`
`David Mordkoff, Esq.
`Sherilyn Pastor, Esq.
`MCCARTER & ENGLISH, LLP
`Worldwide Plaza
`825 Eighth Avenue
`New York, NY 10019
`(212) 609-6800
`Attorneys for Plaintiffs,
`Magellan Health, Inc., Merit Health Insurance Company,
`and Magellan Rx Management, LLC.
`
`UNITED STATES DISTRICT COURT
`FOR THE EASTERN DISTRICT OF NEW YORK
`
`CIVIL ACTION NO. __________________
`
`COMPLAINT AND JURY DEMAND
`
`:::::::::
`
`
`:
`
`MAGELLAN HEALTH, INC.,
`MERIT HEALTH INSURANCE COMPANY,
`and MAGELLAN RX MANAGEMENT, LLC,
`
`Plaintiffs,
`
`v.
`
`ZURICH AMERICAN INSURANCE
`COMPANY,
`
`Defendant.
`
`COMPLAINT
`
`Plaintiffs Magellan Health, Inc. (“Magellan Health”), Merit Health Insurance Company
`
`(“Merit Health”), and Magellan Rx Management, LLC (“Magellan Rx”) (collectively referred to
`
`herein as “Plaintiffs” or “Magellan”), by and through their undersigned attorneys, for their
`
`complaint against Defendant Zurich American Insurance Company (“Zurich” or “Insurer”), allege
`
`as follows:
`
`NATURE OF THE ACTION
`
`1.
`
`Magellan seeks damages resulting from Zurich’s breach of its contractual
`
`obligations to provide coverage under the Commercial Crime Policy number FID 9037497-13 (the
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`“Policy”) that Zurich sold to Magellan. Contrary to its obligations and promises, Zurich has failed
`
`and refused to reimburse Plaintiffs’ in excess of $6.6 million in losses resulting from certain New
`
`York pharmacies’ computer fraud. The pharmacies caused the fraudulent transfer of money to
`
`themselves by entering override codes through a computer to bypass various system edits that
`
`would otherwise have caused Magellan’s computer system to reject their false reimbursement
`
`requests (the “Loss”).
`
`2.
`
`Magellan also seeks a declaratory judgment adjudicating the respective rights,
`
`duties and obligations of Magellan and Zurich under the Policy.
`
`JURISDICTION & VENUE
`
`3.
`
`This Court’s jurisdiction is based upon 28 U.S.C. § 1332, as the parties are of
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`diverse citizenship and the amount in controversy exceeds the sum of $75,000, exclusive of interest
`
`and costs.
`
`4.
`
`Upon information and belief, Defendant Zurich is a corporation organized under
`
`the laws of the State of New York, with its principal place of business at 1299 Zurich Way,
`
`Schaumburg, Illinois. Zurich is licensed to do business and is doing business in New York. It is
`
`licensed or authorized to issue insurance policies and it issues policies in this State, including with
`
`Magellan.
`
`5.
`
`Zurich is subject to jurisdiction in New York by having acted for the purpose of
`
`realizing pecuniary benefit in this State, and by contracting to insure persons, property and/or risks
`
`located within New York.
`
`6.
`
`Indeed, the Policy sold to Magellan expressly states:
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`7.
`
`The Policy directs notice, other than notice of loss, be submitted to Zurich’s New
`
`York offices.
`
`8.
`
`The Policy “covers loss sustained by the Insured[s] resulting directly from an
`
`Occurrence taking place anywhere in the world,” including in and throughout New York.
`
`9.
`
`10.
`
`Zurich delivered the Policy to Magellan through Magellan’s broker in New York.
`
`Plaintiff Magellan Health is a corporation organized and existing under the laws of
`
`the State of Delaware with a principal place of business at 4801 E. Washington Street, Phoenix,
`
`Arizona.
`
`11.
`
`Plaintiff Merit Health is a corporation organized and existing under the laws of the
`
`State of Arizona with a principal place of business at 4801 E. Washington Street, Phoenix, Arizona.
`
`Merit Health is an indirect wholly-owned subsidiary of Magellan Health.
`
`12.
`
`Plaintiff Magellan Rx is a corporation organized and existing under the laws of the
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`State of Delaware with a principal place of business at 8621 Robert Fulton Drive, Columbia,
`
`Maryland. Magellan Rx is an indirect wholly-owned subsidiary of Magellan Health.
`
`13.
`
` Magellan does business in New York, and the underlying fraudulent pharmacy
`
`scheme that is the subject of this action and cause of Magellan’s losses arose in New York.
`
`14.
`
`Venue is properly in this district pursuant to 28 U.S.C. § 1391 because a substantial
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`number of the events or omissions giving rise to the claim occurred in this district, and Zurich,
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`upon information and belief, does business in this district.
`
`15.
`
`Fraudulent claims resulting in the Loss were submitted to Magellan by pharmacies
`
`located in Queens Village, New York and Jamaica, New York. The owners of those pharmacies,
`
`who are residents of Forest Hills, New York, have been indicted by the United States Attorney for
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`this district for engaging in a multi-million health care fraud and money laundering scheme which
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`included the conduct that caused the Loss.
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`THE INSURANCE POLICY
`
`16.
`
`The Policy that Zurich sold Magellan Health provides coverage for the policy
`
`period from April 20, 2020 through April 20, 2021.
`
`Plaintiffs are Insureds under the Policy.
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`The Policy has a $15,000,000 limit, subject to a $250,000 deductible, for Computer
`
`17.
`
`18.
`
`Fraud.
`
`19.
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`The Policy’s “Computer Fraud” Insuring Agreement provides, in pertinent part,
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`that “[Zurich] will pay for loss of . . . Money . . . resulting directly from the use of any computer
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`to fraudulently cause a transfer of Money . . . from inside the Premises or Banking Premises to . . .
`
`a person . . . or place outside those Premises.”
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`20.
`
`The Policy defines “Money” as including “currency, coins and bank notes in current
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`use and having a face value.”
`
`21.
`
`The Policy defines “Premises” as “the interior of that portion of any building
`
`[Magellan] occupies in conducting its business.”
`
`22.
`
`The Policy defines “Banking Premises” as “the interior of that portion of any
`
`building occupied by a banking institution or similar safe depository.”
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`23.
`
`The Policy therefore affords Computer Fraud coverage when there is:
`
`a)
`
`b)
`
`c)
`
`A loss of money;
`
`Resulting directly from the use of a computer;
`
`To fraudulently cause a transfer of money from the inside of an insured’s
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`premises or that of its bank to a place outside those premises or to another.
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`24. Magellan expended substantial premiums to purchase the Policy and has fully
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`performed and complied with all of the terms and conditions of the Policy.
`
`25.
`
`A true and complete copy of the Policy is attached as Exhibit A.
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`THE COMPUTER FRAUD
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`26. Magellan is a leading, diversified specialty health care management organization.
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`It manages some of the fastest growing, most complex areas of health, including complete
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`pharmacy benefits.
`
`27.
`
`Prior to January 1, 2021, Merit Health was the sponsor of a Medicare Part D plan
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`called Magellan Rx Medicare Basic (the “Plan”).
`
`28.
`
`A plan sponsor, such as Merit Health for a Medicare Part D plan or a self-funded
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`employer, typically contracts with a pharmacy benefit manager (“PBM”), to manage various
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`aspects of the pharmacy benefit it offers to its plan beneficiaries. Magellan Rx served as the PBM
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`to the Plan.
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`29.
`
`PBMs like Magellan Rx provide various services, including managing a network
`
`of pharmacies and point-of-sale claims processing with those pharmacies.
`
`30. When a plan beneficiary presents a prescription to a pharmacy, the pharmacy enters
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`various information – including, among other things, the individual’s member identification
`
`number, the National Drug Code of the drug prescribed, and the quantity of drug to be dispensed.
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`The pharmacy then submits that information to the PBM electronically through its computer so
`
`that the PBM can process the claim.
`
`31.
`
`Between approximately April 23, 2020 and May 20, 2020, four New York
`
`pharmacies, including pharmacies located in Queens Village, New York and Jamaica, New York,
`
`(the “NY Pharmacies”) used computer systems to fraudulently cause Magellan to transfer millions
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`of dollars to them from Magellan’s bank by submitting falsely coded claims that triggered
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`automatic payments.
`
`32.
`
`The NY Pharmacies used computers to electronically submit information to the
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`PBM, Magellan Rx.
`
`33.
`
`The NY Pharmacies’ computer submissions fraudulently misused override codes
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`specially implemented in accordance with directives issued by the Centers for Medicare &
`
`Medicaid Services (“CMS”) in response to the COVID-19 pandemic to by-pass system edits that
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`would otherwise have caused the system to reject the claims.
`
`34.
`
`The computerized claim processing system took the fraudulent information
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`submitted by computer from the NY Pharmacies, directly applied the benefit design information
`
`it had about the involved plan beneficiary and the plan benefit offered, and in real time adjudicated
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`each claim – approving them -- within seconds.
`
`35.
`
`Based on the claim processing system’s adjudications, the NY Pharmacies were
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`promptly paid by electronic fund transfers from Magellan’s bank to persons and places outside its
`
`Banking Premises (“EFTs”).
`
`36.
`
`Those EFTs were made consistent with CMS prompt pay requirements.
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`37. Magellan’s systems are set up to pay weekly on Tuesday, and the NY Pharmacies
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`intentionally timed their fraudulent computer submissions to take advantage of Magellan’s EFT
`
`payment schedule.
`
`38.
`
`The NY Pharmacies’ computers were used to fraudulently induce Magellan to
`
`cause its bank to transfer money to the pharmacies.
`
`39.
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`Indeed, Magellan’s loss resulted directly from the use of computers.
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`40. Magellan, on or about May 18, 2020, discovered the computer fraud and
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`immediately undertook steps to mitigate its losses as required by the Policy.
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`41. Magellan nonetheless suffered a loss in excess of $6.6 million.
`
`42.
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`Owners of three of the NY Pharmacies were charged with federal health care fraud
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`and money laundering based in part on allegations that they engaged in the computer fraud scheme
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`perpetrated against Magellan that caused the Loss in an indictment unsealed by the United States
`
`District Court for the Eastern District of New York on December 21, 2020.
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`ZURICH’S DENIAL OF COVERAGE
`
`43. Magellan gave prompt and timely notice of its losses and insurance claim to Zurich.
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`44.
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`By letter dated November 20, 2020, Zurich denied Magellan’s claim on the basis
`
`that Magellan’s loss did not result directly from computer fraud.
`
`45.
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`A true and accurate copy of Zurich’s November 20, 2020 letter is attached as
`
`Exhibit B.
`
`46.
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`Although Zurich admitted that the NY Pharmacies’ claims came to Magellan “via
`
`computer”, Zurich’s denial was predicated on Zurich’s assertion that the loss did not result
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`directly from the computer fraud because of Zurich’s erroneous contention that Magellan
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`employees reviewed submitted claims on a daily basis and approved them for payment by other
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`Magellan employees.
`
`47.
`
`By letter dated February 25, 2021, Magellan requested that Zurich reconsider its
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`denial, and corrected Zurich’s misunderstanding of the process by which Magellan’s Loss
`
`resulted directly from the computer fraud with no intervening action by Magellan employees.
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`48.
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`Zurich, by letter dated March 17, 2021, persisted in its denial of the claim, now on
`
`different but still erroneous grounds, including that the losses supposedly resulted from
`
`Magellan’s “voluntary” payments.
`
`49.
`
`A true and accurate copy of Zurich’s March 17, 2021 letter is attached as Exhibit
`
`C.
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`50.
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`Zurich’s March 17, 2021 letter admits that the NY Pharmacies “submitted
`
`fraudulent information to induce payment” and that payment was caused by those fraudulent
`
`submissions yet still denied Magellan’s claim on the basis of terms that are not found anywhere
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`in the Policy, including a purported requirement that there be hacking or unauthorized access
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`to Magellan’s computer system for a claim to be covered by the Policy.
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`51. Magellan suffered losses resulting from computer fraud.
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`52. Magellan’s losses resulted directly from the use of a computer to fraudulently cause
`
`the transfer of money from “[Magellan’s and/or its Bank’s] Premises” to a “Person” or “Place”
`
`“outside of [Magellan’s and its Bank’s] Premises.”
`
`53.
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`No exclusion, condition, or other term in the Policy bars or negates coverage for
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`Magellan’s loss and Plaintiffs have complied in all material respects with the terms and
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`conditions of the Policy.
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`54. Magellan’s losses, therefore, fall within the coverage provided by the Policy.
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`55.
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`In breach of its contract and other duties, Zurich failed and refused to reimburse
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`Magellan for its covered losses.
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`56.
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`As a direct and proximate result of the foregoing, Magellan has been, and will
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`continue to be, deprived of benefits to which it is entitled, and has incurred substantial actual
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`damages.
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`FIRST CAUSE OF ACTION
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`57. Magellan repeats and realleges all paragraphs above as if fully set forth herein.
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`58.
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`Zurich has refused, rejected and/or failed to honor its obligations to Magellan, and
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`to provide Magellan with the full measure of benefits to which it is entitled under the Policy.
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`59.
`
` Zurich is obligated to (among other things) reimburse Magellan’s computer fraud
`
`losses.
`
`60.
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`61.
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`Zurich has failed to do so, breaching its obligations to Magellan under the Policy.
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`As a direct and proximate result of Zurich’s contract breaches, Magellan has
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`incurred and will continue to incur substantial damages and costs, and reasonably foreseeable
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`consequential damages, including, but not limited to, attorneys’ fees and other costs and
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`expenses of prosecuting this action.
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`SECOND CAUSE OF ACTION
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`62. Magellan repeats and realleges all paragraphs above as if fully set forth herein.
`
`63. Magellan has demanded that Zurich reimburse and indemnify it as required by the
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`Policy, including for the covered losses resulting from the pharmacies’ computer fraud.
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`64.
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`Zurich has failed and refused to honor its duties and obligations to Magellan under
`
`the Policy, at law and otherwise.
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`65. Magellan seeks a judicial determination of the parties’ rights and obligations with
`
`regard to an actual controversy arising out of the Policy.
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`66. An actual, present and justiciable controversy exists between Magellan and Zurich
`
`with respect to Zurich’s respective duties and obligations to Magellan under the Policy.
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`67.
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`The issuance of relief by this Court will resolve the existing controversy between
`
`the parties.
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`68. Magellan is entitled to a declaration that Magellan is entitled to insurance coverage
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`under the Policy for, among other things, the loss Magellan sustained as a result of the
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`pharmacies’ computer fraud, and such further and additional relief as appropriate given that
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`declaration in its favor.
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`THIRD CAUSE OF ACTION
`
`69.
`
`70.
`
` Magellan repeats and realleges all paragraphs above as if fully set forth herein.
`
`Zurich owes a duty of good faith and fair dealing to Magellan and must refrain from
`
`acting in bad faith.
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`71. Magellan timely submitted a claim to Zurich on or about July 24, 2020.
`
`72.
`
`Less than two weeks later, on August 3, 2020, Magellan promptly submitted its
`
`Proof of Loss in excess of $6.6 million.
`
`73. Over three months later, on November 20, 2020, Zurich denied the claim.
`
`74.
`
`In doing so, Zurich offered two erroneous grounds for its denial: (1) that there
`
`allegedly was no direct loss, and (2) that the Fraudulent Impersonation exclusion in
`
`endorsement 14 supposedly applied.
`
`75. Magellan asked Zurich to reconsider its erroneous coverage position, but Zurich
`
`wrongfully denied coverage again, by letter dated March 17, 2021, this time on a different
`
`basis.
`
`76. Despite admitting that the NY Pharmacies submitted fraudulent information to
`
`Magellan by computer to induce payment from Magellan’s bank, Zurich now (albeit
`
`erroneously) claimed, for the first time, that Magellan’s payments to the pharmacy were
`
`“voluntary.”
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`77.
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`Zurich has repeatedly misstated its coverage and the circumstances, and it has
`
`attempted to mislead Magellan by urging that its policy’s Computer Fraud coverage only
`
`applies to hacking or unauthorized access to Magellan’s computer system.
`
`78.
`
`Zurich further takes the position that Magellan’s adherence to CMS directive in
`
`connection with the public health emergency declared due to the COVID-19 pandemic in
`
`adjudicating and paying the false claims submitted to it by computer was “voluntary” and
`
`therefore not covered.
`
`79.
`
`Zurich, by its conduct, breached its duty of good faith and fair dealings and acted
`
`in bad faith by (among other things):
`
`a. knowingly misrepresenting pertinent facts or policy provisions relating to
`
`coverages at issue;
`
`b.
`
`failing to acknowledge with reasonable promptness pertinent communications
`
`as to claims arising under its policies;
`
`c.
`
`failing to adopt and implement reasonable standards and procedures for the
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`prompt investigation of claims arising under its policies;
`
`d. not attempting in good faith to effectuate a prompt, fair and equitable resolution
`
`of Magellan’s covered claim; and,
`
`e. compelling Magellan to institute suit to recover amounts due under its policies.
`
`80. As a result of Zurich’s bad faith and breaches of the covenant of good faith and fair
`
`dealing, Magellan has suffered damages and is entitled to recover money damages (actual,
`
`consequential and punitive), the costs and disbursements of this action, reasonable attorneys’
`
`fees, and interest.
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`PRAYER FOR RELIEF
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`WHEREFORE, Plaintiffs Magellan Health, Merit Health, and Magellan Rx demand
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`judgment finding and declaring that Plaintiffs are entitled to coverage for, and Zurich is obligated
`
`to pay, all losses that Magellan incurred as a result of the pharmacies’ computer fraud; and,
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`awarding Magellan damages (compensatory, consequential, and punitive), costs and attorneys’
`
`fees incurred in this action, prejudgment interest, and such other interest as may be allowed by law
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`on all sums awarded, together with such other and further relief as the Court deems just and proper.
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`DEMAND FOR TRIAL BY JURY
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`Plaintiffs hereby demand trial by jury on all issues so triable.
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`DESIGNATION OF TRIAL COUNSEL
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`Plaintiffs hereby designate Sherilyn Pastor as Trial Counsel.
`
`BY:
`
`Respectfully submitted,
`s/ David Mordkoff
`David Mordkoff, Esq.
`Sherilyn Pastor, Esq.
`MCCARTER & ENGLISH, LLP
`Worldwide Plaza
`825 Eighth Avenue
`New York, NY 10019
`spastor@mccarter.com
`(212) 609-6800
`
`Attorneys for Plaintiffs,
`Magellan Health, Inc.,
`Merit Health Insurance Company, and
`Magellan Rx Management, LLC.
`
`DATED:
`
`May 27, 2021
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