Publicly traded for-profit colleges likely have little or no insurance coverage for a persistent legal threat: qui tam, or whistleblower, lawsuits brought by current or former employees on behalf of the federal government.
The suits, filed under the federal False Claims Act, have typically alleged that colleges boosted enrollments by paying improper incentive compensation to recruiters, violating the terms of agreements governing colleges' eligibility to receive federal financial aid funds.
The U.S. Department of Justice can choose to intervene as lead plaintiff after such suits are filed, but if it declines, private litigants can pursue the cases on their own.
At least 27 qui tam suits had been filed against for-profit colleges as of the end of 2009, according to a tally by law firm Gibson, Dunn & Crutcher LLP. The government declined to intervene in nearly all of these cases, about half of which had been dismissed by the time of the tally. A handful settled, including an incentive compensation case in which Apollo Group Inc. paid $78.5 million and took a charge against 2009 earnings to cover the cost.
The count did not include the biggest qui tam case against a college to date, originally filed in 2007 against Pittsburgh, Pa.-based Education Management Corp. and unsealed earlier this year when the Justice Department decided to intervene.
In a complaint filed last month, the government charged that Education Management created a "boiler room" sales culture in its admissions office, paying recruiters based only on the number of students they enrolled in violation of the government's incentive compensation ban.
Education Management collected $11.1 billion in federal student financial aid funds between 2003 and 2011, while falsely certifying that it was complying with federal rules making "each and every" claim for student aid a violation of the False Claims Act, according to the suit, which seeks treble damages under the act. Eleven states and the District of Columbia, which paid Education Management under state aid programs, have also intervened under state false claims laws.
An Education Management spokewoman has labeled the allegations "flat-out wrong," saying that federal rules allow the company to consider enrollments in compensation decisions as long as they are not the sole factor, and that the company took other factors into account.
Insurance coverage for defense and indemnity costs in qui tam cases is likely to be thin to non-existent for publicly traded college chains, legal and insurance market experts say.
The suits often name the college companies but not their directors or officers, meaning that D&O liability coverage would not be triggered. While D&O programs usually include entity coverage for the company, this applies only to securities claims, not to False Claims Act violations.
"All else being equal, qui tam is not going to trigger entity coverage under a typical D&O program," said Kevin LaCroix, executive vice president with Oakbridge Insurance Services in Beachwood, Ohio.
Robb Jones, senior vice president and general counsel for claims management with United Educators Insurance in Chevy Chase, Md., said he has seen some education-specific D&O policies that provide limited entity qui tam defense cost coverage, but with high deductibles, low sublimits and/or copayments.
"Their coverage for qui tam-type suits thus turns out to be very thin," Jones said in a written response to questions.
Educators legal liability programs--which cover student "failure to educate" and other claims--are also unlikely to respond, either because of fraud exclusions or specific exclusions related to the False Claims Act or "return of funds/grants" claims,Jones said.
While LaCroix said that a college company might notify its general liability insurers for form's sake, he and others agree that none of a typical general liability policy's provisions would apply to a whistleblower claim.
Even for a company with all these types of policies, then, "it would be common for (qui tam) to be a non-covered exposure," said Dan Bailey, a partner with Bailey Cavalieri LLC in Columbus, Ohio.
September 15, 2011
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