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This is the case of PacificSource Health Plans v. Atlantic Specialty Insurance Company, in the U.S. Court of Appeals for the Ninth Circuit.

On Thursday, PacificSource Health advocated for the Ninth Circuit to uphold the default judgment in a lawsuit requesting coverage under its managed care errors and omissions, or E&O, policy for expenses it incurred responding to an injunction requiring it to send notice to class members of an underlying class action lawsuit.

Although the insurer is currently covering PacificSource's legal defense costs in the class action under a reservation of rights, it has maintained that class notification costs should not be covered.

PacificSource told the circuit court, that the Montana federal judge that granted the default acted reasonably because the insurer failed to respond to the complaint.

Attorneys for PacificSource argued that Montana federal judge Brian Morris did not abuse his discretion by rejecting the insurer's motion to set aside a default judgment, which was entered after the insurer failed to respond to the health care provider's complaint, which the insurer claims were a result of a claims-handling mishap.

According to the brief filed by PacificSource in the circuit court, it contends that the only way the insurer can succeed at overturning the default judgment on appeal is by showing that Judge Morris' findings were "illogical, implausible, or unsupported by the record," which the health care provider says the insurer has not done.

"Atlantic Specialty Insurance Company has not even attempted to establish that the district court's determinations are illogical, implausible, or lack support in the record," PacificSource wrote in its brief. "ASIC merely suggests that the district court could have reached different conclusions."

In August 2021, PacificSource filed suit against ASIC in Montana federal court, seeking coverage for expenses it incurred responding to an injunction related to an underlying class action lawsuit.

Montana federal Judge Brian Morris entered a default judgment against the insurer in May 2022, after the insurer failed to respond to PacificSource's civil complaint. ASIC subsequently filed a motion to set aside the default, but Judge Morris denied the request. Judge Morris found that ASIC's failure to appear was not the result of excusable neglect and that the insurer failed to present a "meritorious defense" of its coverage position.

In its opening appellate brief, the insurer told the circuit court that it did not respond to PacificSource's complaint in a timely manner due to the fact that the summons and complaint were delivered to the wrong internal unit after the insurer's registered agent received the documents. In its defense, the insurer called it a "simple, unfortunate clerical mistake." It argued its actions were not in bad faith or intentional misconduct which is the requirement needed to sustain a default judgment.

PacificSource hit back saying ASIC's failure to respond was not the result of one clerical mistake but a string of blunders that were allowed to continue because the insurer did not have any quality control procedures in place.

PacificSource argued that "Courts often uphold default judgments when the defendant has only made a careless clerical mistake, and in this case, ASIC committed far more than a single clerical mistake."

ASIC shot back by casting doubt on the health care provider’s motives, telling the circuit court that despite attorneys for both sides being in constant communication with each other regarding the underlying class action lawsuit, attorneys for PacificSource oddly failed to mention the present coverage suit until after they obtained a default judgment.

PacificSource is represented by Raphael J.C. Graybill of Graybill Law Firm PC and by Martha Sheehy of Sheehy Law Firm, who told the circuit court that it's under no obligation to provide ASIC with that type of informal notice.