No Coverage for Defense of Qui Tam Suit

Claim of False Billing Not a Claim “arising out of” Medical Professional Services

Insurance contracts must be interpreted by reading the entire contract and determining if it provides coverage to the facts alleged. Affinity Living Group and Charles Trefzger, are defendants in a qui tam lawsuit pending in the United States District Court for the Eastern District of North Carolina. They sued Starstone Specialty Insurance Company (“Starstone”) seeking to compel Starstone to defend and indemnify Affinity and Trefzger  in the qui tam suit.

In Affinity Living Group, LLC, and Charles E. Trefzger, Jr., Plaintiffs, v. Starstone Specialty Insurance Company, and Homeland Insurance Company Of New York, 1:18-CV-35, United States District Court for the Middle District Of North Carolina (October 5, 2018) the issue was resolved by the District Court.


In 2016, Stephen Gugenheim filed a qui tam suit in the Eastern District of North Carolina against a number of North Carolina adult care homes, including Mr. Trefzger, whom he identified as the owner of all the homes, and Affinity, which he identified as the managing entity. He sued on behalf of the United States and the State of North Carolina, alleging that the defendants acted in concert to submit false claims for Medicaid reimbursements for services that were not actually provided to residents of their adult care homes. Mr. Gugenheim further alleged that the facilities were understaffed, that they were unable to provide “personal care services” which met the assessed needs of residents, and that staffing levels fell below requirements for obtaining Medicaid reimbursements. Finally, he alleged that the defendants falsely certified compliance to obtain Medicaid reimbursements, in violation of the False Claims Act and a similar North Carolina statute.  The suit seeks treble damages and penalties for each false statement.

Affinity carries separate insurance policies through Homeland Insurance and StarStone, each of which provides indemnification and defense against certain claims arising out of services rendered at Affinity’s adult care facilities. Affinity’s policy with Homeland is the first line of defense, and the StarStone policy is an “umbrella” plan that applies only if the Homeland policy is exhausted on, or is inapplicable to, a covered claim.

After Mr. Gugenheim filed suit, both Homeland and StarStone denied coverage. In its denial letter, StarStone stated that the Gugenheim complaint did not fall within the policy’s coverage provisions “because the complaint does not allege damages resulting from a claim arising out of a medical incident.” (emphasis in original indicating terms that are defined in the policy).

Affinity and Mr. Trefzger then sued Homeland and StarStone. They seek a declaratory judgment that the insurance policies obligate Homeland and StarStone to indemnify and defend against the Gugenheim suit and to reimburse them for defense costs already incurred. They also seek damages for breach of contract.


Construction and application of insurance policy provisions is a question of law appropriate for summary disposition.

Affinity has coverage for the qui tam lawsuit under the StarStone policy if two conditions are met: (1) the primary insurance policy underlying the StarStone policy (here, the Homeland policy) does not apply to, or was exhausted on, a claim against the insured; and (2) the claim against the insured and the damages sought otherwise fall within the coverage provisions of the StarStone policy. Because Homeland, the primary carrier, denied coverage for the Gugenheim suit and the Court has agreed that the Homeland policy excludes coverage, the first condition has been satisfied.

the Gugenheim complaint is a qui tam action filed on behalf of the United States and the state of North Carolina alleging violations of the federal False Claims Act and the North Carolina False Claims Act. To state a claim under the federal False Claims Act, the plaintiff must prove:

  1. that the defendant made a false statement or engaged in a fraudulent course of conduct;
  2. such statement or conduct was made or carried out with the requisite scienter;
  3. the statement or conduct was material; and
  4. the statement or conduct caused the government to pay out money or to forfeit money due.

The coverage provision in the StarStone policy provides: “We [StarStone] will pay on behalf of the insured [losses above the applicable limit] which the insured becomes legally obligated to pay as damages resulting from a claim arising out of a medical incident.” The policy defines “medical incident” as “an alleged or actual act, error or omission in the insured’s rendering or failure to render medical professional services.” “Medical professional services” is defined by the policy as “the health care services or the treatment of a patient including,” inter alia, medical, dental, and counseling services.

The plain language of the policy is clear that billing for medical professional services is not itself a medical professional service. Billing is not a “health care service” or “the treatment of a patient” and is not included among the examples of the covered services listed in the policy. Billing is different in kind from all of these activities.

A number of courts have held that alleged false billings for health care services do not qualify as “medical incidents” or “medical professional services” under other professional liability policies. Billing for medical services does not fall within the policy definition of “medical professional services,” and thus does not qualify as a covered “medical incident.”

The Gugenheim complaint does allege a “medical incident” within the meaning of the policy. It is undisputed that the personal care services discussed in the complaint are “medical professional services,” and the Gugenheim complaint alleges that Affinity failed to render or otherwise provided deficient personal care services to the residents of its adult care homes. The question is therefore whether the Gugenheim claim “arises out of” these alleged or actual acts, errors, or omissions in Affinity’s rendering or failure to render personal care services. The policy itself does not define the phrase “arising out of,” but North Carolina law is clear that the term carries “much broader significance” than the phrase “caused by.” The words “arising out of” are ordinarily understood to mean “incident to,” or “having connection with.”  There must be a “causal connection” between the conduct defined in the policy and the occurrence for which coverage is sought. Coverage does not exist where the occurrence is the result of some independent act disassociated from the conduct defined in the policy.

The Gugenheim claim seeks damages for injuries to the government arising out of Affinity’s alleged false billing, not for injuries to residents arising out of deficiencies in personal care services. Those allegations are mere surplusage designed to reinforce the false billing claims.

False or fraudulent billing is disassociated from Affinity’s rendering or failure to render personal care services. It is, at best, an “intervening cause” that severs any connection between the medical incident alleged in the complaint and the injuries to the government that the False Claims Act suit seeks to recover for. Thus, the court concluded that the Gugenheim claims do not “arise out of” the rendering or failure to render medical professional services and the policy does not provide coverage to Affinity.

Coverage exists under the fact situation in this case only for a “claim arising out of . . . an alleged or actual act, error or omission in the insured’s rendering or failure to render medical professional services.” The “independent act” of false or fraudulent billing is “disassociated from” the rendering or failure to render medical services.

The Gugenheim claim seeks to recover for the government’s injuries arising out of Affinity’s allegedly false billing, not injuries to the patients arising out of personal care services. The claim does not “arise out of a medical incident,” and StarStone is not obligated to defend or indemnify the plaintiffs here in the qui tam suit.


The plaintiffs were charged by the qui tam suit with the intentional act of defrauding the U.S. Government. If proved any judgment obtained on behalf of the U.S. would not be covered since the judgment would be based on an intentional and non-fortuitous act. Since Gugenheim only claimed false billing the court properly refused any coverage for defense or indemnity because the claim had nothing to do with the risks of loss insured against.


© 2018 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at and

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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