Whoa! Delaware Supreme Court Upholds New Trial for Conduent in $235M Texas Medicaid Fraud Settlement Dispute

And the story rolls on.

The Delaware Supreme Court this week ruled against insurance giants AIG, ACE, and Lexington Insurance, upholding a lower court’s decision to order a new trial in their dispute with Conduent State Healthcare (ACS/Xerox/Conduent) over coverage for the 2019 $235 million settlement with Texas. The insurers had argued that Conduent fraudulently structured the settlement to secure coverage.

The big thing about the ruling is that the court found that the insurers’ failures left Conduent with little choice but to act independently in making the settlement with Texas.

Holy Smokes, Batman!

Insurers denied coverage from the start

As everyone knows by now, this case stems from a years-long legal battle between Texas and Conduent over Medicaid fraud allegations concerning ACS/Xerox/Conduent’s flawed Medicaid orthodontic prior authorization process from 2004 to 2011.  The company used untrained admin personnel to add up HLD scores.  There was no scrutiny for medical necessity which was confirmed by a federal audit.

Texas sued, and Conduent reached a $235 million settlement in 2019. However, its insurers refused to cover the claim, alleging the settlement attempted to manipulate coverage, which the OAG was accused of assisting.

Conduent then sued AIG and the other insurers for breach of contract. While the jury originally found that Conduent had engaged in fraudulent conduct to trigger coverage, the trial was riddled with evidentiary issues and insurer misconduct. The Delaware Superior Court judge set aside the verdict and ordered a new trial—a decision now upheld by the state’s highest court.

Delaware Supreme Court: Insurers breached duty to defend

One of the key takeaways from the ruling is that the insurers breached their duty to defend Conduent in the Texas lawsuit.

Under New York law, which governs the policies, the insured is entitled to make a reasonable settlement without the insurer’s consent when an insurer wrongfully refuses to defend. The court ruled that AIG and the others had unjustifiably denied coverage, meaning Conduent was not required to seek their approval before settling with Texas.

The insurers had argued that Conduent’s decision to push Texas to amend its lawsuit to include breach of contract and negligence claims—rather than just Medicaid fraud—was proof of fraud. However, the Delaware Supreme Court rejected that reasoning, pointing out that the settlement explicitly allocated damages to breach of contract, not fraud.

Insurers’ conduct at trial also scrutinized

The court also found that the original trial was marred by serious evidentiary issues, including the use of problematic deposition testimony from the Texas Attorney General’s Office that the judge later admitted should never have been allowed. The insurers also misrepresented their coverage obligations to the jury and improperly used privilege logs to suggest that Conduent was attempting to manufacture coverage—despite court rulings restricting such arguments.

Conduent coming back to Texas?

The state terminated its contract with the company in 2014 over the Medicaid fraud allegations and then again in 2024 after the Delaware Supreme Court agreed to review this case.

With a new trial on the horizon and since the Supreme Court ruled in Conduent’s favor, one has to wonder if it is only a matter of time before Conduent is again working for Texas Medicaid.