Opinion
Case No. 14-cv-01689-JST
10-17-2014
BRADEN PARTNERS, LP, et al., Plaintiffs, v. TWIN CITY FIRE INSURANCE COMPANY, Defendant.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS
Re: ECF. No. 25
Before the Court is Twin City Fire Insurance Company's Motion to Dismiss Braden Partners, LP, et al.'s ("Braden") complaint. ECF No. 25. The Court will GRANT the motion in part and DENY it in part.
I. BACKGROUND
A. Factual and Procedural History
The Court accepts as true the following facts alleged in the complaint for purposes of resolving this motion to dismiss. See Navarro v. Block, 250 F.3d 729, 732 (9th Cir. 2001).
Braden purchased a partnership liability insurance policy from Twin City effective August 15, 2011 to June 1, 2012 (the "Policy"). Compl., ECF No. 1, ¶ 9. The Policy provided that Twin City would pay for "Loss" resulting from any "Claim" for a "Wrongful Act." Id. ¶ 12. The Policy required Twin City to advance defense costs as they were incurred, subject to its right to reimbursement. Id., Ex. 1, Endorsement 11.
On February 28, 2012, the Department of Justice issued subpoenas to Braden requesting documentation related to Braden's sales practices and claims for payment from federally funded healthcare programs ("Subpoenas"). ECF No. 34 at 5. On August 8, 2013, the DOJ notified Braden that a qui tam lawsuit had been filed against it, alleging violations of the Federal False Claims Act and California False Claims Act ("Underlying Complaint"). Id.
The Underlying Complaint alleged that Braden, its general partners and employees engaged in various wrongful acts, including unlawful sales practices in connection with its sleep therapy and oxygen business. ECF No. 1, ¶ 20. With respect to Braden's sleep therapy business, the Underlying Complaint alleged that Braden employees entered into kickback arrangements with physicians and sleep clinics through which Braden referred patients in order to induce them to use Braden's products. Id. As to Braden's oxygen business, it alleged that the company submitted false and fraudulent claims for reimbursement by Medicare and Medi-Cal. Id. The Underlying Complaint sought damages, civil penalties, injunctive relief, and costs and expenses. Id.
Braden provided Twin City notice of the Subpoenas on March 9, 2012, and of the Underlying Complaint on August 21, 2013. Id. ¶¶ 18, 20. Twin City refused to advance defense costs for either, stating that the Subpoenas did not constitute "Claims" under the Policy and that certain Policy exclusions barred coverage for the Underlying Complaint. Id. ¶ 17, 21.
Braden brought this action on April 11, 2014, alleging that Twin City breached the Policy by refusing to advance defense costs for the Subpoenas and Underlying Complaint. Braden requests declaratory relief establishing that Twin City must advance defense costs and indemnify Braden for those costs. Id. ¶¶ 29-37. Braden also filed breach of contract and breach of the covenant of good faith and fair dealing claims. Id. ¶¶ 38-49.
B. Jurisdiction
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1332. The parties are completely diverse and the alleged amount in controversy exceeds $75,000.
II. LEGAL STANDARD
A court should grant a motion to dismiss for failure to state a claim under Rule 12(b)(6) if the complaint does not proffer "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. In considering a motion to dismiss, the court "must accept as true all of the factual allegations contained in the complaint." Erickson v. Pardus, 551 U.S. 89, 94 (2007). Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged to support that theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir.1990). In insurance-coverage disputes, "[t]he burden is on the insured to establish that the claim is within the basic scope of coverage and on the insurer to establish that the claim is specifically excluded." MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 648 (2003).
III. DISCUSSION
Twin City argues that, for policy reasons, California law bars coverage of the Underlying Complaint, and that the Underlying Complaint is excluded from coverage under two separate Policy provisions. Twin City also insists the Policy does not cover the Subpoenas because they are not "Claims."
A. The Underlying Complaint Does Not Seek Uninsurable Relief
Twin City argues that California law bars insuring against the type of "restitutionary" relief the Underlying Complaint seeks. Twin City insists that "[t]he very essence of a False Claims Act violation is the wrongful receipt of money," and that "courts have repeatedly recognized that the damages awarded for a violation are restitutionary in nature." ECF No. 25 at 11.
California law does bar insuring against claims seeking purely "restitutionary" relief. Bank of the W. v. Super. Ct., 2 Cal. 4th 1254, 1266 (1992) ("It is well established that one may not insure against the risk of being ordered to return money or property that has been wrongfully acquired."). But such "restitutionary" relief refers only to "situations in which the defendant is required to restore to the plaintiff that which was wrongfully acquired." Id. at 1268 (internal quotations omitted). "The label of 'restitution' or 'damages' does not dictate whether a loss is insurable. . . . [I]nsurable 'damages' include monetary awards that represent compensation for harm to third parties, even if such awards bear the label 'restitution.'" Unified W. Grocers, Inc. v. Twin City Fire Ins. Co., 457 F.3d 1106, 1115 (9th Cir. 2006) (internal quotations omitted). "The fundamental distinction is . . . whether the claim seeks to recover only the money or property that the insured wrongfully acquired." Id. (citing Bank of the W., 2 Cal. 4th at 1270) (emphasis added). Whether relief represents uninsurable "restitution" thus depends on whether a claim seeks more than the return of wrongfully acquired money or property.
The Federal and California false claims acts do not create solely "restitutionary" remedies. A review of the Underlying Complaint shows that, pursuant to the false claims acts, Braden faces potential liability extending beyond the return of wrongfully acquired revenues—treble damages, civil penalties, and attorneys' fees and costs for the qui tam relator. ECF No. 34, Ex. A, ¶ 264. The Underlying Complaint seeks non-restitutionary, insurable relief.
B. Policy Exclusions Do Not Bar Coverage of the Underlying Complaint
Twin City argues that two Policy exclusions bar coverage for the Underlying Complaint. Twin City insists the Underlying Complaint "is wholly and specifically comprised of allegations that arise from 'the rendering of professional services' as both a provider of medical services, and in Plaintiffs' capacity as 'counselors,' both of which are clearly and specifically excluded from coverage under the Policy." ECF No. 25 at 12.
"[I]nterpretation of an insurance policy is a question of law." Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 18 (1995) (citing AIU Ins. Co. v. Super. Ct., 51 Cal. 3d 807, 818 (1990)). The parties' mutual intention at the time the contract was formed governs its interpretation. Cal. Civ. Code § 1636. The Court must infer this intent, if possible, solely from the contract's written provisions. Id. § 1639. The Court construes insurance policy terms in their ordinary and popular sense, unless the parties have applied special or technical meanings to them. Id. §§ 1638, 1644; AIU, 51 Cal. 3d at 822.
1. The "Medical Incident Exclusion" Does Not Apply
Defendants claim the Underlying Complaint falls within the Policy's "Medical Incident Exclusion." This exclusion bars recovery for claims "based upon, arising from, attributable to, related to, or in any way involving, directly or indirectly, the rendering or failure to render professional services in connection with the Partnership's business as a provider of medical services." ECF No. 1, Ex. 1, Endorsement 15. The Policy contains examples of non-covered professional services, which include:
(1) providing medical . . . treatment, diagnosis or services . . .Id.
(8) offering of any advice by the Partnership and/or its General Partners in connection with any of the above.
According to Twin City, the Underlying Complaint arose as a direct result of Braden and its employees' performance of professional medical services. Specifically, Twin City claims medical services underlie the allegations that Braden violated the false claims acts by soliciting patient referrals for sleep testing and sleep therapy, by ignoring Medicare rules regarding pulse oximetry tests, and by contacting patients in physician waiting rooms, hospitals, clinics, and during home visits. ECF No. 25 at 15-16. Twin City further cites California authority for the proposition that the "based upon . . . arising out of" language in the Policy requires a broad reading of the exclusion. Id. at 14. As a result, Twin City insists the Policy bars recovery for claims "related to Plaintiffs' rendering, or failure to render, professional services in connection with its business as a provider of medical services." Id. at 16.
Under California law, "insurance coverage is interpreted broadly so as to afford the greatest possible protection to the insured, [whereas] ... exclusionary clauses are interpreted narrowly against the insurer." MacKinnon, 31 Cal. 4th at 648 (internal quotations omitted). The terms of an insurance policy should be interpreted, whenever reasonably practical, "in a manner that makes them reasonable and capable of being carried into effect, and that is consistent with the parties' intent." Safeco Ins. Co. of Am. v. Robert S., 26 Cal. 4th 758, 765 (2001); Cal. Civ. Code § 1643. Among other things, this means avoiding a construction of an insurance policy that would render the promises in it illusory. Safeco Ins. Co. of Am., 26 Cal. 4th at 765.
Twin City's broad reading of the medical services exclusion cannot be reconciled with these rules of contract interpretation. Describing the actions attributed to Braden in the Underlying Complaint as the provision of "professional medical services" is inconsistent with the ordinary and popular meaning of those words. Professional medical services are the types of activities that one would expect medical professionals—i.e., nurses, pharmacists, and doctors—to perform, not the sales activities that Braden's employees engaged in, notwithstanding the fact that Braden sells medical equipment. Cf. Tradewinds Escrow, Inc. v. Truck Ins. Exchange, 97 Cal. App. 4th 704, 713 (2002) (defining "professional services" as those "arising out of a vocation, calling, occupation, or employment involving specialized knowledge, labor, or skill"). The "arising out of language, though broad, cannot remedy this disconnect.
The closest Braden employees came to rendering professional medical services occurred when they allegedly visited patients' homes to help set up pulse oximetry equipment and execute pulse oximetry tests. ECF No. 25 at 7. But these visits are more like sales activity than like the types of services medical professionals provide. At their most "medical," Braden employees trained patients to use the medical equipment they sought to sell—an incident of attempting to sell those products, not the provision of professional medical care. The Court cannot say, as a matter of law and at this early stage of the proceedings, that Braden employees' salespersonship constituted the provision of professional services related to Braden's business as a medical services provider.
Furthermore, Twin City's reading of the medical services exclusion would render Policy coverage illusory. If Braden is a medical services provider as Twin City claims, and the Policy did not cover any claim broadly connected with the rendering of "medical services," then the exclusion would serve as an absolute bar to recovery for any claim related to the company's business. Such a construction is not consistent with California law.
Twin City counters that this Court also should construe the medical incident exception broadly because the Policy does not obligate Twin City to defend Braden; rather, the duty to defend remains with Braden. ECF No. 38-4 at 3-5 (citing Commercial Capital Bankcorp. Inc. v. St. Paul Mercury Ins. Co., 419 F. Supp. 2d 1173, 1182 (C.D. Cal. 2006) (dealing with allocation of insured and uninsured defense costs and whether the insurer had to advance all or only some of those costs on a contemporaneous basis); Petersen v. Columbia Casualty Co., No. SACV 12-00183 JVS(ANx), 2012 WL 5316352 at *9-10 (C.D. Cal. Aug. 21, 2012) (discussing cases and explaining that a different standard applies in some cases where the duty to defend lies with the insured rather than the insurer, based on the particular insurance policy at issue and its terms regarding allocation of covered versus uncovered defense costs); Jeff Tracy, Inc. v. U.S. Specialty Ins. Co., 636 F. Supp. 2d 995, 1003-04 (C.D. Cal. 2009) (same)); but cf. Legacy Partners, Inc. v. Clarendon Am. Ins. Co., No. 08cv920 BTM (CAB), 2010 WL 1495198 at *4 (S.D. Cal. Apr. 14, 2010) (relying on Olympic Club v. Those Interested Underwriters at Lloyd's London, 991 F.2d 497, 503 (9th Cir. 1993), to apply the same standard where the insured bore the duty to defend as it would if the insurer had borne that duty).
Twin City is correct that, in certain cases, a court's standard of interpretation of an insurance policy placing the duty to defend on the insured may differ from the standard applicable where the insurer bears the duty to defend. But even to the extent these cases are apposite, they do not alter the ordinary and popular understanding of the term "medical services." And while the exclusion's language is broad, exclusions are to be read narrowly, no matter where the duty to defend lies. The Court will not grant Twin City's motion on this basis.
2. The Professional Errors and Omissions Exclusion Does Not Apply
Twin City also claims the Policy's "Professional Errors and Omissions Exclusion" bars coverage for the Underlying Complaint. This exclusion bars recovery for claims related to the policyholder "undertaking any activities in the capacity of, giving advice in connection with or rendering or failing to render professional services as any of the following: . . . Counselors, including, but not limited to, giving advice, especially as the result of a consultation, about any person's health, whether physical, mental or spiritual." ECF No. 1, Ex. 1, Endorsement 19.
Twin City specifically argues that the Underlying Complaint's allegations regarding Braden's "Patient Care Coordinators" ("PCCs") and their improper interactions with patients fall under this exclusion. The Underlying Complaint alleges PCCs approached patients in physician waiting rooms to encourage them to ask for oximetry testing. ECF No. 1, Ex. A, ¶ 145. It further alleges that PCCs would ask patients questions in order to gather information the PCCs could use to convince physicians to prescribe oximetry tests, and would aggressively push the tests on patients in their homes, regardless of whether a physician had yet prescribed one. Id.
Plaintiffs' PCCs cannot be described as "counselors." The alleged interactions describe a series of sales practices - the type of "counseling" one might receive from a car salesperson regarding the advisability of purchasing a car - not health-related consultations. Interpreting this exclusion narrowly, as it must, the Court finds that the "Professional Errors and Omissions Exclusion" does not bar coverage for the claims embodied in the Underlying Complaint.
C. The Policy Does Not Cover Subpoena-Related Costs
Twin City also argues that it has no obligation to advance defense costs to or indemnify Braden for the cost of responding to the Subpoenas because they are not "Claims" the Policy covers. ECF No. 25 at 17.
The Policy defines a "Claim" as:
(a) a judicial or other proceeding against a General Partner for a Wrongful Act in which such General Partners could be subject to a binding adjudication of liability for compensatory money damages or other civil relief, including an appeal therefor or (b) a written demand against a General Partner for compensatory money damages or other civil relief on account of a Wrongful Act.ECF No. 1., Ex. 1, § IV(G). Braden argues the Subpoenas fit both definitions of "Claim." ECF No. 34 at 20.
First, Braden cites ACE American Insurance Co. v. Ascend One Corp., 570 F. Supp. 2d 789, 796 (D. Md. 2008), for the proposition that subpoenas can constitute "Claims" if the insured is required to produce testimony or documents pursuant to an ongoing investigation of its activities. But the outcome in that case turned on the insurance policy's language defining "Claim" to include "[a] civil, administrative or regulatory investigation against any Insured commenced by the filing of a notice of charges, investigative order or similar document." Id. at 793. Here, the Policy's definition of "Claim" does not include a "regulatory investigation," and thus Braden's suggested comparison falls short.
Second, relying on language in the Policy, Braden argues the Subpoenas constitute a "written demand" for "other civil relief "on account of a Wrongful Act." Id. Braden contends the Subpoenas were demands for "other civil relief under the Policy's definition of "Claim" because they required Braden to hand over a substantial number of documents to the government. ECF No. 34 at 21. Had it failed to comply with the Subpoenas, Braden argues, the Attorney General could readily have forced compliance by obtaining "civil relief in court. Id. at 21-22; see Minuteman Int'l, Inc. v. Great Am. Ins. Co., No. 03 C 6067, 2004 WL 603482 at *7 (N.D. Ill. Mar. 22, 2004) (finding that a subpoena constituted a "claim" under an insurance policy because it was a "written demand" and because the potential for court-ordered compliance made its demands "relief").
But, as the First Circuit explained in Center for Blood Research, Inc. v. Coregis Insurance Co., 305 F.3d 38, 42-43 (1st Cir. 2002), the possibility that Braden might have faced court-ordered compliance with the Subpoenas does not transmute them into "written demands" for "civil relief." If Braden had ignored the Subpoenas, the DOJ certainly could have brought an action to compel production. Had it done so, that action could have led to "civil relief in the form of production, which would have fit the Policy's definition of "Claim." Id. But because this scenario did not unfold, the Subpoenas at most represented a "written demand." Absent court-ordered compliance, such a demand does not request "civil relief."
The Subpoenas do not constitute "Claims" under the Policy. The Policy does not cover Braden's costs incurred in responding to them.
CONCLUSION
For the foregoing reasons, Twin City's motion to dismiss Braden's third claim for costs related to the Subpoenas is GRANTED WITHOUT LEAVE TO AMEND. In all other respects, the motion is DENIED.
Twin City contends that Braden's claim for breach of the covenant of good faith and fair dealing should be dismissed because the balance of Twin City's motion shows that there was no coverage under the policy. ECF No. 28-6 at 19-20. Because Twin City has provided no other argument as to why the Court should dismiss this claim, and because the Court has denied Twin City's motion to dismiss with respect to whether Braden's claims are covered under the Policy, Twin City's motion to dismiss Braden's bad-faith claim is denied.
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IT IS SO ORDERED. Dated: October 17, 2014
/s/_________
JON S. TIGAR
United States District Judge