Darwin Select Ins. Co. v. Ashland Hosp. Corp.

DARWIN SELECT INSURANCE COMPANY,now known as ALLIED WORLD SURPLUS LINES INSURANCE COMPANY APPELLANT v. ASHLAND HOSPITAL CORPORATION d/b/a KING'S DAUGHTERS MEDICAL CENTER;

KENTUCKY HEART INSTITUTE, INC.; RICHARD E. PAULUS, M.D.;

SRIHARSHA VELURY, M.D.; JOHN VAN DEREN, III, M.D.;AND MATTHEW SHOTWELL, M.D. APPELLEESANDHOMELAND INSURANCE COMPANY OF NEW YORK APPELLANT v. ASHLAND HOSPITAL CORPORATION d/b/a KING'S DAUGHTERS MEDICAL CENTER;

KENTUCKY HEART INSTITUTE, INC.; RICHARD E. PAULUS, M.D.;

SRIHARSHA VELURY, M.D.; JOHN VAN DEREN, III, M.D.;

AND MATTHEW SHOTWELL, M.D. APPELLEES

NO. 2016-CA-000372-MR

NO. 2016-CA-000396-MR

NO. 2017-CA-001167-MR

NO. 2017-CA-001168-MR

NO. 2017-CA-001756-MR

Commonwealth of Kentucky Court of Appeals

FEBRUARY 14, 2020

NOT TO BE PUBLISHED

APPEAL FROM BOYD CIRCUIT COURT

HONORABLE C. DAVID HAGERMAN, JUDGE

ACTION NO. 15-CI-00070

OPINION

REVERSING AS TO APPEAL NOS. 2016-CA-000372 AND 2016-CA-000396; DISMISSING AS TO APPEAL NOS. 2017-CA-001167, 2017-CA-001168, AND 2017-CA-001756

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BEFORE: DIXON, KRAMER AND TAYLOR, JUDGES.

KRAMER, JUDGE: Darwin Select Insurance Co., n/k/a Allied World Surplus Lines Insurance Co. ("Darwin"), along with Homeland Insurance Company of New York ("Homeland"), appeal declaratory judgments of the Boyd Circuit Court in favor of the above-captioned appellees (collectively "KDMC"). Upon review, we reverse.

These five consolidated appeals address the same overarching issue: namely, two insurers' (Darwin's and Homeland's) contested liability for providing defense coverage to KDMC relating to 127 lawsuits asserted against KDMC in Boyd Circuit Court. From a procedural standpoint, those 127 other lawsuits were collectively managed in Boyd Circuit Court under the ambit of In re: CardiacLitigation, 14-CI-09999. In re: Cardiac Litigation is not before this Court, and the parties herein represented to the Court during oral arguments that all 127 of the lawsuits related to it have recently been settled. Nevertheless, because the coverage exclusions at issue in these appeals depend upon the nature of the claims asserted in In re: Cardiac Litigation, it is impossible to resolve these appeals without some understanding of that separate matter.

I. In re: Cardiac Litigation

1. The triggering event of In re: Cardiac Litigation: KDMC receives a wide-ranging subpoena from the United States Department of Justice.

On July 25, 2011, the United States, by and through the Department of Justice (DOJ), began an investigation of KDMC and several of KDMC's affiliated entities and physicians. The DOJ's investigation began with a subpoena, which directed KDMC to produce:

1. All medical records and files, digital images and/or films of catheter procedures, intracoronary stent placements, billing records, and schedules reflecting cath lab usage pertaining to all patients treated in the hospital by physicians associated with Cumberland Cardiology and the Kentucky Heart Institute, from August 1, 2006, until present. These physicians include Richard E. Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, and Arshad Ali.

. . .

3. All communications, including email and meeting minutes, that refer or relate to the volume ofintracoronary stent placements performed by Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, or any other employee of Cumberland Cardiology or Kentucky Heard Institute.

4. Documents identifying all health care insurance companies (and their correct business addresses) billed for services by King's Daughters relating to intracoronary stent placements by Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, or any other employee of Cumberland Cardiology or Kentucky Heart Institute.

5. Files of all complaints received regarding Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, or any other employee of Cumberland Cardiology or Kentucky Heart Institute, whether from patients, physicians, nursing personnel, hospital staff, hospital administrators or any other source, concerning intracoronary stent placements.

6. Files and/or documents related to any peer review proceedings, revocation of hospital privileges proceedings, and any other disciplinary or investigatory proceeding concerning Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, and Arshad Ali.

7. Documents identifying or a list of any and all complaints, demand letters and/or lawsuits alleging or suggesting medical malpractice or other wrongdoing relating to Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali,or any other employee of Cumberland Cardiology or Kentucky Heart Institute.

8. Names and records of any and all patients who died and/or suffered complications as a result of or within one month of an angioplasty from August 1, 2006, until present.

9. All contractual agreements between King's Daughters and Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday, Arshad Ali, Cumberland Cardiology, or Kentucky Heart Institute.

10. Results of any internal or external audits of the work performed in the catheterization lab.

11. Results of any internal or external audits, or due diligence, performed on Cumberland Cardiology before their acquisition by King's Daughters Medical Center.

12. Employment contracts, financial agreements, position descriptions, incentives or bonuses offered to Richard Paulus, Zane Darnell, Sriharsha Velury, Matthew Shotwell, Christopher Epling, Ahmed Elsber, Richard Ansinelli, Michelle Friday and Arshad Ali.

As to why, the DOJ further stated in its subpoena that this documentation was:

[N]ecessary in the performance of the responsibility of the U.S. Department of Justice to investigate Federal health care offenses, defined in 18 U.S.C.¹ § 24(a) to mean violations of, or conspiracies to violate: 18 U.S.C. §§ 669, 1035, 1347, or 1518; and 18 U.S.C. §§ 287, 371, 664, 666, 1001, 1027, 1341, 1343, or 1954 if theviolation or conspiracy relates to a health care benefit program (as defined in 18 U.S.C. § 24(b)).

In sum, the subpoena identified who the DOJ was initially investigating, and why. In light of the statutes cited in its subpoena, the DOJ was investigating KDMC and the named associated entities and physicians to determine whether those individuals had either separately or collectively defrauded, stolen, or embezzled funds from Medicare, Medicaid, or federally-regulated employee benefit plans, by overbilling those programs for cardiac medical services that were not only unnecessary under federal reimbursement guidelines but potentially harmful² to the patients.

To that end, the DOJ had subpoenaed an extensive amount of information from KDMC -- what eventually became over seven million pages of records. KDMC also represents that the expense of assembling and producing that information amounted to several millions of dollars.

KDMC had a "directors and officers" ("D&O") policy with Darwin's sister company, Darwin National Assurance Company ("National"), covering claims arising between October 1, 2010 through October 1, 2011. So, on or about December 30, 2011, KDMC notified National about the DOJ's subpoena and investigation, and sought coverage of its consequent expenses by submitting thematter as a claim under the provisions of that policy. National accepted KDMC's claim and, thereafter, paid KDMC the $15 million limits of the D&O policy.

2. KDMC settles the DOJ's civil claims.

The DOJ's investigation proceeded until early 2014, when it culminated into a settlement wherein KDMC paid the United States $40.9 million but admitted no wrongdoing. The settlement agreement stated in relevant part:

B. The United States contends that KDMC submitted or caused to be submitted claims for payment to the Medicare Program (Medicare), Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395kkk-1, and Medicaid Program (Medicaid), 42 U.S.C. §§ 1396-1396w-5.

C. The United States contends that it has certain civil claims against KDMC arising from the following conduct:

1. The United States contends that KDMC engaged in conduct to maximize Medicare and Medicaid reimbursement for the performance of unnecessary diagnostic catheterizations and coronary stents (hereinafter referred to as the "unnecessary interventional cardiac procedures"). The United States contends that KDMC knew, deliberately ignored, or recklessly disregarded the fact that cardiologists associated with or employed by KDMC and its subsidiaries were performing unnecessary interventional cardiac procedures. The United States further contends that KDMC knew, deliberately ignored, or recklessly disregarded the fact that such cardiologists associated with or employed by KDMC and its subsidiaries were falsifying KDMC's medical records in order to create the appearance of a need for the unnecessary interventional cardiac procedures. Between January 1, 2006 andDecember 31, 2011, KDMC or its agents submitted false claims for payment for unnecessary interventional cardiac procedures to the Medicare and Kentucky Medicaid programs, and received millions of dollars in reimbursement as a result of such claims.

. . .

D. This Settlement Agreement is neither an admission of liability by KDMC nor a concession by the United States that its claims are not well founded.

To reemphasize, the settlement agreement recited that the United States had, due to its investigation, asserted civil claims against KDMC. As to the basis of those claims, the settlement agreement recited in Paragraph C.1...