June 10, 2009
Written By Attorneys: Michael A. Hamilton and Paulyne A. Gardner-Smith
Note: This article is an interpretation of current law and is offered for informational purposes only. This material is not legal advice and should not be construed or used as a substitute for the advice of an attorney.
On June 3, 2009, the Superior Court of Pennsylvania held that an insurer was responsible for providing coverage for the settlement of an underlying RICO claim, even where the RICO allegations were based, in part, upon the policyholder's contractual duties and where the policy excluded coverage for breach of contract. In Executive Risk Indemnity, Inc. v. CIGNA Corporation, 2009 Pa. Super. 106, 2009 WL 1537870 (June 3, 2009), the Court was asked to decide whether Executive Risk Indemnity's professional liability policy issued to CIGNA provided coverage for allegations that CIGNA underpaid claims submitted by various medical providers. Plaintiffs in three consolidated lawsuits charged CIGNA with civil Racketeer Influenced and Corrupt Organization Act (RICO) violations and breach of contract. CIGNA settled the lawsuit for $140,000,000, but the amounts were not apportioned between the RICO and breach of contract claims.
Following the settlement, CIGNA sought indemnification from a number of its insurers, including Executive Risk. Executive Risk, in turn, filed a declaratory judgment action, arguing that its policy did not cover the underlying claim because the loss was directly attributable to CIGNA's contractual duty to pay the medical providers' claims and this breach of contract was excluded from coverage. The trial court agreed with Executive Risk and granted its motion for summary judgment.
On appeal, the Superior Court initially concluded that, in accordance with the language of the policy, a simple breach of contract claim was not a covered loss under a professional liability policy. However, the Court found that the RICO claim fell easily within the definition of a "claim" because in the RICO action, either the insureds committed the alleged wrongful acts or they were performed by persons to whom the insureds were legally responsible in the performance of their professional services.
The Superior Court disagreed with Executive Risk's argument that two policy exclusions for breach of contract claims removed the RICO claim from coverage. According to the Superior Court, "while the RICO claims have their genesis in the contractual duty imposed on CIGNA to medical providers, the claims themselves involve the method of doing business." Thus, in the RICO action, "[t]he actions complained of are not simply the failure to pay a claim or using a procedure that underpays claims" but are "the actions in agreement and the agreement itself between CIGNA and other insurers to systematically underpay claims," which are separate and distinct from the breach of contract claim. Executive Risk, 2009 WL 1537870 at *3.
The Superior Court panel also held that the Executive Risk policy was meant to cover RICO claims because the definition of "loss" set forth in the policy included the payment of treble damages, which are available in RICO actions. Furthermore, the RICO claim fit within the policy's definition of a "claim." However, because the allocation between the breach of contract and RICO claims had not been made in the settlement, the Superior Court determined that, on remand, the trial court would need to determine the allocation of the claims in order to determine the amount of coverage owed.
Judge Stephen J. McEwen, Jr. filed a dissenting opinion, reasoning that CIGNA was estopped from asserting coverage for the RICO claims because it entered into the settlement agreement in the underlying litigation without classifying its conduct as violative of the RICO statute. Therefore, CIGNA could not retroactively label those actions as being wrongful RICO-based conduct. However, the issue still remains with the trial court as to the allocation of CIGNA's liability between the RICO and breach of contract claims. Nevertheless, the majority's expansive view of coverage for RICO-based claims should serve notice to insurers that they must carefully scrutinize a claimant's allegations of RICO violations.
