Oceans Healthcare, L.L.C. v. Illinois Union Insurance Company

Filing 28

MEMORANDUM OPINION AND ORDER granting in part 17 Motion for Judgment on the Pleadings; denying 21 Motion for Judgment on the Pleadings. Signed by District Judge Amos L. Mazzant, III on 03/30/2019. (tls) Modified on 3/30/2019 (tls).

United States District Court
EASTERN DISTRICT OF TEXAS
SHERMAN DIVISION

OCEANS HEALTHCARE, L.L.C.,

v.
ILLINOIS UNION INSURANCE
COMPANY.

§
§
§ Civil Action No. 4:18-cv-00175
§ Judge Mazzant
§
§
§

MEMORANDUM OPINION AND ORDER
Pending before the Court are Defendant Illinois Union Insurance Company’s Motion for
Judgment on the Pleadings (Dkt. #17) and competing Plaintiff’s Rule 12(c) Motion for Judgment
on the Pleadings (Dkt. #21). The Court, having reviewed the motions, evidence, and relevant
pleadings, finds that Plaintiff’s motion should be denied and Defendant’s motion should be granted
in part.
BACKGROUND
Plaintiff Oceans Healthcare, L.L.C. (“Oceans”) is a behavioral health provider based in
Plano, Texas. Illinois Union Insurance Company (“IUIC”) is an insurance provider. In 2012,
IUIC issued Oceans claims-made, non-duty to defend Ace Express Company Management
Indemnity Package, Policy No. G23667538 001 (the “Policy”). The Policy is described as a
“run-off” because it covers only “Claims” first made during the policy period that allege Wrongful
Acts committed prior to the Run-Off Date of December 27, 2012. The Policy provided, in relevant
part, Directors and Officers and company coverage with a $25,000 retention and $1,000,000
maximum aggregate coverage.
On February 26, 2015, a qui tam lawsuit was filed under seal in the United States District
Court for the Eastern District of Louisiana alleging that Oceans knowingly and reckless submitted

false and fraudulent claims for payment to Medicare/Medicaid. On August 27, 2015, the Office
of the Inspector General Department of Health and Human Services issued a subpoena to Oceans
pursuant to an investigation it was conducting into possible False Claims Act (FCA) violations
committed by Oceans. The OIG Subpoena demanded specified documents that were dated,
created, revised, or in effect during January 1, 2008, through August 27, 2015 (the “Subpoena
Period”). On September 10, 2015, Oceans reported the OIG Subpoena to IUIC and IUIC’s then
claims administrator—ACE North American Claims (“ACE”). ACE subsequently issued Oceans
a coverage position letter to noting that, based on the information provided, it did not appear as
though a “Claim,” as defined under the Policy, had been made against Oceans. Oceans thereafter
responded to the OIG Subpoena and incurred not less than $1,114,504.25 by retaining in-house
counsel, outside counsel, and expert witnesses. On August 3, 2017, the qui tam Complaint filed
against Oceans was unsealed; on August 4, 2017, Oceans notified IUIC of the complaint; and on
August 15, 2017, IUIC’s new claims administrator responded denying coverage. On August 15,
2017, the qui tam complaint against Oceans was dismissed.
On March 15, 2018, Oceans filed the present action in the United States District Court for
the Eastern District of Texas. Oceans complaint (Dkt. #1) alleges breach of contract, violations of
Chapter 542 of the Texas Insurance Code, and requests attorneys’ fees—all premised IUIC’s
denying coverage of the OIG Subpoena. On May 18, 2018, IUIC filed an answer (Dkt. #6) to
Oceans complaint and asserted counterclaims requesting that the court declare: (1) the Policy does
not afford coverage for the OIG Subpoena or for the costs incurred by Oceans in responding to the
OIG Subpoena because the OIG Subpoena is not a Claim for a Wrongful Act as defined by the
Policy; in the alternative, (2) the OIG Subpoena concerns Wrongful Acts that occurred after
December 27, 2012, thus the Policy’s Run-off exclusion precluded coverage; and, also in the

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alternative, (3) the Policy’s Government Funding Defense Costs Sublimit provision limits any
coverage to $250,000. These claims are the subject of IUIC’s present motion for judgment on the
pleadings (Dkt. #17).
On August 10, 2018, Oceans filed a response (Dkt. #20) to IUIC’s motion for judgment on
the pleadings. On August 23, 2018, IUIC filed a reply (Dkt. #22). On August 10, 2018, Oceans
filed the present motion for judgment on the pleadings (Dkt. #21) requesting that the Court dismiss
with prejudice IUIC’s declaratory judgment counterclaims, including its request for attorneys’ fees
and costs.
LEGAL STANDARD
Federal Rule of Civil Procedure 12(c) provides that “[a]fter the pleadings are closed—but
early enough not the delay trial—a party may move for judgment on the pleadings.” “A motion
brought pursuant to Fed. R. Civ. P 12(c) is designed to dispose of cases where the material facts
are not in dispute and a judgment on the merits can be rendered by looking to the substance of the
pleadings and any judicially noticed facts.” Hebert Abstract Co. v. Touchstone Props., Ltd., 914
F.2d 74, 76 (5th Cir. 1990) (citation omitted); Great Plains Tr. Co. v. Morgan Stanley Dean Witter
& Co., 313 F.3d 305, 312–13 (5th Cir. 2002). “The central issue is whether, in the light most
favorable to the plaintiff, the complaint states a valid claim for relief.” Hughes v. Tobacco Inst.,
Inc., 278 F.3d 417, 420 (5th Cir. 2001) (citing St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d
425, 440 n.8 (5th Cir. 2000)).
“Pleadings should be construed liberally, and judgment on the pleadings is appropriate only
if there are no disputed issues of fact and only questions of law remain.” Great Plains Tr., 313
F.3d at 312 (quoting Hughes, 278 F.3d at 420). The standard applied under Rule 12(c) is the same

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as that applied under Rule 12(b)(6). Ackerson v. Bean Dredging, LLC, 589 F.3d 196, 209 (5th Cir.
2009); Guidry v. Am. Pub. Life Ins. Co., 512 F.3d 177, 180 (5th Cir. 2007).
ANALYSIS
The parties’ competing motions for judgment on the pleadings places four issues before
the Court: (1) whether the OIG Subpoena is a Claim for Wrongful Acts, as defined under the
Policy; if so, (2) whether coverage is barred by the Policy’s Run-Off Exclusion; and, if not barred,
(3) whether coverage is limited to $250,000 under the Policy’s Government Funding Defense
Costs Sublimit. Lastly, if the OIG Subpoena is not covered under the Policy, (4) whether IUIC is
entitled to attorneys’ fees and costs.
I.

Texas Insurance Law
A federal court is required to follow the choice of law rules of the state in which it sits.

Klaxon v. Stentor Electric Manufacturing Co., 313 U.S. 487, 496 (1941). Thus, the Court must
look to Texas choice of law rules. The parties do not dispute that Texas law applies in the present
action. The Court must “apply Texas law as interpreted by Texas state courts.” Gilbane Bldg. Co.
v. Admiral Ins. Co., 664 F.3d 589, 593 (5th Cir. 2011) (quoting Mid–Continent Cas. Co. v. Swift
Energy Co., 206 F.3d 487, 491 (5th Cir. 2000)). Under Texas law, “insurance policies are
construed according to common principles governing the construction of contracts, and the
interpretation of an insurance policy is a question of law for a court to determine.” Am. Int’l
Specialty Lines Ins. Co. v. Rentech Steel LLC, 620 F.3d 558, 562 (5th Cir. 2010). The Court must
interpret the policy to discern the intention of the parties as it is expressed in the policy. Id.
Whether a contract is ambiguous is also a question of law. Id. (citing Kelley–Coppedge, Inc. v.
Highlands Ins. Co., 980 S.W.2d 462, 464 (Tex.1998)). An ambiguity is not present simply because
the parties advance conflicting interpretations but exists “only if the contractual language is

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susceptible to two or more reasonable interpretations.” Id. (citing Am. Mfrs. Mut. Ins. Co. v.
Schaefer, 124 S.W.3d 154, 157 (Tex. 2003)). ‘“Effectuating the parties’ expressed intent is [the
Court’s] primary concern.” Don’s Bldg. Supply, Inc. v. OneBeacon Ins. Co., 267 S.W.3d 20, 23
(Tex. 2008). “No one phrase, sentence, or section [of the policy] should be isolated from its setting
and considered apart from the other provisions.” Id. A policy’s terms should be given their plain
meaning, without inserting additional provisions in the contract. Id.
“Under Texas law, an insurer may have two responsibilities relating to coverage—the duty
to defend and the duty to indemnify.” Gilbane, 664 F.3d at 594 (citing D.R. Horton–Tex., Ltd. v.
Markel Int’l Ins. Co., 300 S.W.3d 740, 743 (Tex. 2009)). The duties to defend and indemnify are
distinct, and one may exist without the other. Id.; see also Colony Ins. Co. v. Peachtree Const.,
Ltd., 647 F.3d 248, 253–54 (5th Cir. 2011). An insurer’s duty to defend is determined by the
application of the “eight-corners rule.” GuideOne Elite Ins. Co. v. Fielder Road Baptist Church,
197 S.W.3d 305, 308 (Tex. 2006). “The rule takes its name from the fact that only two documents
are ordinarily relevant to the determination of the duty to defend: the policy and the pleadings of
the third-party claimant.” Id. (citing King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002)).
“[T]he duty to defend does not rely on the truth or falsity of the underlying allegations; an insurer
is obligated to defend the insured if the facts alleged in the petition, taken as true, potentially assert
a claim for coverage under the insurance policy.” Colony, 647 F.3d at 253 (citing GuideOne, 197
S.W.3d at 308). All doubts regarding the duty to defend are resolved in favor of the duty, and the
pleadings are construed liberally. Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491 (Tex.
2008). If a complaint potentially includes a covered claim, the insurer must defend the entire suit.
Id. (citation omitted).

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In determining whether an insurer has a duty to defend, the policyholder “bears the initial
burden of showing that the claim [in the underlying action] is potentially within the insurance
policy’s scope of coverage.” Harken Expl Co. v. Sphere Drake Ins. PLC, 261 F.3d 466, 471 (5th
Cir. 2001) (citation omitted). “However, it is the insurer that carries the burden of establishing
that ‘the plain language of a policy exclusion or limitation allows the insurer to avoid coverage of
all claims, also within the confines of the eight corners rule.’” Regency Title Company, LLC v.
Westchester Fire Ins., No. 4:11–cv–390, 2013 WL 6054820, at *4 (E.D. Tex. Nov. 15, 2013)
(quoting Northfield Ins., 363 F.3d at 528). In addition, “[e]xclusions [in the insurance policy] are
narrowly construed, and all reasonable inferences must be drawn in the insured’s favor.” Gore
Design Completions, Ltd. v. Hartford Fire Ins. Co., 538 F.3d 365, 370 (5th Cir. 2008). An
exclusion is ambiguous only if it is clearly susceptible to multiple reasonable interpretations.
Regency Title Co, 2013 WL 6054820, at *4 (citing Carolina Cas. Ins. Co. v. Sowell, 603 F. Supp.
2d 914, 923 (N.D. Tex. 2009)). “[The] rules favoring the insured . . . are applicable only when
there is an ambiguity in the policy; if the exclusions in question are susceptible to only one
reasonable interpretation, the [the rules favoring the insured] do not apply.” Id. (citing Am. States
Ins. Co. v. Bailey, 133 F.3d 363, 369 (5th Cir.1998)). “Courts should not strain to find an
ambiguity, if, in doing so, they defeat the probable intentions of the parties, even though the insured
may suffer an apparent harsh result as a consequence.” Ohio Cas. Group of Ins. Companies v.
Chavez, 942 S.W.2d 654, 658 (Tex. App.–Houston [14th Dist.] 1997, writ denied). “Furthermore,
if a policy provision is susceptible to only one reasonable interpretation, the court is obligated to
give the words their ‘plain meaning’ even if this means coverage is denied.” Regency Title Co.,
2013 WL 6054820, at *4 (citing Evanston Ins. Co. v. Legacy of Life, Inc., 645 F.3d 739, 744–45
(5th Cir. 2011)).

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“There are two traditional types of insurance policies: occurrence policies and claims-made
policies.” Munsch Hardt Kopf & Harr P.C. v. Executive Risk Specialty Ins. Co., No. 3:06–cv–
01099, 2007 WL 708851, at *3 (N.D. Tex. Mar. 8, 2007) (citing Matador Petrochemical Corp. v.
St. Paul Surplus Lines Ins. Co., 174 F.3d 653, 658–59 (5th Cir. 1999)). “Coverage under an
occurrence policy is based on the triggering event.” Id. “However, under a claims-made policy,
notice to the insurer is the triggering event and is a condition precedent to coverage.” Id. “The
notice provisions of such policies are therefore strictly construed; otherwise, the insured would
receive coverage that was not bargained for.” Id.; see also Komatsu v. U.S. Fire Ins. Co., 806
S.W.2d 603, 607 (Tex. App.—Fort Worth 1991, writ denied).
With these principles guiding, the Court turns to the parties’ arguments.
II.

Whether the OIG Subpoena constitutes a “Claim” for “Wrongful Acts”
The Policy’s Coverage Section Insurance Clause 3 provides:
The Insurer shall pay the Loss of the Company which the Company . . . becomes
legally obligated to pay by reason of a Claim first made against the Company during
the Policy Period and reported to the Insurer during the Policy Period and reported
to the Insurer . . . for any Wrongful Act taking place on or before the Run-Off Date.

(Dkt. #6, Exhibit 5 at p. 70). IUIC contends that the OIG Subpoena is neither a Claim nor made
pursuant to any Wrongful Act.
i.

A Claim

Subsection (a)
Oceans asserts that the OIG Subpoena falls under the Policy’s definition of a Claim set out
in subsection (a), which provides that a Claim is “a written demand against any insured for
monetary damages or non-monetary or injunctive relief.” See (Dkt. #6, Exhibit 5 at p. 22). IUIC
disagrees and argues that the OIG Subpoena does not satisfy subsection (a) because it does not
seek any form of relief. Instead, IUIC avers, the OIG Subpoena was simply gathering information
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to determine whether there would be a basis for seeking monetary or non-monetary relief from
Oceans in the future. IUIC cites three cases to support its position that the OIG Subpoena is not a
written demand for non-monetary relief. See Employers’ Fire Ins. Co. v. ProMedica Health Sys.,
Inc., 524 F. App’x 241, 252 (6th Cir. 2013); Musclepharm Corp. v. Liberty Ins. Underwriters, Inc.,
712 F. App’x 745, 754 (10th Cir. 2017); First Horizon Nat’l Corp. v. Houston Cas. Co., 2017 WL
2954716, at *10 (W.D. Tenn. June 23, 2017).
The parties do not dispute that the OIG Subpoena is a demand. The Court is left to
determine whether the demand for the specified document production—made pursuant to a
subpoena— is a form of non-monetary relief. 1 The Court finds that it is.
The Policy does not define the term “relief,” therefore Texas law requires that the term be
given its plain, ordinary, and generally accepted meaning. See Ramsay v. Maryland Am. Gen. Ins.
Co., 533 S.W.2d 344, 246 (Tex. 1976). To this end, Oceans points to a court within this district
that has considered an analogous situation. See Agilis Benefit Services, LLC v. Travelers Casualty
and Surety Company of America, No. 5:08CV213, 2010 WL 11595321, at *1 (E.D. Tex. Feb. 24,
2010) report and recommendation adopted, 2010 WL 8573372 (Apr. 30, 2010). In Agilis, the
defendant–insurer issued the plaintiffs–insured a liability policy that covered claims for wrongful
acts made against the plaintiffs–insured during the policy period. Id. Thereafter, the IRS began
investigating the plaintiffs–insured for their alleged involvement in promoting and operating tax
evasion schemes. Id. During the investigation, the grand jury issued a subpoena and search
warrants that required the plaintiffs–insured to produce financial documents. Id. The plaintiffs–
insured sought reimbursement from the defendant–insurer for costs related to the subpoena and
search warrants. Id. The defendant–insurer argued that the subpoena was not a claim as defined

1

There is no dispute that the OIG Subpoena does not to seek any monetary relief.

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under the policy because it was not a written demand for non-monetary relief. Id. Similar to the
present action, the parties dispute centered on whether a demand for the production of specified
documents pursuant to a subpoena constitute a form of non-monetary relief. Id. The court looked
to the Black’s Law Dictionary definition of “relief” and caselaw from other Circuit Courts and
determined that the documents the plaintiffs–insured were commanded to produce pursuant to the
grand jury subpoena were, in fact, written demands for non-monetary relief. The court held that
the term “relief” is “broad enough to include a demand for ‘something due,’ including a demand a
demand to produce documents or appear to testify.” Id. at *11.
The Court addressed the Agilis decision in Starkey Mortgage. See W.R. Starkey Mortgage,
LLP v. Chartis Specialty Insurance Co., NO. 4:12-CV-219, 2013 WL 12138896 at *6 (E.D. Tex.
June 27, 2013). In Starkey Mortgage, the Department of Justice sent the plaintiff–insured an email
requesting the production of certain documents and threatened to issue a subpoena if the plaintiff–
insured failed to comply. Id. at *1–2. The plaintiff–insured produced the requested documents
and argued that the DOJ’s email was a claim under the controlling insurance policy, which,
identical to the Policy in here, broadly defined a claim to include “a written demand for monetary
or non-monetary relief.” Id. The Court emphasized that no court has found that a request for
information—that was not accompanied by a subpoena—was sufficient to constitute a demand or
a claim. Id. at *6. The Court agreed with the principles expressed in Agilis but found them
inapplicable because, in Starkey, the plaintiff–insurer’s compliance was voluntary rather than
compelled, as in Agilis. Id. The Court held that “[a] request accompanied by a threat of a subpoena
is not sufficient to establish a ‘demand for something due,’ since without the subpoena, nothing is
actually due.” Id. Thus, implicit in that holding, the Court concurred that a subpoena is
determinative as to whether a request is a demand for something due.

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The facts in the present action are more analogous to Agilis than Starkey. Here, Office of
Inspector General served Oceans with a subpoena that initially required Oceans to produce certain
documents and appear before a special agent of the Office of Inspector General on September 25,
2015. For Oceans’ convenience, the OIG Subpoena stated that, in lieu of an appearance, Oceans
could just produce the requested documents before September 25, 2018. The OIG Subpoena
further stated the document production was “required by law” and that a failure to produce the
documents may be taken as a failure to comply with the subpoena, which could expose Oceans to
civil liability. For these reasons, the OIG Subpoena is undoubtedly a demand for something due,
which the Court, and at least one other court in this district, has adjudged to be a request for nonmonetary relief.
The three cases IUIC cited to support its interpretation of the term “relief” are
distinguishable for two reasons. First, neither case applies Texas contract law, which the parties
do not dispute is the law that governing the interpretation of the Policy. See ProMedical Health,
524 F. App’x at 252 (applying Ohio contract law); Musclepharm, 712 F. App’x at 754 (applying
Colorado contract law); First Horizon, 2017 WL 2954716, at *10 (applying Tennessee contract
law). Second, coverage was denied in those cases because each respective request for document
production was accompanied by a disclaimer of any wrongdoing. The respective courts reasoned
that a demand for documents that explicitly disclaims any wrongdoing does not seek relief.
The insurance policies in ProMedical Health, MusclePharm, and First Horizon each
contained coverage sections similar to the present policy, which afforded coverage on account of
a Loss on a Claim for a Wrongful Act. The policies specifically defined the terms, Loss, Claim,
and Wrongful Act. Coverage could be afforded only if each of these elements were met. Each
policy defined a “Claim” to be, in part, a demand for non-monetary relief, and did not specifically

10

define term “relief.” Because the requests in those cases contained disclaimers, the courts
conflated “relief” and Wrongful Act.
For example, in MusclePharm, the Order and related subpoenas disclaimed that the FTC’s
investigation was being “made to determine whether any persons or entities have engaged in, or
are about to engage in, any of the reported acts or practices or any acts or practices of similar
purport or object.” Musclepharm, 712 F. App’x at 750. The Sixth Circuit found that: (1) a claim
under the policy required relief; (2) relief required the redress of wrongdoing; (3) the language in
Order and related subpoenas disclaimed any wrongdoing; and therefore, (4) there necessarily
cannot be a claim. Id. at 754. The courts in ProMedical Health and First Horizon based their
decisions, in large part, on similar reasoning. See ProMedical Health, 524 F. App’x at 252
(disclaimer held that “[n]either this letter nor the existence of this nonpublic investigation should
be construed as indicating that a violation has occurred or is occurring” and the court determined
that); First Horizon, 2017 WL 2954716, at *10 (explaining that “[t]aking the Policy as a whole . .
. these subpoenas and/or CIDs do no constitute a Claim under the Policy because the documents
do not contain allegations of a “Wrongful Act.).
This analysis, however, conflates elements. Whether a request is a Claim is a distinct
question from whether that request is for a Wrongful Act. The written demands in ProMedical
Health, MusclePharm, and First Horizon are more accurately characterized as claims that were
not afforded coverage because they were not made pursuant to a wrongful act. Further, it was not
necessary for the courts in ProMedical Health, MusclePharm, and First Horizon to address this
distinction because without any wrongdoing, there was no wrongful acts—thus, no coverage.
The present action does not present the Court with this option because, as discussed herein,
the OIG Subpoena alleges wrongdoing. The Court notes, however, that even if the OIG Subpoena

11

did not allege any wrongdoing, it is still a Claim under the Policy’s definition and the Court’s
“demand for something due” interpretation of the term relief.
Subsection (g)
IUIC argues that subsection (g), as amended by Endorsement No. 5, supports its
interpretation of the Policy as precluding coverage of subpoenas served on the Company, including
over subsection (a). Subsection (g) originally defined a claim as:
(g) a civil, criminal, administrative or regulatory investigation commenced by:
(i)
(ii)

the service upon or other receipt by any nature person Insured
of a written notice, investigative order, or subpoena; or
the service upon or other receipt by any Company of a written
notice or investigative order; from the investigating authority
identifying such natural person Insured as an individual, or
such Company as an entity, respectively, against whom a
proceeding described in paragraphs c, d, or f immediately above
may be commenced . . . .

(Dkt. #6, Exhibit 5 at p. 41). The subsection was thereafter amended by Endorsement No. 5 to
read:
(g)

a civil, criminal, administrative or regulatory investigation commenced by
the service upon or other receipt by any natural person Insured of a written
notice, investigative order, or subpoena from the investigating authority
identifying such natural person Insured as an individual, against whom a
proceeding described in paragraphs c, d or f immediately above may be
commenced . . . .

(Dkt. #6, Exhibit 5 at p. 22–23)
IUIC argues that Endorsement No. 5’s deletion of any civil, criminal, administrative or
regulatory investigation commenced by “the service upon or other receipt by any Company of a
written notice or investigative order” from the definition of Claim under subsection (g) establishes
that there was no intent to provide coverage for a subpoena served on Oceans. IUIC’s contends if
a subpoena could satisfy subsection (a), there would be no need to address subpoenas of the

12

Company in the original version of subsection (g). That is, interpreting subsection (a) to include
subpoena of the Company would render meaningless the amendment of subsection (g) by
endorsement deleting investigative subpoenas served upon the Company from that definition. The
Court is not convinced.
Endorsement 5 expands the definition of a Claim and does not function to limit it. The
Policy lays out ten specific definitions of a Claim, all set out in the disjunctive—separated by the
word “or.” Therefore, “each subpart must be considered separately.” LCS Corr. Servs., Inc. v.
Lexington Ins. Co., 800 F.3d 664 (5th Cir. 2015) (citing PPG Indus., Inc. v. Shell Oil Co., 727
F.Supp. 285, 287 (E.D. La.1989) (“[U]nder the law of Texas, contract language should be given
its “plain grammatical meaning.” Simply stated, “or” is disjunctive, or alternative in its effect.).
Further, if the Court also found reasonable IUIC’s interpretation of subsection (g)—as
functioning to exclude the OIG Subpoena from subsection (a)’s definition—this would render the
section ambiguous. Fundamental Texas insurance law principles mandate ambiguity be resolved
in favor of coverage. See Texas Industries, Inc. v. Factory Mutual Ins. Co., 486 F.3d 844, 846 (5th
Cir. 2007) (explaining that “when an insurance policy can be given multiple reasonable
interpretations, ‘[i]t is a settled rule that policies of insurance will be interpreted and construed
liberally in favor of the insured and strictly against the insurer.’”) (quoting Kelly Assocs., Ltd. v.
Aetna Cas. & Sur. Co., 681 S.W.2d 593, 596 (Tex. 1984)).
As the Court agrees with Oceans that the OIG Subpoena satisfies the definition set out in
subsection (a), it is trivial to determine whether it also meets subsection (g). The Court now
considers whether the OIG Subpoena is for Wrongful Acts.

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ii.

Wrongful Act
IUIC next argues that, if the OIG Subpoena is a Claim, it fails to fall into the zone of

coverage because it fails to allege any Wrongful Act. The Policy defines a Wrongful Act as “any
actual or alleged error, omission, misleading statement, misstatement, neglect, breach of duty or
act allegedly committed or attempted by (C) the Company, but only with respect to Insuring Clause
3 of this Coverage Section . . . .” (Dkt. #6, Exhibit 5 at p. 70). IUIC argues that the OIG Subpoena
does not allege any wrongdoing and, instead, merely sought the production of documents in
connection with an investigation into unspecified FCA violations. IUIC cites two cases to support
its narrow interpretation.
Oceans responds that the OIG Subpoena alleges a Wrongful Act because it identified the
target—Oceans; identified its investigative purpose— “in connection with an investigation being
conducted by the OIG into possible False Claim violations;” and identified the investigation period
as the prior eight (eight) years (2008–2015). Oceans again maintains, and the Court agrees, that
Agilis germane on this issue.
The search warrant in Agilis, sought “evidence, contraband, or property used or intended
to be used as the means of committing a criminal offense concern a violations [sic] of Title 26
U.S.C. Sections(s) 7212, 7201 and Title 18 U.S.C. 371.” Agilis 2010 WL 11595321, at * 13. The
court found that the service of a grand jury subpoena and the execution of a search warrant on
plaintiffs that referenced criminal statues was more than enough to show that the IRS was alleging
that plaintiff committed “Wrongful Acts” under a policy that defined the term identical to the one
in the present action. Id. Here, the OIG Subpoena requested documents that were dated, created,
revised, or in effect during the Subpoena Period “in connection with an investigation into . . .
possible False Claims Act violations under 31 U.S.C. sec. 3729-3733 . . . .” (Dkt. #21, Exhibit 1

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at p. 7). Although, the present action contains no allegations that the OIG issued and/or executed
a search warrant, the OIG Subpoena contains all of the information that the court in Agilis found
tantamount alleging a wrongful act. The OIG Subpoena sufficiently alleges FCA violations.
The Court, finding that the OIG Subpoena is a Claim for a Wrongful Act, now considers
whether it is covered under the Policy.
III.

Duty to Defend, Duty to Pay Defense Cost, and the Eight-Corners Rule
The parties dispute the nature of IUIC’s financial obligations under the Policy.

Specifically, whether IUIC has the duty to defend claims first made during the policy period or a
duty to pay the cost of defending those claims. This distinction is significant for two reasons. First,
if the Policy confers IUIC a duty to defend claims made, the Court is constrained to determine
whether IUIC has a duty to defend the OIG Subpoena by looking only to eight-corners of the
subpoena and Policy. The Court, notwithstanding a narrow exception, would not be allowed to
consider extrinsic evidence, such as the qui tam complaint. Second, if IUIC has duty to defend,
IUIC would be obligated to defend the OIG Subpoena in its entirety—even if it is only partially
covered.
The IUIC Policy’s Coverage Section Insurance Clause 3 provides, pertinent part:
A Loss is defined as “damages, judgments, settlements, pre-judgment or postjudgment interest awarded by a court and Costs, Charges, Expenses incurred by …
Company under Insuring Clause 3.” Costs, Charges and Expenses means:
reasonable and necessary costs charges, fees and expenses incurred by the Insurer,
or by any Insured with the Insurer’s consent, in defending Claims and the premium
for appeal, attachment or similar bonds arising out of covered judgments
....
“It shall be a duty of the Insured and not the duty of the Insurer to defend any
Claim.”
(Dkt. #6, Exhibit 5 at p. 44, 77).

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IUIC argues that the plain language of the Policy charges it with no affirmative duty defend
claims; rather, only obligates it pay for the defense costs in defending a claim. Oceans concedes
that the Policy does not contain a standard duty to defend clause. Oceans, however, argues that
IUIC’s duty to advance defense costs is akin to a duty to defend and should be subject to the
automatic trigger and eight-corners rule. Oceans relies on three cases it contends stands for the
proposition that the eight-corners rule applies to the duty to pay defense—even where the insurer
has no duty to defend. See Julio & Sons Co. v. Travelers Cas. and Sur. Co. of Am., 591 F.Supp.2d
651 (S.D. N.Y. 2008) (applying the eight-corners rule to a duty to pay defense cost reasoning that
there was no material difference between an unconditional duty to advance payment cost and a
duty to defend); Basic Energy Servs., Inc. v. Liberty Mut. Ins. Co., 655 F.Supp.2d 666 (W.D. Tex.
2009) (vacated following settlement) (applying the eight-corners rule to a duty to reimburse
defense costs reasoning that “this reimbursement of defense costs obligation is most analogous to
a duty to defend, even when the duty to defend is explicitly disclaimed”); Pendergest-Holt v.
Certain Underwriters at Lloyd’s of London, 681 F.Supp.2d 816 (S.D. Tex. 2010), modified on
appeal by Pendergest-Holt v. Certain Underwriter’s at Lloyd’s of London, 600 F.3d 562, 574 (5th
Cir. 2010). 2 Oceans is correct in its analysis of the lower court’s decision in Pendergest-Holt. On
appeal, however, the Fifth Circuit modified the lower court’s decision by explicitly addressing and
declining to apply the eight-corners rule in a context outside of an insurer’s duty to defend. See
Pendergest-Holt, 600 F.3d at 574.

2

Oceans also argues that the Fifth Circuit applied the eight-corners rule to an insureds duty to pay defense costs in
The City of College Station, Texas v. Star Ins. Co., 735 F.3d 332, 336-340 (5th Cir. 2013). This, however, is not
completely accurate. The Fifth Circuit only applied the eight-corners rule because the insurer abandoned its contention
that the policy in question did not impose a duty to defend. Id. at 337 (holding that “the City contended that the duty
to reimburse is measured by the same metric as the duty to defend. The district court implicitly agreed with the City,
applying the eight-corners rule to determine SIC’s liability for defense costs. On appeal, SIC relies exclusively on the
argument that the eight-corners rule does not trigger liability, abandoning its earlier contention that the City's policy
did not impose a duty to defend. We hold SIC to its forfeiture and turn to apply the eight-corners rule to the facts of
this case.”.

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The lower court in Pendergest-holt applied the eight-corners rule in to a duty to advance
costs reasoning that “in the absence of Texas court decisions explicitly refusing to apply the eight
corners rule in cases such as this one—in which no duty to defend exists but in which there is a
duty to advance defense costs—and with no explicit direction from Texas courts to apply a
different standard, the logic employed by the Julio & Sons and Basic Energy courts is persuasive.”
Pendergest-Holt v. Certain Underwriters at Lloyd’s of London, 681 F.Supp.2d 816, 828 (S.D. Tex.
2010). The Fifth Circuit modified the lower court’s decision and explicitly reserved the application
of the eight-corners rule in any context other than a duty to defend until the Texas Supreme Court
established that such was possible. The Fifth Circuit explained:
The Texas Supreme Court has spoken of the eight corners rule only in the context
of duty-to-defend cases, and no Texas state court has applied the rule to a case, like
the present one, involving a duty to advance defense costs. Whatever the Texas
Supreme Court might do to resolve the issue in a future case, however, we need not
venture a guess in this one: the D&O Policy’s terms plainly state that the
underwriters must advance defense costs “until it is determined that the alleged act
or alleged acts did in fact occur” and, in so doing, require recourse to something
more than mere allegations. The terms contemplate the use of extrinsic evidence in
making the determination. Thus, we need not and hence do not pause to decide
whether the eight corners rule applies to the duty to advance costs as a general
matter . . . .
Pendergest-Holt, 600 F.3d at 574 (internal citations omitted). Although the Fifth Circuit did not
foreclose on the applicability of the eight-corners rule to cases involving a duty to advance defense
costs, the Court finds it prudent to echo this reluctance and await guidance from the Texas Supreme
Court.
The Fifth Circuit nevertheless found that even if the eight-corners rule did apply, the parties
displaced it because the insurance policy anticipated the use to extrinsic evidence to determine
coverage. Id. at 574 (explaining that “[t]exas prefers freedom of contract and honors the wellworn prerogatives of parties to override judge-made doctrines—like the eight corners rule—by

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contracting around them. . . . Assuming but not deciding the eight corners rule would have applied,
the parties chose—in plain language—to displace it and to provide for the use of extrinsic
evidence.”). The Court finds this to be true in the present action.
The Allocation clause provides that IUIC “shall advance, on a quarterly basis Costs,
Charges, and Expenses which the Insurer believe to be covered under this Policy until a different
allocation is negotiated, arbitrated or judicially determined.” (Dkt. #6, Exhibit 5 at p. 45). Texas
law requires that the Court interpret contracts to effectuate the intent of the parties. Here, the plain
language of the Policy anticipates the use of extrinsic evidence and therefore the parties could not
have intended to look only to the eight-corners when evaluating IUIC’s financial obligation with
respect to claims made under the Policy.
Lastly, even if the parties did not displace the eight-corners rule, some Texas courts have
recognized a narrow exception where an insurer does not dispute the merits of the underlying claim
and the extrinsic evidence goes “strictly to an issue of coverage without contradicting any
allegation in the pleadings material to the merits of the underlying claim.” State Farm Fire & Cas.
Co. v. Wade, 827 S.W.2d 448, 452–53 (Tex. App.—Corpus Christi 1992, writ denied) (concluding
that extrinsic evidence could be admitted in deciding the duty to defend when the facts alleged are
insufficient to determine coverage and “when doing so does not question the truth or falsity of any
facts alleged in the underlying petition”). Here, IUIC neither contests nor disputes the merits of
the qui tam action. IUIC advocates for the use of the qui tam complaint for the limited purpose of
discerning its relation, if any, to the OIG Subpoena. If the OIG Subpoena and the qui tam action
are related, the qui tam complaint may prove useful to expound on the conduct set out in the
subpoena. A more definite understanding of the OIG Subpoena’s allegations of FCA violations

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may help establish whether the conduct falls in the zone of coverage. This is a pure coverage
inquiry and does not evoke the concerns protected by the eight-corners rule.
In any event, IUIC does not have a duty to defend and the eight-corners rule is not
applicable to present action. The Court turns now to whether the OIG Subpoena is precluded from
coverage by the Policy’s Run-Off Exclusion.
IV.

The Policy’s Run-Off Exclusion
IUIC contends that the OIG Subpoena is precluded from coverage by the Policy’s Run-Off

Exclusion, which provides:
The Insurer shall not be liable for that portion of Loss under this Coverage Section
on account of any Claim:
i.
Alleging, based upon, arising out of, attributable to, directly or indirectly
resulting from, in consequence of, or in any way involving any Wrongful
Act or Interrelated Wrongful Act taking place, in whole or in part,
subsequent to the Run-Off Date.
See (Dkt. #21, Exhibit 1 at p. 4–5). The Policy sets the Run-Off Date as December 27, 2012.
IUIC argues that the OIG Subpoena’s request for documents dated after December 27,
2012, establishes that the FCA violations—Wrongful Acts—are alleged to have occurred after the
Run-Off Date.

This contention, IUIC argues, is supported by specific allegations of FCA

violations in qui tam complaint that occur after the Run-Off Date.
Oceans’ argument that the Run-Off exclusion does not apply is premised on and fails
because of its inaccurate presumption that IUIC has duty to defend. Oceans contends that the
Court should construe the OIG Subpoena’s demand for documents created during the Subpoena
Period as alleging that FCA violations—Wrongful Acts—potentially occurred at any time from
January 1, 2008, through August 27, 2015. Therefore, Oceans contends, because the OIG
Subpoena alleges FCA violations potentially taking place before and after the Run-Off Date—
December 27, 2012—IUIC is obligated to defend the subpoena in its entirety. This logic would
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prove true if the Policy conferred IUIC a duty to defend. Because it does not, however, the plain
language of the Run-Off Exclusion makes the inverse true: if the OIG Subpoena is for Wrongful
Acts or Interrelated Wrongful Acts that occurred before and after the Run-Off date, it is not
covered. By the Policy’s terms, the OIG Subpoena is precluded from coverage if it alleges, is based
upon, arises out of, is attributable to, directly or indirectly results from, is in consequence of, or in
any way involves any alleged FCA violation or alleged FCA violation that have a common nexus
any fact, circumstance, situation, event, transaction, cause or series of facts, circumstances,
situations, events, transactions or causes taking place, in whole or in part, subsequent to December
27, 2012. The Fifth Circuit has held that “[w]hen an exclusion precludes coverage for injuries
‘arising out of’ described conduct, the exclusion is given a broad, general and comprehensive
interpretation. A claim need only bear an incidental relationship to the described conduct for the
exclusion to apply.” Century Surety Company v. Seidel, 893 F.3d 328, 333 (5th Cir. 2018) (quoting
Scottsdale Ins. Co. v. Tex. Sec. Concepts & Investigation, 173 F.3d 941, 943 (5th Cir. 1999)).
Oceans attempts to qualify, or completely reverse, its prior position and argues that the
Run-Off Date Exclusion does not apply because the OIG Subpoena’s allegations of FCA violations
are not narrowed to exact dates. This is in direct contradiction of its contention that the Court
should construe the OIG Subpoena as alleging FCA violations potentially taking place at any time
from January 1, 2008, through August 27, 2015. The Court cannot accept Oceans’ interpretation
as reasonable.
The Court’s analysis here is straightforward. The Policy’s Run-Off Exclusion, drafted in
the broadest manner, precludes coverage of Wrongful Acts and Interrelated Wrongful Acts that
occur, in whole or in part, after December 27, 2012. The OIG Subpoena requested specified
documents that were dated, created, revised, or in effect during January 1, 2008, through August

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27, 2015, which were in relation to, responsive of, and in connection with allegations of FCA
violations—Wrongful Acts. The only reasonable interpretation of an investigative OIG Subpoena
that alleges FCA violations and demands responsive documents created during the Subpoena
Period is that the FCA violations are alleged to have occurred during this period.
It is clear from the face of the OIG Subpoena that it alleges FCA violations, in whole or in
part, from January 1, 2008, through August 27, 2015. Thus, the Run-Off Exclusion precludes
coverage of the OIG Subpoena that arises out of Wrongful Acts or Interrelated Wrongful Acts that
occurred after the Run-Off Date.
The Court, finding the OIG Subpoena is preclude from under the Run-Off Exclusion,
declines to address IUIC’s alternative argument concerning the Policy’s Government Funding
Defense Costs Sublimit.
V.

Attorneys’ Fees
IUIC requests attorneys’ fees in connection with its counterclaims for a declaratory

judgment. It, however, fails to provide a legal basis for its request. The Court assumes that IUIC’s
request is made pursuant to either the federal or state declaratory judgment act.
To the extent that IUIC brings its request under the Texas Declaratory Judgments Act
(DJA), its request should be denied. The DJA, as set forth in Chapter 37 of the Texas Civil Practice
and Remedies Code—and more specifically—Section 37.009, provides that “[i]n any proceeding
under this chapter, the court may award costs and reasonable and necessary attorney’s fees as are
equitable and just.” Tex. Civ. Prac. & Rem. Code § 37.009. The Fifth Circuit has, however,
foreclosed the use of the DJA in federal court. See Camacho v. Texas Workforce Comm’n, 445
F.3d 407, 411 (5th Cir. 2006); Olander v. Compass Bank, 363 F.3d 560, 567–68 (5th Cir. 2004).
The Court is to “apply state attorney’s fee law only when it embodies a substantive policy.”

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Camacho, 455 F.3d at 412. And, the Fifth Circuit has held that the DJA is procedural and not
substantive. Id. “The Declaratory Judgments Act does not confer new substantive rights upon the
parties nor additional jurisdiction on the courts but merely provides a procedural device for
determination of controversies which are already within the jurisdiction of the courts.” Hous. Auth.
of City of Harlingen v. Valdez, 841 S.W.2d 860, 864 (Tex. App.—Corpus Christi 1992, writ
denied). IUIC has not identified a substantive statute that provides for attorneys’ fees in the
disposition of its declaratory judgment counterclaims.
To the extent that IUIC brings its request under the Federal Declaratory Judgement Act,
that request is likewise denied. The Federal DJA, as set forth 28 U.S.C. § 2202 provides “further
necessary or proper relief based on a declaratory judgment or decree may be granted, after
reasonable notice and hearing, against any adverse party whose rights have been determined by
such judgment.” The Fifth Circuit has stated that the Federal DJA “does not provide statutory
authority to award attorney’s fees that would not otherwise be available under state law in a
diversity action.” Utica Lloyd’s of Tex. v. Mitchell, 138 F.3d 208, 210 (5th Cir. 1998) (citing
Mercantile Nat’l Bank v. Bradford Trust Co., 850 F.2d 215, 218 (5th Cir. 1988)). Again, IUIC has
not identified a substantive statute that provides for attorneys’ fees in the disposition of its
declaratory judgment counterclaims. The Court therefore finds that IUIC’s request for attorneys’
fees should be denied.
CONCLUSION
It is therefore ORDERED that Plaintiff’s Rule 12(c) Motion for Judgment on the Pleadings
(Dkt. #21) is DENIED. It is further ORDERED that Defendant Illinois Union Insurance
Company’s Motion for Judgment on the Pleadings (Dkt. #17) is GRANTED IN PART as follows:
Defendant Illinois Union Insurance Company’s request that the Court declare that Plaintiff is not

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entitled to coverage under the Policy for the OIG Subpoena is GRANTED; Defendant Illinois
Union Insurance Company’s request for attorneys’ fees is DENIED.

Plaintiff Oceans

. Healthcare LLC’s claims for breach of contract and violations of Chapter 542 of the Texas
Insurance Code—premised, in their entirety, on the OIG Subpoena—are DISMISSED WITH
PREJUDICE.
IT IS SO ORDERED.

SIGNED this 30th day of March, 2019.

___________________________________
AMOS L. MAZZANT
UNITED STATES DISTRICT JUDGE

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