An insurance company is asking the court to determine how much coverage a medical device manufacturer is entitled to in a fraud suit alleging it participated in upcoding.
Federal Insurance Company filed the complaint May 19 in the U.S. District Court for the Southern District of Illinois against Joint Active Systems Inc. The plaintiff is represented by attorney Janet Davis of Chicago.
Federal Insurance Company seeks declaratory judgment “to determine and resolve questions of actual controversy” involving two insurance policies issued to Bonutti Research Inc. from December 2018 to December 2019 and Bonutti Orthopedic Services LTD from December 2017 to December 2018.
With respect to Bonutti Research’s policy, the parties dispute whether coverage a lawsuit filed by realtor Todd Mathy in Iroquois County “is limited to an aggregate limit of $1,000,000 for defense costs only subject to a $1,000,000 retention because the lawsuit is a claim for regulatory wrongful acts.”
With respect to Bonutti Orthopedic Services’ policy, the parties dispute whether Federal Insurance has a duty to defend Joint Active Systems in a civil investigative demand issued to the defendant by the Department of Justice.
According to the complaint, the original complaint was filed under seal by Mathy on Nov. 9, 2019 to “recover damages and civil penalties on behalf of the State of Illinois pursuant to the Illinois Claims Fraud Prevention Act.” Joint Active Systems was served with the suit on March 12, 2019 after the seal was lifted.
Joint Active Systems manufactures and sells medical devices for elbows, knees and other joints. The devices are used to restore range of motion for patients recovering from injuries or medical procedures, according to the complaint.
“The lawsuit contends that since most private insurers do not provide coverage for stretch devices, JAS makes false claims by billing insurers for devices that insurers do cover,” the suit states. “This practice is referred to as ‘upcoding’ which allegedly defrauds private insurers and violates the ICFPA by causing those insurers to pay false claims for medical devices.”
Mathy’s lawsuit also alleges Joint Active Systems conspired with seven durable medical equipment suppliers by billing the suppliers instead of the patient’s insurer. The supplier pays Joint Active Systems for the device and then bills the insurer using upcoding, the suit states.
According to Mathy’s lawsuit, “this fraud ‘launders’ claims to insurers to ensure JAS is reimbursed for devices not covered by insurers.”
Federal Insurance Company claims it was notified of Mathy’s lawsuit on April 2, 2019. The insurer issued a reservation of rights letter on April 30, 2019.
Federal Insurance Company stated that the lawsuit amounts to a “claim for a regulatory wrongful act” against Joint Active Systems.
“Accordingly, Federal agreed to provide a defense for the lawsuit under the [Bonutti Research] policy, but also stated that Federal would not be liable for loss, other than defense costs for the lawsuit, and that coverage for defense costs is subject to a $1,000,000 retention,” the suit states.
Counsel for Joint Active Systems challenged Federal Insurance Company’s coverage position on Feb. 25, prompting the insurer to seek declaratory judgment.
Federal Insurance Company asks the court to declare that “because the lawsuit is a claim alleging regulatory wrongful acts, coverage under the [Bonutti Research] policy is limited to an aggregate limit of $1,000,000 for defense costs only subject to a $1,000,000 retention and a coinsurance percentage of 50%” and that “Federal has no duty to defend or obligation to indemnify JAS for the CID or the lawsuit under the [Bonutti Orthopedic Services] policy.”
U.S. District Court for the Southern District of Illinois case number 3:20-cv-471