Wrongful Acts Insurance Policies and the False Claims Act: The Sixth Circuit Rejects the “Put Up or Shut Up” Defense

Businesses facing potential False Claims Act liability must meet the notice requirements in their applicable “wrongful acts” insurance policies to avoid denials of coverage. Although these notice requirements can only be determined on a policy-by-policy basis, a decision by the United States Court of Appeals for the Sixth Circuit provides a cautionary tale about what not to do when seeking coverage for False Claims Act liability under a wrongful acts policy. Specifically, in First Horizon National Corporation v. Houston Casualty Company, the Sixth Circuit held that an insurance company properly denied coverage to First Horizon, because the company did not file a notice of claim until it had almost finalized a $212.5 million False Claims Act settlement with the U.S. Department of Justice (DOJ).[1] According to the Court, First Horizon’s notice obligations were triggered when DOJ revealed its investigation, formally presented its litigation position, and made an initial $610 million settlement offer. In reaching its holding, the Court rejected First Horizon’s “put up or shut defense,” under which the company argued it was not required to give notice until DOJ demanded money. Given the Sixth Circuit’s decision, and subject to the language in their policies, companies should consider providing notice as soon as they become aware of potential False Claims Act liability. 

Wrongful Acts Insurance and “Claims Made” Notice Provisions

Wrongful acts insurance policies such as the ones at issue in First Horizon typically cover “claims made” during a defined policy period. To limit coverage to claims made during this defined period, insurers generally require policyholders to provide timely notice of “claims.”[2] In addition, some “claims made” policies give policyholders the ability to provide a “notice of circumstances,” which can allow a policyholder to preserve its right to file a claim that has not yet occurred but is “reasonably expected” to occur. In other words, notice of circumstance provisions may provide coverage for claims brought against the policyholder after the policy period ends if, among other things, the policyholder properly notifies the insurer when it first becomes aware of circumstances that are reasonably expected to give rise to a claim.

First Horizon, the False Claims Act, and Timely Notice

First Horizon National Corporation is a lender that, among other things, provides federally regulated and secured Fair Housing Act mortgages. In 2012, First Horizon learned DOJ was investigating the company for violations of the False Claims Act. In May 2013, DOJ formally updated First Horizon on the status of the False Claims Act investigation. During this update, DOJ informed First Horizon that it faced more than $1 billion in False Claims Act liability. 

As relevant here, First Horizon purchased $75 million in wrongful acts insurance to cover claims made during the one-year policy period that ran from August 1, 2013, to August 1, 2014. The policy included notice of claims and notice of circumstances provisions. First Horizon did not disclose DOJ’s False Claims Act investigation when it purchased this policy.

In February 2014, DOJ and First Horizon entered into the first of two tolling agreements that allowed the parties to negotiate a False Claims Act settlement without pressure from the statute of limitations. On April 29, 2014, DOJ offered to settle the matter for $610 million. First Horizon did not file a notice of claim based on DOJ’s settlement offer.

One month later, however, First Horizon filed a notice of circumstances. Importantly, this notice did not mention the $610 million offer, the tolling agreements, or DOJ’s formal presentation of First Horizon’s potential $1 billion False Claims Act liability. Instead, First Horizon broadly notified its insurer that DOJ was investigating potential False Claims Act violations that could lead to a monetary demand or claim from the government.  

On August 1, 2014, the policy period ended. In December 2014, DOJ provided First Horizon with an updated oral and written presentation of the government’s litigation position. During this update, DOJ informed First Horizon that it would file a False Claims Act complaint if First Horizon did not make a “productive” counter to DOJ’s pending $612 million offer. In February 2015, well after the policy period ended, First Horizon finally notified its insurer about the settlement negotiations. At that point, the parties were close to agreement on a $212.5 million settlement, which they finalized in June 2015. The insurer denied coverage on the grounds that First Horizon’s notice requirements were triggered during the policy period that ended in August of 2014. First Horizon filed suit in federal district court seeking coverage.     
 
In the district court, First Horizon asserted a “put up or shut up defense,” arguing that its notice requirements were not triggered until DOJ demanded money under the False Claims Act. The district court rejected First Horizon’s arguments, and the company appealed to the Sixth Circuit. On the appeal, the Sixth Circuit confirmed that First Horizon forfeited its right to coverage by waiting too long to notify its insurer about the False Claims Act liability. First, the Court found that DOJ’s April 2014 settlement offer triggered the policy’s notice of claim requirement. Second, the Court concluded that First Horizon should have filed its notice of circumstances in May 2013 when DOJ first presented its False Claims Act case. Thus, First Horizon’s May 2014 notice of circumstances and its February 2015 notice of claim were too late.

Conclusion

First Horizon is a cautionary tale for companies with wrongful acts policies that may cover False Claims Act liability. Importantly, the case highlights the fact that companies must be acutely aware of their notice obligations. As established in First Horizon, False Claims Act investigations and settlement negotiations can trigger notice requirements even if the government never files a complaint. Moreover, even awareness of a preliminary False Claims Act investigation may necessitate submission of a notice of circumstances. Although other provisions in wrongful acts policies might limit coverage for certain False Claims Act losses, failing to properly notify an insurer can result in a loss of coverage before any other such provisions come into play. Therefore, companies with wrongful acts policies must carefully comply with applicable notice requirements to prevent denials of coverage.

For more information, contact a member of our False Claims Act and Qui Tam Litigation Group.