Billing Fraud Penalties Do Not Constitute “Damages” Under Professional Liability Policy

Applying Maine law, a federal district court has held that an insurer did not have a duty to defend an insured mental health agency in a billing fraud investigation by the state health department because the sanctions sought by the department did not constitute “damages” within the meaning of the insured’s professional liability policy.  Oceanway Mental Health Agency, Inc. v. Philadelphia Indem. Ins. Co., 2019 WL 302486 (D. Maine Jan. 23, 2019).

The insured mental health agency was investigated by the state health department based on complaints about billing submissions and records related to Medicaid and the state health program, Mainecare, and received several notices of violations.  The department took remedial action, including imposing a penalty and requiring the mental health agency to return the entirety of certain “overpayments or payments made in error.”  The insured sought coverage under its professional liability coverage, and the insurer denied coverage.

In the coverage action that followed, the court held that the insurer did not breach its duty to defend by denying coverage because the state health department proceedings did not involve “damages.”  The court reasoned that the term “damages” was defined to not include fines, sanctions and penalties, and the administrative proceedings involved fines, sanctions and penalties based on alleged violations of billing standards.  The court also concluded that the definition was reinforced with exclusionary language precluding coverage for damages for any actual or alleged breach of contract or agreement or arising out of acts, errors, or omissions of a managerial or administrative nature, which clearly encompassed the insured’s “liability” to the state department.  Consequently, the court granted the insurer’s motion for summary judgment.