NU Online News Service, May 24, 1:37 p.m. EDT--A recent federal appeals court ruling disallowing professional liability insurance coverage for brokers who marketed a 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 of whether there's coverage is important," commented Sandra D. Hauser an attorney with the Sonnenschein Nath & Rosenthal New York Office.
Ms. Hauser commented in the wake of a May 13, decision by the 4th U.S. Circuit Court of Appeal in Richmond, Va. that disallowed errors and omissions coverage for three brokers involved with selling coverage under an unlicensed health plan that went broke in South Carolina.
The brokers, Arnold H. Valentine, Lewis H. Wade, and Michael Requa, were sued after the Guild Health & Welfare Trust Fund administered by The Fidelity Group, which has no connection with Fidelity Financial Services, went broke in 1999 with $30 million in liabilities for unpaid medical claims.
South Carolina's insurance department shut down the operation in 1999 for operating without a license. According to the court ruling, the plan was marketed as an Employee Retirement Income Security Act (ERISA) plan when it was actually a riskier Multiple Employer Welfare Arrangement (MEWA).
Employees who were left with no coverage for medical claims sued the brokers alleging fraud and negligence, and sought compensation from the brokers' insurer, the American Automobile Insurance Company (AAIC).
A jury in South Carolina U.S. District Court in Charleston found that the brokers should have coverage from AAIC and the company appealed.
The Fourth Circuit in overruling the lower court noted language in the AAIC policy that excluded any defense for errors and omissions for any claim arising out of the insolvency, receivership or bankruptcy of an organization where the insured placed a client's funds.
In addition to finding that AAIC had no obligation to defend or indemnify the brokers, the appeals court remanded the case back to the lower court to consider the insurer's request for reimbursement for defense costs in the case.
Ms. Hauser noted that Fidelity was one of 100 unlicensed health providers that have been uncovered recently.
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