Illinois Appellate Court Holds Interrelated Wrongful Acts Provision and Prior and Pending Litigation Exclusion Bar Coverage

The Appellate Court of Illinois has held that an underlying lawsuit was interrelated with another lawsuit brought against the insured by a different claimant, and thus precluded from coverage pursuant to the policy’s interrelated wrongful acts exclusion. Arch Ins. Co. v. PCH Mgmt. Alpha, LLC, 2024 WL 5039931 (Ill. App Ct. Dec. 9, 2024).

In 2018, a third-party medical holdings company and its managing member filed a counterclaim and third-party complaint against the insured in Illinois state court for perpetuating a fraudulent billing scheme. The pleadings alleged that the insured engaged in a “familiar pattern and practice” and “modus operandi,” in which it would contract with regional hospitals in financial distress and obtain unrestrained control of the company. The counterclaim and third-party complaint further contended that a number of other similar lawsuits were pending against the insured, each of which allegedly stated that the insured was vested with authority over all aspects of hospital operations and finance and that the insured abused this control in order to enrich itself at the expense of the hospitals. The 2018 pleadings specifically alleged that the centerpiece of the insured’s fraudulent scheme was the aggressive development of hospital laboratory services.

The insured sought coverage for the counterclaim and third-party complaint under its claims-made directors and officers insurance policy in effect from September 11, 2017, to September 11, 2018. The policy included an interrelated wrongful acts provision, which required all claims arising from, based upon, or attributable to the same wrongful act or interrelated wrongful acts to be deemed a single claim first made on the earliest date that any of those claims were first made, even if such date was before the policy period. The policy defined “interrelated wrongful acts” as wrongful acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause or series of causally connected facts, circumstances, situations, events, transactions or causes.

The insurer filed a declaratory judgment action asserting that the policy’s interrelated wrongful acts provision precluded coverage for the underlying matter, because it arose from, was based upon, or attributable to the same or interrelated wrongful acts at issue in another lawsuit filed in Oklahoma state court in June 2017, prior to the inception of the policy period. The trial court ruled in favor of the insurer, and the insured appealed.

The appellate court affirmed the trial court’s ruling, concluding that the underlying action and the earlier Oklahoma action arose from the same interrelated wrongful acts under the policy and thus were deemed a single claim first made at the time of the Oklahoma action before the inception of the policy period. In so holding, the court refused to consider that some of the entities involved in the insured’s common scheme were different. Rather, the court underscored that the underlying action and the Oklahoma action both alleged that the insured presented itself as the “white knight” that would “save the hospital” from financial distress, caused the hospitals to enter into hospital management agreements that gave the insured unfettered control of the hospital, entered into laboratory management agreements to increase the overall revenue, and provided false projections and representations to fraudulently induce the hospitals to sign the management agreements. Accordingly, the court determined that both matters “clearly” shared a common nexus of facts, circumstances, and events insofar as the insured engaged in the same fraudulent billing scheme with both hospitals for its own financial benefit.

The court also determined that, because the claims were interrelated and because the Oklahoma action was filed before the inception of the policy period, the policy’s prior and pending litigation exclusion also applied to bar coverage. This exclusion precluded coverage for any claims against the insured arising out of, based upon, or attributable to wrongful acts specified in a written demand, suit, or proceeding against the insured prior to the applicable pending and prior litigation date, or any interrelated wrongful acts thereof.