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A drug-testing company whose employees botched four clinical trials by fudging paperwork is entitled to insurance coverage under an employee dishonesty policy — even if the employees had nothing to gain and honestly believed they were doing nothing wrong — because motive and intent are “irrelevant to the concept of dishonesty,” a federal appeals court has ruled. In Scirex Corp. v. Federal Insurance Co., the 3rd U.S. Circuit Court of Appeals reversed a decision by Senior U.S. District Judge John P. Fullam of the Eastern District of Pennsylvania that granted summary judgment in favor of the insurer. But the court upheld Fullam’s holding that limited coverage to $280,000 on the grounds that the conduct by the Scirex nurses was a series of related events that amounted to a single “occurrence” for insurance purposes. Scirex’s lawyer, Joseph F. Roda of Roda & Nast in Lancaster, Pa., argued that the nurses’ repeated failure to follow protocol and accurately record their observations ruined four enormous studies valued at $156,000 to $575,000, according to court documents. As a result, Roda said, Scirex was entitled to recovery up to the $280,000 policy limit for each study, for a total of $880,786. But Federal Insurance’s lawyer, Alfred W. Putnam of Philadelphia-based Drinker Biddle & Reath, argued that even if the nurses’ conduct was covered, it was not a series of separate acts but a related course of conduct, according to court documents. Chief 3rd Circuit Judge Edward R. Becker, writing for a unanimous three-judge panel, agreed, saying that the policy’s occurrence clause was designed to limit liability and that, in the insurance industry, the term “occurrence” is commonly understood to mean all loss caused by a single act or related events. Becker, in the opinion joined by 3rd Circuit Judges Jane R. Roth and Max Rosenn, said Scirex’s interpretation “would lead us to grant a separate recovery for each forged check passed as part of an employee’s forgery scheme, a result that has been squarely rejected.” According to court papers, Scirex conducted a total of four clinical studies, in 1997 and 1998, for three different sponsors. Each trial was designed to test a pain medication for patients who had undergone dental surgery, and each had a protocol, written by the pharmaceutical company sponsoring the study, which detailed the procedures to be followed in that study, court papers state. All four protocols required patients to remain under the observation of Scirex nurses, at Scirex’s clinic, for at least eight hours after being given the first medication dose. Anticipating that some test subjects would find the medication ineffective, the protocols mandated providing supplemental pain medication. Subjects who received such supplemental medication were termed “rescued,” while those who took only the drug being studied were termed “unrescued,” according to court papers. After receiving a tip from a former employee, Scirex conducted an audit, according to court documents, and discovered that its nurses routinely released patients early — before eight hours had passed — but nonetheless submitted records that made it appear they had followed the protocols and observed them for the full eight hours. The audit showed that unrescued patients were often released early, sometimes after as little as one hour. During the course of a test subject’s eight-hour stay, the protocols required Scirex’s nurses to observe the subjects and record their observations. The records had to be “timely, accurate and complete,” because they were what the U.S. Food and Drug Administration evaluated, according to court papers. Since the FDA’s clinical testing requirements are exacting and inflexible, the discrepancies found in the audit rendered the four studies worthless. As a result, Scirex was forced to perform each study again without charge, court documents state. But when Scirex submitted a claim under its employee dishonesty policy, Federal Insurance denied the claim, court papers state, saying Scirex’s losses were more akin to ordinary expenses from a failed business venture than losses, such as fraudulently claimed overtime, caused by employee dishonesty. After Scirex filed suit, Federal Insurance moved for dismissal, arguing that the conduct of the nurses was not even dishonest. Fullam agreed, saying that since the nurses did not believe their conduct to be wrongful, they could not be deemed dishonest. “The words ‘fraudulent’ and ‘dishonest’ both focus on the intent of the actor, and connote intentional conduct by the actor as wrongful,” Fullam said. By contrast, Fullam said, the nurses acted on their “stubborn belief that [they] were right and that the drug companies were imposing unreasonable and unnecessary requirements.” Fullam found that the nurses “gained no personal benefit from their actions,” and that while their actions might have been ill-considered, they did not believe they were being duplicitous or dishonest since the testimony showed that they “honestly believed that they were substantially complying with the requirements of the protocols.” Becker disagreed, saying, “Scirex’s nurses understood that they were to record their observations of test subjects every thirty minutes for eight hours, yet in many cases their records included ‘observations’ for times when the patients were sitting at home. Even worse, these fictionalized records falsely implied that the patients had remained in the clinic for the full eight hours, and therefore that the tests had proceeded according to protocol.” As a result, Becker said, “not only did the nurses fictionalize the records, they made it virtually impossible to discover the fictionalization until disclosure by the informant.” Becker concluded that “such flagrant misrepresentation in a field characterized by strict adherence to procedure … was clearly dishonest, as well as highly unfaithful.”

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