Overview of the Lawsuit
Oakland, California-based Kaiser Permanente has filed a lawsuit against nine liability insurers. Kaiser accuses them of breach of contract. The health system alleges these insurers refused to cover any portion of its $556 million settlement with the federal government. That settlement resolved False Claims Act allegations related to Medicare Advantage billing practices.
Kaiser Foundation Health Plan, together with its Colorado affiliate, filed the complaint on February 20. They filed it in the U.S. District Court for the Northern District of California. Through the lawsuit, Kaiser seeks up to $95 million in coverage. This coverage falls under a layered program of directors and officers (D&O) liability policies.
Who Are the Defendants?
Nine Major Insurers Named in the Complaint
The defendants in this case represent some of the largest names in the insurance industry. They include:
- AIG
- Chubb
- Berkley
- Starr
- National Fire
- RSUI
- Markel
- Fair American
- Allianz
The Root of the Dispute
A Whistleblower Case Years in the Making
The legal dispute traces back to Kaiser’s January settlement of a consolidated whistleblower action. That action brought together six qui tam lawsuits and a complaint-in-intervention by the Department of Justice. The underlying case alleged Kaiser violated the False Claims Act. Specifically, it accused Kaiser of submitting improper risk-adjusting diagnosis codes to the Centers for Medicare and Medicaid Services (CMS). The goal, according to prosecutors, was to inflate Medicare Advantage payments.
Between 2009 and 2018, Kaiser allegedly ran a scheme targeting patients in California and Colorado. The company used internal data-mining tools to find diagnoses from patients’ past medical histories. These diagnoses had not previously been submitted to CMS. Kaiser then sent “queries” to physicians, urging them to add those diagnoses through addenda — sometimes months, or even more than a year, after the original patient visit.
Aggressive Targets and Financial Incentives
Furthermore, the government alleged that Kaiser set aggressive diagnosis submission targets for physicians and facilities. Underperforming providers were flagged for review. Financial incentives and bonuses tied to meeting risk adjustment goals were also part of the alleged scheme. Notably, internal compliance audits and physician complaints raised concerns about the legality of these practices. Despite those warnings, Kaiser allegedly continued them.
How the D&O Policies Work
AIG’s Primary Policy and Its Limits
AIG issued the primary D&O policy in this layered program. That policy provides $10 million in coverage above a $10 million self-insured retention. Kaiser confirms it has already satisfied that retention threshold. The remaining eight excess insurers issued policies covering an additional $85 million.
AIG’s Partial Payment and Coverage Denial
Initially, AIG acknowledged the lawsuit qualified as a covered claim. However, AIG paid only $1 million toward Kaiser’s legal defense costs. The insurer cited a policy provision that limits coverage for claims involving the return of government funds. Moreover, AIG denied coverage for the settlement itself. All eight excess insurers followed AIG’s lead and also denied coverage.
Kaiser’s Legal Argument
Why Kaiser Believes Coverage Applies
Kaiser strongly contests the insurers’ position. The health system argues that the policy exclusion does not apply to the full settlement amount. Because the government pursued treble damages under the False Claims Act, Kaiser contends that a significant portion of the settlement represents multiplied damages. Those multiplied damages, Kaiser argues, go beyond any funds it received from CMS. Therefore, they should qualify for coverage under the D&O policies.
This legal distinction is critical. If Kaiser succeeds, it could recover up to $95 million from the defendants. In contrast, if the insurers’ interpretation holds, Kaiser absorbs that cost entirely on its own.
The Alleged Billing Scheme
How Diagnosis Codes Were Manipulated
According to the Department of Justice, the alleged scheme worked systematically. Kaiser’s internal tools identified past diagnoses that were not submitted to CMS. Physicians then received queries to retroactively add those diagnoses — even when they had no connection to the actual patient visit in question.
Additionally, the government alleged that in many cases, the added diagnoses lacked any clinical relevance to the visit. This practice, if proven, allowed Kaiser to claim higher risk scores for patients, which in turn inflated the Medicare Advantage reimbursements it received from CMS.
Kaiser’s Official Response
Settling to Avoid Prolonged Litigation
Kaiser has addressed the underlying settlement publicly. In a previous statement, the health system said: “We chose to settle to avoid the delay, uncertainty and cost of prolonged litigation.” Kaiser also emphasized that the case reflected broader industry challenges. Additionally, the company noted that multiple major health plans have faced similar government scrutiny over Medicare Advantage risk adjustment standards and practices.
Importantly, Kaiser stressed that the case did not involve the quality of care members received. Instead, it centered on how the Medicare risk adjustment program’s documentation requirements apply. The dispute, Kaiser maintained, was an interpretive one — not a reflection of patient care failures.
