United States District Court, E.D. Texas, Sherman Division
MEMORANDUM OPINION AND ORDER
L. MAZZANT, UNITED STATES DISTRICT JUDGE
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.
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
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.
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).
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.
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)).
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).
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
Texas Insurance Law
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 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.
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).
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.
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).
these principles guiding, the Court turns to the parties'
Whether the OIG Subpoena constitutes a “Claim”
for “Wrongful Acts”
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.
#6, Exhibit 5 at p. 70). IUIC contends that the OIG Subpoena
is neither a Claim nor made pursuant to any Wrongful Act.
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 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 Fed.Appx. 241, 252 (6th
Cir. 2013); Musclepharm Corp. v. Liberty Ins.
Underwriters, Inc., 712 Fed.Appx. 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).
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