Cross v. Health Care Mgmt. Partners

• Decision Date: 16 August 2010
• Docket Number: Nos. 09-1251, 09-1263, 09-1264, 09-1265, 09-1278, 09-1279.,s. 09-1251, 09-1263, 09-1264, 09-1265, 09-1278, 09-1279.
• Citation: 616 F.3d 1086
• Parties: VALLEY FORGE INSURANCE COMPANY, a Pennsylvania insurance company; Zurich American Insurance, successor in interest to Zurich Insurance Company (U.S. Branch), Plaintiffs-Appellees/Cross-Appellants, v. HEALTH CARE MANAGEMENT PARTNERS, LTD., d/b/a O'Hara Regional Center for Rehabilitation; ORCR, Inc., d/b/a O'Hara Regional Center for Rehabilitation; Solomon Health Management, LLC, d/b/a Solomon Health Services, LLC; Hersch “Ari” Krausz; David Sebbag; V. Robert Salazar, Defendants-Appellants/Cross-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

616 F.3d 1086

VALLEY FORGE INSURANCE COMPANY, a Pennsylvania insurance company; Zurich American Insurance, successor in interest to Zurich Insurance Company (U.S. Branch), Plaintiffs-Appellees/Cross-Appellants,

v.HEALTH CARE MANAGEMENT PARTNERS, LTD., d/b/a O'Hara Regional Center for Rehabilitation; ORCR, Inc., d/b/a O'Hara Regional Center for Rehabilitation; Solomon Health Management, LLC, d/b/a Solomon Health Services, LLC; Hersch “Ari” Krausz; David Sebbag; V. Robert Salazar, Defendants-Appellants/Cross-Appellees.

Nos. 09-1251, 09-1263, 09-1264, 09-1265, 09-1278, 09-1279.

United States Court of Appeals,Tenth Circuit.

Aug. 16, 2010.

COPYRIGHT MATERIAL OMITTED.

Richard B. Podoll of Podoll & Podoll, P.C., Greenwood Village, CO (Gregory G. Sapakoff of Podoll & Podoll, P.C., Greenwood Village, CO; and T. Jeffrey Fitzgerald and Marie Elizabeth Williams of Faegre & Benson, LLP, Denver, CO, with him on the briefs) for Defendants-Appellants/Cross-Appellees.

J. Robert Hall of Meckler Bulger Tilson Marick & Pearson LLP, Chicago, IL (Michael M. Marick of Meckler Bulger Tilson Marick & Pearson LLP, Chicago, IL; Michael L. O'Donnell and Sean D. Baker of Wheeler Trigg O'Donnell LLP, Denver, CO; Patrick W. Kennison, Jr. of Kutak Rock LLP, Omaha, NE; and Kelly Sue Kilgore of Kutak Rock LLP, Denver, CO, with him on the brief) for Plaintiffs-Appellees/Cross-Appellants.

Before GORSUCH, McKAY, and CUDAHY ^* , Circuit Judges.

GORSUCH, Circuit Judge.

When the government sued them for allegedly engaging in Medicare and Medicaid fraud, the appellants asked their insurance companies to provide them with a defense. The insurers promptly and unequivocally disputed their obligation to do so. Still, they agreed to supply a defense, subject to a reservation of rights permitting them to challenge their duty to defend at a later stage and, if successful in that challenge, to recoup the costs they incurred in defending the appellants.

Consistent with their reservation of rights, the insurers eventually brought this lawsuit seeking two things: a declaratory judgment that they had no duty to provide the appellants with a defense under the terms of the applicable insurance policies, and reimbursement of the defense costs they had already expended. The district court ruled that the insurers had no duty to defend, and this court affirmed. Later, on remand, the district court awarded the insurers full reimbursement of their defense costs. Now on appeal once more, the appellants challenge the propriety of this latest ruling. The insurers cross-appeal, submitting that the district court erred in declining to add prejudgment interest to their awards. Finding none of the parties' various challenges to the district court's judgment persuasive, we affirm.

I

A

In approaching the case before us, a little background about its parent lawsuit helps. Following an audit of the billing practices of O'Hara Regional Center for Rehabilitation, a long-term care facility in Denver, federal and state officials came to the view that various individuals and entities associated with the Center had provided substandard care to Medicare and Medicaid patients, and had submitted false and fraudulent claims for the care they did provide. Eventually, the relevant governmental agencies brought suit. See United States of America, et al. v. Health Care Mgmt. Partners, Ltd., et al., No. 04-CV-2340-REB-BNB (D.Colo.2004). The defendants included Health Care Management Partners, Ltd.; ORCR, Inc.; Solomon Health Management, LLC; Hersch “Ari” Krausz; David Sebbag; and V. Robert Salazar (collectively, the O'Hara Defendants).

In short order, the O'Hara Defendants contacted their insurance carriers-Zurich, Valley Forge, and certain underwriters at Lloyd's of London-demanding that the carriers provide them with a defense. Lloyd's refused to defend the O'Hara Defendants, disclaiming coverage. Zurich and Valley Forge, too, took the position that their policies didn't afford coverage but, even so, they agreed to provide a defense. At the same time, Valley Forge and Zurich reserved the right to seek reimbursement for all expenses they incurred in defending the O'Hara Defendants, should a court later agree that their policies imposed on them no duty to defend.

To reserve its rights, Valley Forge sent the O'Hara Defendants a letter stating that, while it “does not believe that its defense obligations have been triggered, it has decided for now to provide a defense ... subject to a reservation of rights, [including] ... the right to seek a judicial determination of its coverage obligations in advance of the conclusion of the underlying matter, and to recover defense costs it has spent in the event it is determined that it had no defense obligation.” App. Vol. 11 at 2607-08. Zurich sent a similar letter, saying it “reserves its right to deny, reject, contest or disclaim any duty to defend [the O'Hara Defendants]”; “to withdraw from the defense of the ... [l]awsuit in the event it is determined there is no coverage; and to seek and obtain reimbursement of any damages and/or defense [ ] costs [it] paid.” App. Vol. 11 at 2579. The O'Hara Defendants accepted the defense the insurance companies supplied and apparently never objected to the reservation of rights letters they received. It also appears the O'Hara Defendants were generally aware of the expenses accrued in defending them because, for example, they received copies of their counsels' litigation budgets.

B

That brings us to the case now before us. While the government's lawsuit against the O'Hara Defendants carried on, Zurich, Valley Forge, and Lloyd's filed complaints against the O'Hara Defendants, seeking declarations that they had no duty to defend the O'Hara Defendants against the government's claims. Zurich and Valley Forge also sought reimbursement of the defense costs that by then they had already expended. The district court consolidated these various cases and, ultimately, issued a declaratory judgment holding that the government's claims against the O'Hara Defendants were not covered by the relevant insurance policies, so there was no duty to defend (or indemnify). On appeal, this court affirmed the district court's declaratory judgment and remanded the matter back to the district court to resolve what, if any, amounts Zurich and Valley Forge should recoup for the defense costs they had advanced. See Zurich Am. Ins. Co. v. O'Hara Reg'l Ctr. for Rehab., 529 F.3d 916 (10th Cir.2008).

After extensive summary judgment briefing on remand, the district court held Zurich and Valley Forge entitled to recoup all of the costs they had incurred on behalf of the O'Hara Defendants. The district court rejected, however, Zurich and Valley Forge's claim that they were also entitled to prejudgment interest on those recovered sums. The O'Hara Defendants now appeal, asking us to hold that the district court erred in granting summary judgment to the insurance companies. For their part, Zurich and Valley Forge cross-appeal the district court's denial of prejudgment interest. We first address the O'Hara Defendants' appeal, before turning to Zurich and Valley Forge's cross-appeal.

II

The O'Hara Defendants' appeal proceeds in two essential movements. First, they say, an insurer cannot recoup the defense costs it expended under a reservation of rights letter unless a right of recoupment is also expressly mentioned in the parties' underlying insurance policy. And, they say, the insurance policies they signed with Valley Forge and Zurich contain no language discussing the recoupment of defense costs in these circumstances. Accordingly, the O'Hara Defendants conclude, Zurich and Valley Forge may not, as a matter of law, recover the defense funds they spent-even though, as the district court and this court have already held, the insurance contracts never required them to provide a defense in the first place. Second, assuming the insurers are lawfully entitled to recoup something, the O'Hara Defendants argue that genuine issues of material fact still remain over the amount the insurers are owed, thus precluding the entry of summary judgment.

A

In the O'Hara Defendants' view, Zurich and Valley Forge cannot recover the defense costs they expended for the simple reason that no provision in the parties' insurance contracts contemplates that possibility. This result pertains, the O'Hara Defendants argue, even though the insurance companies did send “reservation of rights” letters when they agreed to provide a defense-and even though the O'Hara Defendants do not dispute the clear import of those letters, apparently never objected to them at the time, and accepted the defense their insurers provided. This result pertains because, in the O'Hara Defendants' view, “[a]llowing an insurer to recover defense costs expended under a reservation of rights, without a contractual basis in its insurance policy providing a right of recoupment, would be contrary to Colorado law and public policy.” Opening Br. 23. In support of their position, the O'Hara Defendants point us to General Agents Insurance Co. of America, Inc. v. Midwest Sporting Goods Co., 215 Ill.2d 146, 293 Ill.Dec. 594, 828 N.E.2d 1092 (2005), where the Illinois Supreme Court reasoned that an insurer's reservation of rights letter could only reserve the rights contained within an insurance policy and could not create new rights. Id. at 1102-03; see also Shoshone First Bank v. Pac. Employers Ins. Co. ., 2 P.3d 510 (Wyo.2000); Gen. Star Indem. Co. v. V.I. Port Auth., 564 F.Supp.2d 473 (D.Vi.2008).

Zurich and Valley Forge respond that Colorado has taken a different tack than Illinois and the other jurisdictions cited by the O'Hara Defendants. To balance the interests of insureds and insurers, Zurich and Valley Forge say, Colorado law requires an insurer to pay defense costs, but at the same time provides the insurer with this assurance: if it pays defense costs pursuant to a reservation of...