim
alleging health care fraud . . . .
Id. at 25–27 § III (D) (emphasis in original). In its denial letter, Homeland cited
Exclusions 4 and 16, among others, as the basis for its conclusion that the
Gugenheim suit was “excluded in its entirety” from coverage by the policy. Doc.
32-1 at 145–46.
The parties also briefed the question of whether the Gugenheim suit is a covered “Claim
for a Professional Services Wrongful Act.” See Doc. 35 at 6–18; Doc. 31 at 6–13. The Court
need not, and does not, rule on that question, because the policy exclusions would bar coverage
for the Gugenheim suit even if it qualified as a “Claim for a Professional Services Wrongful
Act.” See infra Section II. While far from a settled question, the Court assumes without
deciding that the Gugenheim suit would fall within the coverage provisions of Affinity’s policy
with Homeland, absent these exclusions.
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II.
Law and Analysis4
The parties agree that they entered into the insurance contract in North Carolina,
and that North Carolina law governs this diversity suit. Doc. 31 at 5; Doc. 36 at 6 n.1;
see also Fortune Ins. Co. v. Owens, 351 N.C. 424, 428, 526 S.E.2d 463, 466 (2000)
(North Carolina law “mandates that the substantive law of the state where the last act to
make a binding contract occurred, usually delivery of the policy, controls the
interpretation of the contract.”). In North Carolina, an insurance policy is a contract, and
its terms are interpreted in fundamentally the same manner as contract terms: the goal is
to arrive at the intent of the parties when the policy was issued. Woods v. Nationwide
Mut. Ins. Co., 295 N.C. 500, 505, 246 S.E.2d 773, 777 (1978).
“As the language of the policy is the clearest indicator of the parties’ intentions,
where the policy is unambiguous, it must be presumed the parties intended what the
language used clearly expresses, and the policy must be construed to mean what on its
face it purports to mean.” Integon Nat'l Ins. Co. v. Phillips, 212 N.C. App. 623, 626, 712
S.E.2d 381, 383 (2011). If there is an ambiguity,5 the ambiguous terms should be
construed in favor of coverage for the insured, because the insurance company drafts the
policy. Wachovia Bank & Trust Co. v. Westchester Fire Ins. Co., 276 N.C. 348, 354, 172
4
The Court omits internal citations, alterations, and quotation marks throughout this opinion,
unless otherwise noted. See United States v. Marshall, 872 F.3d 213, 217 n.6 (4th Cir. 2017).
A policy term is ambiguous when it is “fairly and reasonably susceptible to more than one
interpretation.” Liberty Corp. Capital, Ltd. v. Delta Pi Chapter of Lambda Chi Alpha, No.
1:09cv765, 2012 WL 3308371, at *2 (M.D.N.C. Aug. 13, 2012).
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S.E.2d 518, 522 (1970). Construction and application of an insurance policy provision is
generally a question of law appropriate for summary disposition. Prime TV, LLC v.
Travelers Ins. Co., 223 F. Supp. 2d 744, 749 (M.D.N.C. 2002); C.D. Spangler Constr.
Co. v. Industrial Crankshaft & Eng’g Co., 326 N.C. 133, 141, 388 S.E.2d 557, 562
(1990).
The party seeking coverage must show that the terms of the policy cover a
particular event; conversely, it is the insurer who carries the burden of demonstrating that
an exclusion applies. Kruger v. State Farm Mut. Auto. Ins. Co., 102 N.C. App. 788, 790,
403 S.E.2d 571, 572 (1991). “When the language of a contract is clear and unambiguous,
effect must be given to its terms, and the court, under the guise of constructions, cannot
reject what the parties inserted.” Weyerhaeuser Co. v. Carolina Power & Light Co., 257
N.C. 717, 719, 127 S.E.2d 539, 541 (1962).
North Carolina courts apply these interpretive principles through the “comparison
test,” which requires reading “the policies and the complaint side-by-side to determine
whether the events as alleged are covered or excluded.” Harleysville Mut. Ins. Co. v.
Buzz Off Insect Shield, LLC, 364 N.C. 1, 6, 692 S.E.2d 605, 610 (2010). Here, Homeland
relies on two policy exclusions that match up exactly with the events alleged in the
Gugenheim complaint.
Policy Exclusion 4 expressly precludes indemnity and defense coverage for “any
claim . . . in any way involving any actual or alleged . . . [d]ishonest [or] fraudulent . . .
act, error or omission by an Insured.” Doc. 22-1 at 26 (emphasis in original). The
Gugenheim complaint consistently and repeatedly uses the words “false” and
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“fraudulent” to describe the actions of Affinity and other defendants. See, e.g., Doc. 32-1
at p. 7 ¶ 2, p. 39 ¶ 126, p. 43 ¶ 147, p. 44 ¶ 152, p. 46 ¶ 162. It asserts only two claims
for relief––violations of the federal False Claims Act and its North Carolina counterpart,
id. at 7 ¶ 2—and dishonesty is an essential element of both claims. See United States v.
Raza, 876 F.3d 604, 619–20 (4th Cir. 2017) (“The FCA penalizes anyone who knowingly
presents . . . a false or fraudulent claim for payment or approval to the federal
government.”); N.C. Gen. Stat. § 1-607(a)(1)–(2) (requiring that the defendant
“knowingly” present, use, or make a “false or fraudulent claim . . . or statement . . . .”). It
does not assert a negligence claim of any sort, nor can it be read to contend that Affinity
acted inadvertently or carelessly. As such, the Gugenheim suit falls within Policy
Exclusion 4 as a claim “involving” an “alleged . . . dishonest or fraudulent . . . act” by
Affinity. See MSO Washington, Inc. v. RSUI Grp., Inc., No. C12-6090 RJB, 2013 WL
1914482, at * 3, 9 (W.D. Wash. May 8, 2013) (applying an exclusion for claims “based
upon or arising out of . . . [d]ishonest, fraudulent, criminal or intentional acts, errors or
omissions committed by or at the direction of the Insured” to exclude coverage for a
False Claims Act suit.).
The next part of Policy Exclusion 4 also excludes the alleged fraud, which
bars coverage for claims alleging “the gaining of any profit, remuneration or
advantage by an Insured to which such Insured was not legally entitled,
including, but not limited to, health care fraud.” Doc. 22-1 at 26 (emphasis in
original). The Gugenheim complaint specifically alleges that Affinity and its codefendants submitted bills to the government for services which were never
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rendered. See, e.g., Doc. 32-1 at p. 7 ¶ 4, pp. 34–35 ¶ 107, p. 35 ¶ 112, pp. 44–45
¶¶ 149, 152, p. 45 ¶ 155. If true, this would constitute “profit or remuneration” to
which Affinity “was not legally entitled,” and Affinity has not contended
otherwise. See Int’l Ass’n of Chiefs of Police, Inc. v. St. Paul Fire & Marine Ins.
Co., 686 F. Supp. 115, 116–17 (D. Md. 1988) (construing an exclusion for “claims
relating to any unlawful profit or advantage” to bar indemnity for a settlement of
fraud claims arising from the insured’s alleged overbilling of employee work time
on a federal contract.).
Policy Exclusion 16, which bars coverage for claims “made by or on behalf
of” federal and state governments “including but not limited to any Claim alleging
health care fraud and abuse,” is also directly on point. Doc. 22-1 at 27 (emphasis
in original). The Gugenheim complaint was filed on behalf of the federal
government and the state of North Carolina,6 and the terms “health care fraud and
abuse,” while not specifically defined in the policy, obviously include a fraudulent
scheme to submit claims and obtain payments for health-related services which
were never provided. See, e.g., United States v. Perry, 659 F. App’x. 146, 148–53
(4th Cir. 2016) (finding that a scheme to submit claims and obtain Medicaid
See 31 U.S.C. § 3730(b) (“A person may bring a civil action for a violation of [the False
Claims Act] for the person and for the United States Government. The action shall be brought in
the name of the Government.”); N.C. Gen. Stat. § 1-608(b) (“A person may bring a civil action
for a violation of [the North Carolina False Claims Act] for the person and for the State as
follows: (1) The action shall be brought in the name of the State . . . .”).
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reimbursements for services that were not actually rendered amounted to health
care fraud under 18 U.S.C. § 1347). Affinity does not contend otherwise.7
Affinity maintains that exclusions are to be narrowly construed in favor of
coverage, see, e.g., Doc. 35 at 5, but this principle only applies where policy terms are
ambiguous. Liberty Corp. Capital, Ltd., 2012 WL 3308371 at *2 (i.e., noting that
ambiguous terms “should be construed strictly in favor of coverage”). Where, as here,
“the language of a contract is clear and unambiguous, effect must be given to its terms,
and the court, under the guise of constructions, cannot reject what the parties inserted.”
Weyerhaeuser Co., 257 N.C. at 719, 127 S.E.2d at 541. There is no ambiguity to wring
out of these policy exclusions: each exempts the Gugenheim claim from coverage.
Affinity also contends that Homeland was obligated to investigate the veracity of
the claims in the Gugenheim suit before denying coverage, rather than simply reviewing
the complaint. See Waste Mgmt. of Carolinas, Inc. v. Peerless Ins. Co., 315 N.C. 688,
691–92, 340 S.E.2d 374, 378–79 (1986) (noting that the insurer has a “duty to investigate
and evaluate facts expressed or implied” in the complaint “as well as facts learned from
the insured and from other sources.”); Doc. 35 at 19 (“Had a Homeland claim handler
picked up the telephone and called Affinity . . . it would have readily ascertained that the
allegations” are “entirely without merit.”). But the policy is clear that the truth of the
allegations is immaterial; it explicitly states that both Exclusions 4 and 16 bar coverage
Even if the fraud alleged in the Gugenheim complaint were not “health care fraud and
abuse,” coverage would still be excluded. Exclusion 16 bars coverage for claims made on behalf
of the government, with health care fraud claims merely being an example, not a requirement.
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for claims involving a mere allegation of dishonesty or health care fraud. Doc. 22-1 at 25
–27. Because “the facts are not even arguably covered by the policy,” the insurer had no
duty to investigate the third-party claim. Waste Mgmt. of Carolinas, Inc., 315 N.C. at
692, 340 S.E.2d at 378.
III.
Conclusion
The Gugenheim suit is unambiguously excluded from coverage under two separate
prongs of Policy Exclusion 4 and under Exclusion 16. Because “it appears certain that
the plaintiff cannot prove any set of facts in support of his claim entitling him to relief,”
Homeland is entitled to judgment on the pleadings. Edwards v. City of Goldsboro, 178
F.3d 231, 244 (4th Cir. 1999).
For the foregoing reasons, it is ORDERED that Homeland’s motion for judgment
on the pleadings, Doc. 30, is GRANTED, and to the extent Affinity’s motion for partial
summary judgment, Doc. 29, is directed against Homeland, it is DENIED
This the 25th day of September, 2018.
__________________________________
UNITED STATES DISTRICT JUDGE
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