Springstone, Inc. v. Hiscox Ins. Co., Inc. ( 2021 )

NOT RECOMMENDED FOR PUBLICATION
File Name: 21a0434n.06
Case No. 20-6014
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
SPRINGSTONE, INC., ) Sep 17, 2021
DEBORAH S. HUNT, Clerk
)
Plaintiff-Appellant, )
) ON APPEAL FROM THE UNITED
v. ) STATES DISTRICT COURT FOR
) THE WESTERN DISTRICT OF
HISCOX INSURANCE COMPANY, INC., ) KENTUCKY
)
Defendant-Appellant. )
BEFORE: SUTTON, Chief Judge; SUHRHEINRICH and SILER, Circuit Judges.
SILER, Circuit Judge. Responding to lawsuits and investigations is expensive (even when
they are without merit). That reality played out when Plaintiff Springstone, Inc. incurred
substantial legal fees responding to a government subpoena based on a sealed qui tam lawsuit.
Springstone thought, however, it was in luck. After all, it had purchased insurance from Defendant
Hiscox Insurance Company, Inc. to cover it from certain legal claims. But its coverage does not
extend so far. Springstone’s policy does not cover qui tam actions filed before the coverage period,
nor does it cover subpoena responses. Accordingly, the district court’s judgment is AFFIRMED.
I
Springstone (headquartered in Louisville) provides behavioral health services across
several facilities. In January 2017, it purchased insurance from Hiscox. That insurance plan
Case No. 20-6014, Springstone, Inc v. Hiscox Ins. Co., Inc.
included Directors & Officers (D&O) Liability Coverage. Only two parts of that coverage are
relevant here:
• Coverage B: Company Reimbursement Coverage
o This D&O Coverage Part shall pay the Loss of a Company arising from a Claim
first made against an Individual insured during the Policy Period or the Discovery
Period (if applicable) for any actual or alleged Wrongful Act of such Individual
Insured, but only when and to the extent that such Company has indemnified such
Individual Insured for such Loss.
• Coverage C: Company Coverage
o This D&O Coverage Part shall pay the Loss of a Company arising from a Claim
first made against a Company during the Policy Period or the Discovery Period (if
applicable) for any actual or alleged Wrongful Act of a Company.
In July 2016, a qui tam lawsuit was filed—under seal—against Springstone. It alleged that
“Springstone had violated the False Claims Act by obtaining reimbursement from Medicare and
Medicaid for medically unnecessary services that it provided to patients.” A year after the lawsuit
was filed, the Office of the Inspector General for the Department of Health and Human Services
sent Springstone a subpoena related to its investigation of the qui tam complaint. That subpoena
requested documents related to Springstone’s patient treatment and management practices.
A few months later, Springstone informed Hiscox that it had received the subpoena and
sought coverage for its response under the D&O Coverage. Hiscox denied Springstone’s request.
In its response, Hiscox stated that there was no “Claim,” and the subpoena did not allege a
“Wrongful Act.” A large legal bill ensued.
In 2019, the qui tam lawsuit was dismissed, and the complaint was unsealed. Springstone
informed Hiscox of the lawsuit and again sought coverage for its response. Hiscox denied that
second request for coverage.
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Case No. 20-6014, Springstone, Inc v. Hiscox Ins. Co., Inc.
Springstone then filed this action against Hiscox in Kentucky state court. Springstone
alleged: (1) a breach of contract; (2) common law bad faith; (3) violations of the Kentucky Unfair
Claims Settlement Practice Act and Kentucky Consumer Protection Act; and (4) unjust
enrichment. Springstone also sought a declaration of rights under the insurance agreement and
punitive damages. Hiscox removed to federal court and filed a motion to dismiss. The district
court agreed with Hiscox and found that neither Coverage B nor Coverage C covers the costs of
responding to the subpoena and that Coverage C specifically excludes non-monetary relief.
II
We have jurisdiction under 28 U.S.C. § 1291 and review the district court’s dismissal of
Springstone’s complaint de novo. See Williams v. Duke Energy Int’l, Inc., 681 F.3d 788, 799 (6th
Cir. 2012). We must accept as true all the factual allegations in the complaint and draw all
reasonable inferences in favor of Springstone, the nonmovant. NicSand, Inc. v. 3M Co., 507 F.3d
442, 449 (6th Cir. 2007) (en banc). The parties agree that Kentucky law governs interpretation of
the policy’s terms. Although Kentucky law requires us to construe contracts liberally and resolve
doubts in favor of the insured, Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 564 (6th Cir. 2008),
contract terms “should be given their plain and ordinary meaning.” Nationwide Mut. Ins. Co. v.
Nolan, 10 S.W.3d 129, 131 (Ky. 1999).
III
Springstone alleges that the qui tam action and the government subpoena triggered
coverage under its D&O Policy. But we must apply the plain meaning of the Policy’s terms. And
under the plain meaning of the Policy, Hiscox could deny coverage for three reasons. First, the
qui tam lawsuit was not filed during the policy period. Second, Springstone failed to indemnify
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Case No. 20-6014, Springstone, Inc v. Hiscox Ins. Co., Inc.
any individual as required by Coverage B. Third, non-monetary relief is excluded from Coverage
C. Each rationale is taken in turn.
Underlying Qui Tam. Springstone asserts that the underlying qui tam lawsuit constitutes a
Claim under the Policy. Hiscox is only responsible, however, for losses “arising from a Claim
first made . . . during the Policy Period[.]” And here, the qui tam complaint was filed six months
before the Policy Period. Springstone counters—at least for qui tam actions—that first made does
not necessarily mean when the action was first filed. Because qui tam cases can sit under seal for
years, it alleges that first made can mean first unsealed. See My Left Foot Children’s Therapy,
LLC v. Certain Underwriter’s at Lloyd’s London, 207 F. Supp. 3d 1168 (D. Nev. 2016). But
Springstone’s definition defies the plain meaning of the Policy. The definition of made is the past
simple and past participle of make. Made, Cambridge Dictionary. And make means “to produce
something.” Make, Cambridge Dictionary. A lawsuit is first produced or created when it is filed
not when it was unsealed. Springstone’s policy reasons for adopting its definition are unavailing.
A qui tam action’s unique posture does not inherently avoid coverage. Instead, companies can
ensure such coverage by extending its policy’s claim discovery period beyond the coverage period.
Springstone cannot be insulated because it chose not to do so.
Springstone also points to the Policy’s relation back provision, which allows Springstone
to notify Hiscox of situations that may give rise to a Claim in the future. That provision, however,
is prospective. That is, it allows Springstone to notify Hiscox of situations that may give rise to a
Claim in the future. Springstone attempts to flip that provision on its head, allowing it to pull
forward a Claim from the past. That it cannot do.
Indemnification. Coverage B also requires indemnification of an Individual Insured. And
indemnification is “a duty to make good any loss, damage or liability incurred by another.” CLK
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Multifamily Mgmt., LLC v. Greenscapes Lawn & Landscaping, Inc., 563 S.W.3d 706, 712 (Ky.
Ct. App. 2018) (quoting Frear v. P.T.A. Indus., Inc., 103 S.W.3d 99, 107 (Ky. 2003)) (cleaned up).
In other words, the Individual Insured must have a duty to pay the loss. See, e.g., Nassif v. Sunrise
Homes, Inc., 739 So. 2d 183, 185 (La. 1999) (“Indemnity in its most basic sense means
reimbursement, and may lie when one party discharges a liability which another rightfully should
have assumed.”) (citing Black's Law Dictionary 769 (6th ed. 1990)); Beeler v. Martin, 306 S.W.3d
108, 110 (Mo. Ct. App. 2010) (“Indemnity ‘is the shifting of responsibility from the shoulders of
one person to another.’”) (citation omitted). So, although some Individual Insureds had documents
relevant to the subpoena, they did not have any financial obligations related to those requests.
Those costs were Springstone’s alone. Therefore, Springstone did not indemnify any Individual
Insured by retaining counsel to respond to a subpoena directed at the company.
Exclusion. Under Coverage C, “[t]he Insurer shall not be liable to make any payment for
Loss in connection with any Claim made against any Insured: seeking fines or penalties or non-
monetary relief against the Company.” Thus, even if the subpoena was a written demand for non-
monetary relief, it is excluded from Coverage C. Importantly, the exclusion forecloses payment
for any Loss, including Defense Costs. Under these circumstances, Hiscox properly denied
coverage.
Resisting this conclusion, Springstone also at times contends that the subpoena was “a civil,
criminal, administrative or regulatory investigation of an Individual Insured” rather than a Claim
for non-monetary relief against the company. If true, however, that argument runs into a different
problem: Such a Claim requires the Individual Insured (i.e., an employee or executive) to be
“identified in writing by such investigating authority.” The subpoena only identified
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Case No. 20-6014, Springstone, Inc v. Hiscox Ins. Co., Inc.
Springstone. It did not mention, address, or target any employees or executives at the
company. None of Springstone’s counterarguments change this outcome.
Remaining claims. The district court appropriately dismissed the remaining state law
claims because Hiscox was entitled to deny Springstone’s insurance claims. See Ehlschide v.
Colonial Life & Acc. Ins. Co., 2005 WL 1993534, at *2 (Ky. App. 2005) (quotations omitted) (Bad
faith claim requires that “[t]he insurer must be obligated to pay the claim under the terms of
policy[.]”); see also Furlong Dev. Co. LLC v. Georgetown-Scott Cnty. Plan. and Zoning Comm’n,
504 S.W.3d 34, 39–40 (Ky. 2016) (quotations omitted) (Unjust enrichment is not available “when
the terms of an express contract control”).
IV
Springstone understandably seeks reimbursement for an expensive investigation. But the
insurance it purchased did not cover either the actions of the government or a complaint filed
before the Policy Period. AFFIRMED.
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