A customer of a US medical diagnostic company filed a suit against the company, its buyer and four of its directors for allegedly submitting fraudulent insurance charges for non-reimbursable medical services. The alleged fraud dated from 2014 to 2021, and the initial demand was for $20M plus damages and attorney fees.
The medical diagnostic company had a management liability policy with a retro date of 1st January 2016 which excluded any claim or investigation before that date. The company was acquired on 31st December 2019 and as its management liability policy went into run-off, it purchased a six-year tail period which only provided cover for claims arising out of wrongful acts prior to the 31st December 2019.
However, the allegations of fraud were from 2014 to 2021, which was prior to the retro date and after the acquisition date.
There were other complexities in this claims case, such as various start dates of named directors, the element of fraud, as well as multiple policies in play that could respond.
Eventually all parties agreed to mediate and settle. The total claim paid was $3.5M, shared by three different insurers.
This claims case was complex because it required multiple parties to agree on claims allocation with complex coverage issues. In some cases, the seller can be left with only a portion of their losses paid by the insurers.
If the medical diagnostic company had purchased a fit-for-purpose M&A policy, there would be one policy in place to address this specific exposure for the company and its selling directors.
If you have any questions regarding M&A insurance for business sellers, please contact the transaction liability team at tlpe@cfc.com.
