AFFININTY LIVING GROUP, LLC, ET AL. V. STARSTONE SPECIALTY INSURANCE COMPANY, ET AL.
Filing
47
MEMORANDUM OPINION AND ORDER signed by JUDGE CATHERINE C. EAGLES on 10/5/2018. StarStone's motion for judgment on the pleadings, (Doc. 27 ), is GRANTED and Affinity's motion for partial summary judgment, (Doc. 29 ), 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 here, Affinity Living Group and Charles Trefzger, are defendants in
a qui tam lawsuit pending in the United States District Court for the Eastern District of
North Carolina. They filed this case seeking to compel Affinity’s insurer, defendant
StarStone Specialty Insurance Company, to defend and indemnify them in the qui tam
suit. Because the qui tam claims did not arise out of the rendering or failure to render
medical professional services, they are not covered by Affinity’s policy with StarStone,
and the Court will grant StarStone’s motion for judgment on the pleadings.
I.
Background
In 2016, Stephen Gugenheim filed a qui tam suit in the Eastern District of North
Carolina against a number of North Carolina adult care homes, including Mr. Trefzger,
whom he identified as the owner of all the homes, and Affinity, which he identified as the
managing entity.1 Doc. 32-1 at p. 8 ¶ 6. He filed the complaint on behalf of the United
States and the State of North Carolina, id. at p. 6 ¶ 1, alleging that the defendants acted in
concert to submit false claims for Medicaid reimbursements for services that were not
actually provided to residents of their adult care homes. Id. at p. 7 ¶¶ 2, 4. Mr.
Gugenheim further alleged that the facilities were understaffed, that they were unable to
provide “personal care services”2 which met the assessed needs of residents, and that
staffing levels fell below requirements for obtaining Medicaid reimbursements. Id. at pp.
34–35 ¶¶ 107–09, p. 37 ¶ 120. Finally, he alleged that the defendants falsely certified
compliance to obtain Medicaid reimbursements, in violation of the False Claims Act, 31
U.S.C. § 3729, and a similar North Carolina statute, N.C. Gen. Stat. § 1-605. Id. at pp. 6–
7 ¶¶ 1–2, p. 47 ¶¶ 165–66, p. 48 ¶¶ 170–71. The suit seeks treble damages and penalties
for each false statement. Id. at p. 8 ¶ 11.
Affinity carries separate insurance policies through Homeland Insurance and
StarStone, each of which provides 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, see Doc. 22-1 at 11, and the StarStone policy
1
Nothing in this Order should be construed as expressing an opinion on the merits of the
Gugenheim complaint or the veracity of its allegations.
According to the complaint, “Personal Care Services provided under the N.C. Medicaid
Program include a range of hands-on human assistance provided to persons of all ages with
disabilities and chronic conditions to enable them to accomplish tasks that they would ordinarily
do for themselves if they were not disabled.” Doc. 32-1 at p. 29–30 ¶ 86.
2
2
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.
After Mr. Gugenheim filed suit, both Homeland and StarStone denied coverage.
Doc. 32-1 at 146, 160. In its denial letter, StarStone stated that the Gugenheim complaint
did not fall within the policy’s coverage provisions “because the complaint does not
allege damages resulting from a claim arising out of a medical incident.” Id. at 160
(emphasis in original indicating terms that are defined in the policy).
Affinity and Mr. Trefzger then filed this suit against Homeland and StarStone.
Doc. 11. They seek a declaratory judgment that the insurance policies obligate
Homeland and StarStone to indemnify and defend against the Gugenheim suit and to
reimburse them for defense costs already incurred. Id. at ¶¶ 158–62; Doc. 32 at 27. They
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 suited for
resolution based on consideration of the Gugenheim complaint and the policy.3
“Construction and application of insurance policy provisions is 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); accord C.D. Spangler Const. Co. v. Industrial Crankshaft
& Eng’g Co., 326 N.C. 133, 141, 388 S.E.2d 557, 562 (1990). The parties agree that they
3
The plaintiffs have moved for summary judgment. Doc. 32. The defendant StarStone has
moved for judgment on the pleadings, Doc. 27, which appropriately allows for consideration of
the undisputed copies of the Gugenheim complaint and the insurance policy. 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).
3
entered into the insurance contract in North Carolina and that North Carolina law governs
in this diversity suit. Doc. 28 at 6; 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.”). 4
By separate Order, the Court has held that the Homeland policy excludes coverage
for the claims made and defense costs associated with the Gugenheim lawsuit. See Doc.
46. This Order addresses whether Affinity has coverage under its policy with StarStone.
II.
Discussion and Analysis
Affinity has coverage for the qui tam lawsuit under the StarStone policy if two
conditions are met: (1) the primary insurance policy underlying the StarStone policy
(here, the Homeland policy) does not apply to, or was exhausted on, a claim against the
insured; and (2) the claim against the insured and the damages sought otherwise fall
within the coverage provisions of the StarStone policy. Doc. 19-1 at 25 (§ IV(F)(1)–(2)).
Because Homeland, the primary carrier, denied coverage for the Gugenheim suit and the
Court has agreed that the Homeland policy excludes coverage, the first condition has
been satisfied. In evaluating whether there is coverage under the second condition, the
Court will read the policy and the Gugenheim 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).
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).
4
As noted above, the Gugenheim complaint is a qui tam action filed on behalf of
the United States and the state of North Carolina alleging violations of the federal False
Claims Act and the North Carolina False Claims Act. Doc. 32-1 at p. 6 ¶ 1. To state a
claim under the federal False Claims Act, the plaintiff must prove:
(1) that the defendant made a false statement or engaged in a fraudulent course of
conduct; (2) such statement or conduct was made or carried out with the requisite
scienter; (3) the statement or conduct was material; and (4) the statement or
conduct caused the government to pay out money or to forfeit money due.
United States ex rel. Harrison v. Westinghouse Savannah River Co., 352 F.3d 908, 913
(4th Cir. 2003); see also N.C. Gen. Stat. § 1-607(a)(1)–(2) (providing liability for
damages sustained by the state when a defendant “knowingly” presents, uses, or makes a
“false or fraudulent claim . . . or statement . . . .”). Consistent with these requirements,
Mr. Gugenheim alleges that the adult care homes owned and managed by Affinity and
Mr. Trefzger acted in concert to submit false claims for Medicaid reimbursements for
personal care services that were not actually rendered or otherwise fell below various
quality controls for obtaining Medicaid reimbursements. Doc. 32-1 at pp. 7–8 ¶¶ 2, 4–6.
The coverage provision in the StarStone policy provides: “We [StarStone] will
pay on behalf of the insured [losses above the applicable limit] which the insured
becomes legally obligated to pay as damages resulting from a claim arising out of a
medical incident.” Doc. 19-1 at 15 (§ I(A)).5 The policy defines “medical incident” as
5
The policy emphasized words or phrases defined within the policy by using boldface type.
The first time the Court quotes policy language, it too will indicate defined words and phrases in
bold, exactly as written in the policy. Thereafter, the Court will use regular typeface.
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“an alleged or actual act, error or omission in the insured’s rendering or failure to render
medical professional services.” Doc. 19-1 at 33 (§ V(J)). “Medical professional
services” is defined by the policy as “the health care services or the treatment of a patient
including,” inter alia, medical, dental, and counseling services.6
The plain language of the policy is clear that billing for medical professional
services is not itself a medical professional service. Billing is not a “health care service”
or “the treatment of a patient” and is not included among the examples of the covered
services listed in the policy. See supra note 6. No item on this list of examples has
anything to do with billing, payment, insurance, Medicaid reimbursement, or any
financial or business aspect of patient care; instead, each listed activity entails some
aspect of looking after a patient. The only listed service not directly involved in patient
care is “committee activities for accreditation, quality assurance, peer review, and
standards review,” Doc. 19-1 at 33 (§ V(K)), which is also unrelated to billing. Id.
Billing is different in kind from all of these activities.
This plain reading of the policy language is supported by case law. A number of
courts have held that alleged false billings for health care services do not qualify as
“medical incidents” or “medical professional services” under other professional liability
The full definition for “Medical Professional Services” is “the health care services or the
treatment of a patient including medical, surgical, dental, nursing, psychiatric, osteopathic,
chiropractic or other health care professional services; furnishing or dispensing of prescription
drugs, blood, blood products, medical, surgical or dental supplies; furnishing of food or beverage
in connection with such treatment; and the providing of counseling or social services in
connection with such treatment or care. Medical professional services includes the insured’s
committee activities for accreditation, quality assurance, peer review, and standards review.”
Doc. 19-1 at 33 (§ V(K)).
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policies. See, e.g., Horizon West Inc. v. St. Paul Fire & Marine Ins. Co., 214 F. Supp. 2d
1074, 1079 (E.D. Cal. 2002), aff’d, 45 F. App’x 752 (9th Cir. 2002) (holding that “billing
for services rendered is not a professional service”); Health Care Indus. Liab. Ins.
Program v. Momence Meadows Nursing Ctr., Inc., 566 F.3d 689, 694–95 (7th Cir. 2009)
(distinguishing false billing from a medical incident arising out of professional services);
Hampton Med. Grp., P.A. v. Princeton Ins. Co., 840 A.2d 915, 925 (N.J. Super. Ct. App.
Div. 2004) (noting that “billing practices . . . do not constitute professional services”).
Billing for medical services does not fall within the policy definition of “medical
professional services,” and thus does not qualify as a covered “medical incident.”
That does not end the inquiry, as the Gugenheim complaint elsewhere does allege
a “medical incident” within the meaning of the policy. It is undisputed that the personal
care services discussed in the complaint are “medical professional services,” and the
Gugenheim complaint alleges that Affinity failed to render or otherwise provided
deficient personal care services to the residents of its adult care homes. Doc. 32-1 at p. 7
¶ 4, pp. 30–35 ¶¶ 87–109. The question is therefore whether the Gugenheim claim
“arises out of” these alleged or actual acts, errors, or omissions in Affinity’s rendering or
failure to render personal care services. See Doc. 19-1 at 15 (§ I(A)), 33 (§ V(J))
(providing coverage for claims arising out of a “medical incident,” defined as “an alleged
or actual act, error or omission in the insured’s rendering or failure to render medical
professional services.”).
The policy itself does not define the phrase “arising out of,” but North Carolina
law is clear that the term carries “much broader significance” than the phrase “caused
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by.” State Capital Ins. Co. v. Nationwide Mut. Ins. Co., 318 N.C. 534, 539, 350 S.E.2d
66, 69 (1986). The words “‘arising out of’ . . . are ordinarily understood to mean
‘incident to,’ or ‘having connection with.’” Id. While this is a broad and comprehensive
phrase, its use does not equate to “a general liability insurance contract.” Fidelity & Cas.
Co. of N.Y. v. N.C. Farm Bureau Mut. Ins. Co., 16 N.C. App. 194, 198–99, 192 S.E.2d
113, 118 (1972). There must be a “causal connection” between the conduct defined in
the policy and the occurrence for which coverage is sought. Scales v. State Farm Mut.
Auto. Ins. Co., 119 N.C. App. 787, 790, 460 S.E.2d 201, 203 (1995). Coverage does not
obtain where the occurrence is “the result of some independent act disassociated from”
the conduct defined in the policy. See State Capital, 318 N.C. at 540, 350 S.E.2d at 70.
Here, the policy covers claims “arising out of” Affinity’s “rendering or failure to
render” personal care services. The Gugenheim claim, however, seeks damages for
injuries to the government arising out of Affinity’s alleged false billing, not for injuries to
residents arising out of deficiencies in personal care services. See Doc. 32-1 at pp. 7–8 ¶¶
2–6, 11; 31 U.S.C. § 3729(a) (providing recovery for “damages which the Government
sustains because of the act of” the defendant); United States ex rel. Woodard v. Country
View Care Ctr., Inc., 797 F.2d 888, 893 (10th Cir. 1986) (noting that the United States’
injury under the False Claims Act is “the difference between what the government
actually paid and the amount it would have paid in the absence of the fraudulent claim.”).
False or fraudulent billing is “disassociated from” Affinity’s rendering or failure to
render personal care services. See State Capital, 318 N.C. at 540, 350 S.E.2d at 70; see
also Doc. 32-1 at p. 7 ¶ 2 (alleging that the defendants knew of or recklessly disregarded
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the falsity of their Medicaid claims). It is an “intervening cause” that severs any
connection between the medical incident alleged in the complaint and the injuries to the
government that the False Claims Act suit seeks to recover for. Cf. State Capital, 318
N.C. at 539–40, 350 S.E.2d at 69–70 (holding that gunshot injuries “arose out of” the use
of an automobile where they were caused by the accidental discharge of a firearm being
unloaded from the automobile and distinguishing injuries caused by the reckless or
intentional discharge of a firearm inside an automobile because the reckless and
intentional conduct was an “independent . . . disassociated” act that severed the causal
connection between use of the truck and the victim’s injuries). Thus, the Gugenheim
claims do not “arise out of” the rendering or failure to render medical professional
services and the policy does not provide coverage to Affinity.
The Court appreciates that there is no case directly on point and that the North
Carolina courts have broadly interpreted the phrase “arising out of” when it appears in
coverage provisions. See State Capital, 318 N.C. at 538, 350 S.E.2d at 69; Pulte Home
Corp. v. Am. S. Ins. Co., 185 N.C. App. 162, 167, 647 S.E.2d 614, 618 (2007); City of
Greenville v. Haywood, 130 N.C. App. 271, 276, 502 S.E.2d 430, 433 (1998). But those
cases do not hold that “arising out of” should be read in such a way as to sever the phrase
from its surrounding language. Affinity’s policy only covers claims that arise out of “an
alleged or actual act, error or omission in the insured’s rendering or failure to render
medical professional services,” Doc. 19-1 at 33 (§ V(J)), not claims that arise out of
anything associated with running a nursing home. Cf. Fidelity & Cas. Co., 16 N.C. App.
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at 198, 192 S.E.2d at 118 (in using the words “arising out of” the parties did not
“contemplate a general liability insurance contract.”).
A comparison of two North Carolina cases, each applying the “arising out of”
policy language at issue here, supports this reading. The two cases address insurance
coverage for claims against law enforcement officers accused of sexual assault while on
duty.
In City of Greenville v. Haywood, the City’s insurance policy covered damages
owed “because of WRONGFUL ACT(S) . . . arising out of the performance of the
INSURED’S duties to provide law enforcement . . . .” 130 N.C. App. at 274, 502 S.E.2d
at 432 (emphasis omitted). The court found coverage for a claim against a city police
officer alleging that the officer had sexually assaulted the plaintiff after investigating a
break-in at her apartment. Id. at 273, 502 S.E.2d at 432. Applying State Capital, the
court noted that “the phrase ‘arising out of’ . . . only requires a causal nexus between” the
insured conduct, i.e. “law enforcement duties,” and the sexual assault injuries for which
coverage was sought. Id. at 277, 502 S.E.2d at 434. The court found that a sufficient
causal nexus did exist, as “‘but for’ [the insured’s] position as a . . . police officer, [he]
would not have had an opportunity to enter [the victim’s] home, conduct a partial
investigation of the reported break-in, and later sexually assault her.” Id.
In a later case involving coverage for a sexual assault committed by a law
enforcement officer, the Supreme Court adopted a dissenting opinion from the Court of
Appeals that distinguished Haywood based on a difference in policy language. See
Young v. Great Am. Ins. Co. of N.Y., 359 N.C. 58, 58, 602 S.E.2d 673, 674 (2004).
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Similar to the Haywood policy, the policy in Young covered all damages owed “because
of ‘wrongful act(s)’ . . . arising out of the performance of the Insured’s duties to provide
law enforcement activities.” 162 N.C. App. 87, 89, 590 S.E.2d 4, 6, rev’d, 359 N.C. 58,
602 S.E.2d 673 (2004). Unlike in Haywood, however, the policy limited “wrongful acts”
to acts committed “by an Insured while performing law enforcement duties.” Id.
(emphasis added). A majority of the Court of Appeals found coverage, finding Haywood
indistinguishable. Id. at 90–91, 590 S.E.2d at 6–7.
In the opinion later adopted by the Supreme Court, the dissent noted that the
provision limiting “wrongful acts” to those committed “while performing law
enforcement duties” could not be ignored. Id. at 92, 590 S.E.2d at 8 (Hunter, J.,
dissenting). The dissent maintained that “the terms should be construed together” and
held that “the intent of the policy is clear and unambiguous: it is designed to cover those
wrongful acts of police officers committed as the officer is carrying out duties related to
law enforcement.” Id. at 92, 590 S.E.2d at 8. Because a “sexual assault is not a law
enforcement duty,” the officer did not commit a wrongful act “while performing law
enforcement duties,” and the policy did not provide coverage. Id. The Supreme Court of
North Carolina agreed, reversing the Court of Appeals majority “[f]or the reasons stated
in the dissenting opinion.” Young, 359 N.C. at 58, 602 S.E.2d at 674.
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Read together, Young and Haywood make clear that the specific language in each
policy must be read as a whole to ascertain the parties’ intentions.7 See also State
Capital, 318 N.C. at 541, 350 S.E.2d at 70 (“[E]ach policy is a separate contract of
insurance between the company issuing it and the insured, and requires a separate and
independent analysis in light of that relationship.”); Woods v. Nationwide Mut. Ins. Co.,
295 N.C. 500, 505, 246 S.E.2d 773, 777 (1978) (noting that the goal of interpreting
insurance contracts is to arrive at the intent of the parties when the policy was issued).
Here, coverage exists only for a “claim arising out of . . . an alleged or actual act, error or
omission in the insured’s rendering or failure to render medical professional services.”
Doc. 19-1 at 15 (§ I(A)), 33 (§ V(J)). While the personal care services discussed in the
complaint are medical professional services, the “independent act” of false or fraudulent
Indeed, because North Carolina Courts are clear that the phrase “arising out of” is much
broader than the phrase “caused by,” most of the cases cited by StarStone are not helpful. While
these cases involve closely analogous facts, each denying professional liability insurance
coverage for False Claims Act suits alleging false billing, they interpret insurance policies
requiring that the claim or injury be “caused by” the medical incident or medical services, or
otherwise involve different policy terms. See, e.g., Horizon West Inc., 214 F. Supp. 2d at 1076
(construing a policy covering damages “resulting from . . . [inter alia], the providing or failure to
provide professional services” to exclude coverage for a False Claims Act suit alleging
fraudulent Medicaid billing); Zurich Am. Ins. Co. v. O’Hara Reg’l Ctr. for Rehab., 529 F.3d 916,
919 n.3–5, 925–26 (10th Cir. 2008) (construing three policies, two of which covered injuries
“caused by a ‘medical incident,’” and a third which covered damages “because of a ‘professional
incident,’” to deny coverage for a False Claims Act suit alleging fraudulent Medicaid billing);
Momence Meadows Nursing Ctr., 566 F.3d at 694–95 (construing a policy where covered
injuries had to be “caused by a ‘medical incident’” to deny coverage for a False Claims Act suit
alleging fraudulent Medicaid billing); United States ex rel. Cal. Advocates for Nursing Home
Reform v. Am. Intern. Spec. Lines Ins. Co., No. C 06-03069 JSW, 2007 WL 4208352, at *2
(N.D. Cal. Nov. 27, 2007) (construing a policy covering injuries “caused by a medical incident”
to deny coverage for a False Claims Act suit alleging false billing); see also MSO Washington,
Inc. v. RSUI Grp., Inc., No. C12–6090 RJB, 2013 WL 1914482, at *8–9 (W.D. Wash. May 8,
2013) (denying coverage for a False Claims Act suit because the policy only covered negligence
in the rendering of professional services, while False Claims Act liability requires a knowing
misrepresentation; Affinity’s policy does not contain a similar negligence limitation).
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billing is “disassociated from” the rendering or failure to render those services. See State
Capital, 318 at 540, 350 S.E.2d at 70.
III.
Conclusion
The Gugenheim claim seeks to recover for the government’s injuries arising out of
Affinity’s allegedly false billing, not injuries to the patients arising out of personal care
services. The claim does not “arise out of a medical incident,” and StarStone is not
obligated to defend or indemnify the plaintiffs here in the qui tam suit.
Because the Court holds that the Gugenheim claim does not arise out of a medical
incident, it need not reach StarStone’s other arguments against coverage.
It is ORDERED that:
1. StarStone’s motion for judgment on the pleadings, Doc. 27, is GRANTED.
2. Affinity’s motion for partial summary judgment, Doc. 29, is DENIED.
This the 5th day of October, 2018.
__________________________________
UNITED STATES DISTRICT JUDGE
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