NU Online News Service, May 24, 1:37 p.m.EDT--A recent federal appeals court ruling disallowingprofessional liability insurance coverage for brokers who marketeda fraudulent health plan should have a wide-ranging impact,according to an attorney on the case.

"We've seen a wave of unauthorized health scams, so the issue ofwhether there's coverage is important," commented Sandra D. Hauseran attorney with the Sonnenschein Nath & Rosenthal New YorkOffice.

Ms. Hauser commented in the wake of a May 13, decision by the4th U.S. Circuit Court of Appeal in Richmond, Va. that disallowederrors and omissions coverage for three brokers involved withselling coverage under an unlicensed health plan that went broke inSouth Carolina.

The brokers, Arnold H. Valentine, Lewis H. Wade, and MichaelRequa, were sued after the Guild Health & Welfare Trust Fundadministered by The Fidelity Group, which has no connection withFidelity Financial Services, went broke in 1999 with $30 million inliabilities for unpaid medical claims.

South Carolina's insurance department shut down the operation in1999 for operating without a license. According to the courtruling, the plan was marketed as an Employee Retirement IncomeSecurity Act (ERISA) plan when it was actually a riskier MultipleEmployer Welfare Arrangement (MEWA).

Employees who were left with no coverage for medical claims suedthe brokers alleging fraud and negligence, and sought compensationfrom the brokers' insurer, the American Automobile InsuranceCompany (AAIC).

A jury in South Carolina U.S. District Court in Charleston foundthat the brokers should have coverage from AAIC and the companyappealed.

The Fourth Circuit in overruling the lower court noted languagein the AAIC policy that excluded any defense for errors andomissions for any claim arising out of the insolvency, receivershipor bankruptcy of an organization where the insured placed aclient's funds.

In addition to finding that AAIC had no obligation to defend orindemnify the brokers, the appeals court remanded the case back tothe lower court to consider the insurer's request for reimbursementfor defense costs in the case.

Ms. Hauser noted that Fidelity was one of 100 unlicensed healthproviders that have been uncovered recently.