Oceans Healthcare, L. L.C. v. Ill. Union Ins. Co.

• Decision Date: 30 March 2019
• Docket Number: Civil Action No. 4:18-cv-00175
• Citation: 379 F.Supp.3d 554
• Parties: OCEANS HEALTHCARE, L.L.C., v. ILLINOIS UNION INSURANCE COMPANY.
• Court: U.S. District Court — Eastern District of Texas

379 F.Supp.3d 554

OCEANS HEALTHCARE, L.L.C.,

v.ILLINOIS UNION INSURANCE COMPANY.

Civil Action No. 4:18-cv-00175

United States District Court, E.D. Texas, Sherman Division.

Signed March 30, 2019

Michael Lester Hood, Haynes and Boone LLP, Dallas, TX, for Oceans Healthcare, L.L.C.

Angelo G. Savino, Alexander J. Selarnick, Cozen O'Connor, New York, NY, William H. Craven, Cozen O'Connor, Dallas, TX, for Illinois Union Insurance Company.

MEMORANDUM OPINION AND ORDER

AMOS L. MAZZANT, UNITED STATES DISTRICT JUDGE

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 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 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, 61 S.Ct. 1020, 85 L.Ed. 1477 (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 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).

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...