Conduent State Healthcare ruling sets stage for retrial

By Doug Bailey

A protracted court battle over insurers’ refusal to cover a company’s legal damages – with charges and countercharges of fraud, breach of contract, misrepresentations, and other accusations – ended up in the Delaware Supreme Court this month with the judges affirming a lower court’s decision to toss out a jury verdict in favor of the insurance companies, paving the way for a retrial.

The complex $400 million case of Conduent State Healthcare versus AIG Specialty Insurance Company and three other insurers, dates back nearly a quarter-century when Conduent (formerly Xerox State Healthcare) contracted with the state of Texas to administer its Medicaid program.

In 2012, Texas opened an investigation into Conduent for alleged overbilling by orthodontic providers culminating in multiple lawsuits, including one by the state under its Medicaid Fraud Prevention Act. Though no actual fraud, only negligence and breach of contract, was alleged, court watchers said the state’s attorney general filed under the fraud statute because it allowed for treble damages and fines.

In 2019, the company and the state settled for $235 million - the amount of the alleged overbilling – and excluded any fines or penalties. Conduent then sought coverage of the settlement costs under its insurance policies.

But AIG and others refused to pay, alleging that Conduent breached its policy terms by not seeking their prior consent for the settlement and that the case fell under policy exclusions for fraudulent acts and behavior.

Conduent sued AIG and the other insurers and agreed to a trial by jury, a strategy that seemingly backfired when the jury ruled in favor of AIG.

Jury's decision at issue

The jury’s decision, however, was confusing, some said “nonsensical,” because it ruled that Conduent’s settlement with Texas was “reasonable and non-collusive,” but at the same time was “fraudulent and in bad faith.”

Conduent moved to set aside the jury verdict and requested a new trial. The judge agreed, saying the trial was plagued by evidentiary issues and multiple events of overreaching and disregard for the court’s rulings. For example, the court admitted a deposition on written questions from the Texas AG that, in hindsight, was “so replete with evidentiary problems” – hearsay, inability to cross-examine the witness, and lack of personal knowledge – that it should have been excluded “despite the agreement of the parties.”

Lawyers for the insurers also repeatedly violated the court’s rulings by drawing “improper inferences” from Conduent’s privilege logs, arguing that the insurers “never had any coverage obligation to Conduent,” and referred to an inadmissible press release in front of the jury.

Evidentiary issues cited

The Superior Court concluded that the evidentiary issues likely “confused the jury and tainted the jury’s verdicts.” It reasoned that the jury’s verdict might have reflected this confusion, as the jury found fraud and bad faith, but neither collusion nor an unreasonable settlement. To “prevent manifest injustice,” the court set aside the jury verdict and ordered a new trial. The judge in the case said it was the only time she had overruled a jury decision in more than 20 years on the bench.

AIG appealed the judge’s ruling but lost before the state’s Supreme Court.

Now the case goes to retrial, only this time, much of the evidence and material AIG used to make its case has been ruled inadmissible and the damages have been reduced to about $40 million because some insurers settled out of court.

“Even if the verdicts might hypothetically be reconciled, common sense suggests that a
fraudulent, non-collusive, reasonable settlement arranged in bad faith is a confused verdict,” the Supreme Court justices wrote. “The Superior Court’s ruling setting aside the jury verdict did not exceed the bounds of reason or ignore the law and custom to produce justice.”

Conduent 'gratified' by ruling

A Conduent statement said the company is looking forward to a new trial.

“Conduent is gratified by the Delaware Supreme Court’s decision, which makes clear that adherence to the rules of evidence matter and that a win-at-all-costs approach to litigation has consequences,” said Robin Cohen of Cohen Ziffer Frenchman & McKenna. “At the same time, it reaffirms core principles of New York insurance law, including that an insurer that breaches its defense obligation cannot then insist on continued cooperation from its insured.”

Attorneys for Conduent said the court’s decision vindicates the company’s years-long fight to secure coverage it was entitled to.

“It is also a powerful rebuke to litigators who flout evidentiary rulings in an effort to tilt the scales of justice,” Cohen added. “Conduent plans to seek justice by taking the fight back to the insurers, but this time on a level playing field.”