Insurance Coverage for FCA Lawsuits

For companies that have business dealings with the government, the False Claims Act (“FCA”), 31 U.S.C. ” 3729-3733, needs no introduction. The FCA, which at a high level prohibits making false claims to obtain payment from the federal government, has led to billions of dollars in recovery by the United States Department of Justice (DOJ). Indeed, in each of the last four years, the DOJ has recovered more than $3 billion, including $3.8 billion in 2013 alone. See Justice Department Recovers $3.8 Billion from False Claims Act Cases in Fiscal Year 2013, Dept. of Justice, http://1.usa.gov/1VyZsNn. In October 2014, a federal jury handed down a $175 million verdict against a Texas manufacturing company accused of making false claims in connection with the installation of highway guardrails. See Trinity Industries Whistleblower Awarded $175 Million in Guardrail Suit, The Wall Street Journal, http://on.wsj.com/1LX9g24. With the potential for trebled damages, attorneys' fees, and penalties under the FCA, that figure could increase.

The prevalence of FCA claims against companies is compounded by the fact that private persons ' called “relators” ' are able to file FCA suits on behalf of the government as qui tam plaintiffs (as derived from the Latin phrase ” qui tam pro domino rege quam pro se ipso in hac parte sequitur,” meaning “he who sues in this matter for the king as well as for himself”). The FCA entitles relators to receive up to 30% of the amount recovered by the government through qui tam actions. 31 U.S.C. ' 3730(d). Companies face additional liability under the FCA for retaliating against purported whistleblowers. In recent years, the FCA has been further bolstered by amendments that provide additional inducements and protections to qui tam plaintiffs.

Virtually no industry is immune from FCA claims. The FCA implicates all government contracts, including defense contracts, construction contracts, and various government programs such as federally insured loans and mortgages, education grants, and Medicare.

Informed counsel and risk managers seek to minimize risk in the event of FCA claims. Depending on the nature of allegations, and perhaps more importantly the company's response to those allegations, insurance coverage may be available to cover all or a portion of the company's defense costs and loss. This article highlights some of the common issues policyholders should consider, both in purchasing their liability insurance policies and responding to FCA suits and allegations.

Preparing for FCA Claims

Claims under the FCA generally implicate three types of liability insurance: 1) Directors and Officers (“D&O”) Liability Insurance; 2) Employment Practices Liability (“EPL”) Insurance; and 3) Errors and Omissions (“E&O”) Insurance. See, e.g., Carolina Cas. Ins. Co. v. Omeros Corp., No. C12-287RAJ, 2013 WL 5530588 (W.D. Wash. Mar. 11, 2013) (denying insurer's motion for summary judgment that FCA claim was excluded under D&O policy and noting that insurer had provided coverage for qui tam anti-retaliation claim under policy's employment coverage); Cmty. Health Ctr. of Buffalo, Inc. v. RSUI Indem. Co., No. 10-CV-813S, 2012 WL 713305 (W.D.N.Y. Mar. 5, 2012) (holding that Defendant failed to establish that defense and indemnification coverage for FCA complaint was excluded under D&O policy).

Coverage also may be available under other types of liability insurance policies, such as commercial general liability policies, depending on the allegations of the claim or lawsuit. See, e.g., Watts Indus., Inc. v. Zurich Am. Ins. Co., 121 Cal. App. 4th 1029, 1036, 18 Cal. Rptr. 3d 61, 64 (2004), as modified on denial of reh'g (Sept. 15, 2004). Although the three types of policies provide different coverages, each commonly covers “Loss” resulting from a “Claim” for “Wrongful Acts” as those terms are defined in the respective policy.

Because the definitions of these terms differ from policy to policy, it is important to be aware of how these terms are defined. The term “Claim,” for instance, often is not limited to the filing of the lawsuit, but may include the service of subpoena, a written or oral demand for monetary damages or equitable relief, or even a request to toll statute of limitations. Some policies expressly provide that the definition of “Claim” includes government investigations and informal investigations. The definition of “Claim” not only sets the parameters for what is covered, but also may affect the policyholder's notice obligations discussed below. In many instances, it may beneficial for policyholders to procure insurance policies with a broad definition of “Claim,” but policyholder should take note that there may be a corresponding need to make sure notice is provided in a broader set of circumstances.

Likewise, the definition of “Loss” often is important. To maximize protection for FCA claims, and avoid disputes with the insurance company, the definition should expressly include fines and penalties and the multiplied portion of any award. Similarly, policyholders should avoid definitions of “Loss” that exclude “matters uninsurable” as the phrase is hopelessly ambiguous and could present problems in the context of FCA claims.

In addition to these definitions, policyholders should anticipate that insurers may attempt to avoid their coverage obligations by asserting that exclusions in the policies apply. Although it is impossible to predict all of the policy exclusions that insurers may attempt to assert, insurers often have raised several exclusions as a bar to coverage for FCA claims. These include the following:

Conduct-based Exclusions

Conduct-based exclusions include exclusions that limit coverage based on an insured's alleged misconduct. Examples of conduct-based exclusions include exclusions for illegal personal gain, dishonest acts, and fraudulent or illegal conduct. See, e.g., Gen. Star Nat'l Ins. Co. v. Adams Valuation Corp., No. 13 C 2973, 2014 WL 479759, at *6 (N.D. Ill. Feb. 6, 2014) (finding no coverage for FCA allegations based on exclusion barring coverage for claims “[a]rising out of a dishonest, fraudulent, criminal or malicious act or omission, or intentional misrepresentation”). In many instances, the exclusions are not triggered until there is a final adjudication of wrongdoing. In such cases, the conduct-based exclusions generally will not relieve the insurer's defense obligations, regardless of how egregious the allegations of misconduct, nor preclude coverage in the case of settlements, which are not a final adjudication on the merits of the claim.

To maximize the potential for coverage, policyholders, at a minimum, should insist that any conduct-based exclusion be narrowed in scope and limited to instances where intentional misconduct is established by final adjudication. Policyholders also should examine closely the allegations of any underlying complaints: if any of the claims in the underlying case are based on non-intentional conduct, a conduct-based exclusion likely will not absolve an insurer of its duty to defend. XL Specialty Ins. Co. v. Bollinger Shipyards, Inc., No. CIV.A. 12-2071, 2014 WL 5524407, at *22 (E.D. La. Oct. 31, 2014) (negligent misrepresentation and unjust enrichment allegations, which were part of government's FCA complaint, did not fall within scope of dishonest and infidelity exclusions).

'Prior Acts' or 'Prior Litigation' Exclusions

“Prior acts” and “prior litigation” exclusions include exclusions for claims relating to wrongful acts that occurred prior to a specific date set forth in the policy, or for claims relating to a specified claim or circumstance. See, e.g., Cmty. Health Ctr. of Buffalo, Inc., 2012 WL 713305, at *3 (denying insurer's motion for judgment on the pleadings based on argument that FCA complaint was interrelated with prior claim). These exclusions are particularly dangerous in the context of FCA claims, because qui tam suits are preliminarily filed under seal, and policyholders may not know about a lawsuit until years after it was filed. See, e.g., AmerisourceBergen Corp. v. Ace Am. Ins. Co. , 100 A.3d 283, 286 (Pa. Super. 2014). In AmerisourceBergen , for example, the policyhoder brought a declaratory judgment action seeking to recovr defense costs it expended to defend a FCA lawsuit. Although the policyholder did not learn about the FCA lawsuit until 2009, the lawsuit had been filed three years earlier. The court, nevertheless, held that coverage for the lawsuit was barred by a prior litigation exclusion, which excluded coverage for lawsuits “filed or commenced” before the applicable policy period.

Policyholders should be cognizant of any prior acts exclusions and their impact on any existing but unknown claims, and attempt to limit the application of such exclusions by carving out FCA claims filed under seal and unknown to the alleged wrongdoer.

Policyholders cannot anticipate all potential exclusions or other defenses that an insurer may assert in the event of an FCA claim, but counsel and risk managers should note these common issues at the procurement stage and, where necessary, attempt to minimize any future coverage issues with respect to such claims.

Responding to FCA Claims

Just as important as having a good understanding about the scope of coverage is having a strong grasp on what needs to be done in the event a claim is made. For instance, many policyholders have foregone millions of dollars in coverage by failing to provide proper notice.

Counsel and risk managers carefully should read policy terms and conditions regarding notice requirements in the event a claim is made, and comply with those terms and conditions to the letter. For FCA claims, however, there is an additional complexity. As discussed above, under the FCA, qui tam suits are preliminarily filed under seal to allow the DOJ the opportunity to investigate the allegations and decide whether to intervene. 31 U.S.C. ' 3730(b). In some instances, policyholders may first learn about the lawsuit through an investigatory subpoena by the DOJ. Depending on the policy language ' and, specifically, the definition of “Claim” ' the investigatory subpoena itself may constitute a “Claim” and trigger a policyholder's obligation to provide notice. See, e.g., Minuteman International, Inc. v. Great American Ins. Co., 2004 WL 603482 at *2 (N.D. Ill. Mar. 22, 2004). Additional difficulties arise where the definition of “Claim” does not include subpoenas, the policyholder becomes aware of a suit, but is constrained by the seal from disclosing the case to its insurer. In these circumstances, a policyholder may move to lift the seal to allow for the provision of notice to its insurer. See, e.g., U.S. ex rel. Health Outcomes Technologies v. Hallmark Health Sys., Inc., 349 F. Supp. 2d 170, 173 (D. Mass. 2004). Short of that, policyholders should provide their insurers with as much publicly available information as possible.

One also must be mindful of any policy requirements for retaining defense counsel. Some policies, for example, require insurer approval prior to incurring defense costs. Additionally, in some instances, insurers improperly may attempt to impose billing guidelines on policyholders that make it increasingly difficult for policyholders to recover their defense costs. Such guidelines generally are not part of liability insurance policies, and policyholders usually should not accept them without discussion and mutual agreement on the terms.

Resolving FCA Claims

If not dismissed on the merits, many FCA lawsuits are resolved by settlement. Insurance coverage issues are particularly crucial during the settlement negotiation process. Indeed, the framework of the settlement agreement can make the difference between millions of dollars in indemnity coverage and no indemnity coverage.

One issue that often arises is a requirement in policies for policyholders to obtain the insurer's consent prior to settlement. Despite this requirement, where the insurer is not providing a defense or paying defense costs, many states permit policyholders to settle a claim without consent, so long as the settlement is reasonable. Policyholders should proceed with caution and evaluate the potentially applicable insurance law before entering into such settlements.

Unless all of the claims in the FCA complaint are covered, another common issue at the settlement stage is whether the entire settlement will be covered when there are both covered and uncovered claims asserted. Many liability insurance policies contain allocation provisions to address these issues. For instance, some policies contain allocation provisions that require insurers and policyholders to use their “best efforts” to allocate between covered and uncovered claims.

Conclusion

Regardless of the industry, companies that have business dealings with the government face the risk of FCA investigations, allegations, and lawsuits. To manage these risks, companies should: 1) make sure they have appropriate liability insurance in place; 2) make sure they respond in a manner that does not jeopardize their coverage if a FCA claim is asserted against the company or its directors or officers; and 3) carefully consider insurance coverage issues prior to resolving a FCA lawsuit.

Joseph Saka is counsel in Lowenstein Sandler LLP's Washington, DC, office. He represents businesses in disputes with their insurance companies and helps clients maximize the value of their insurance assets. The views expressed in this article are those of the author, and are not necessarily the views of the firm or any of its clients.

For companies that have business dealings with the government, the False Claims Act (“FCA”), 31 U.S.C. ” 3729-3733, needs no introduction. The FCA, which at a high level prohibits making false claims to obtain payment from the federal government, has led to billions of dollars in recovery by the United States Department of Justice (DOJ). Indeed, in each of the last four years, the DOJ has recovered more than $3 billion, including $3.8 billion in 2013 alone. See Justice Department Recovers $3.8 Billion from False Claims Act Cases in Fiscal Year 2013, Dept. of Justice, http://1.usa.gov/1VyZsNn. In October 2014, a federal jury handed down a $175 million verdict against a Texas manufacturing company accused of making false claims in connection with the installation of highway guardrails. See Trinity Industries Whistleblower Awarded $175 Million in Guardrail Suit, The Wall Street Journal, http://on.wsj.com/1LX9g24. With the potential for trebled damages, attorneys' fees, and penalties under the FCA, that figure could increase.

The prevalence of FCA claims against companies is compounded by the fact that private persons ' called “relators” ' are able to file FCA suits on behalf of the government as qui tam plaintiffs (as derived from the Latin phrase ” qui tam pro domino rege quam pro se ipso in hac parte sequitur,” meaning “he who sues in this matter for the king as well as for himself”). The FCA entitles relators to receive up to 30% of the amount recovered by the government through qui tam actions. 31 U.S.C. ' 3730(d). Companies face additional liability under the FCA for retaliating against purported whistleblowers. In recent years, the FCA has been further bolstered by amendments that provide additional inducements and protections to qui tam plaintiffs.

Virtually no industry is immune from FCA claims. The FCA implicates all government contracts, including defense contracts, construction contracts, and various government programs such as federally insured loans and mortgages, education grants, and Medicare.

Informed counsel and risk managers seek to minimize risk in the event of FCA claims. Depending on the nature of allegations, and perhaps more importantly the company's response to those allegations, insurance coverage may be available to cover all or a portion of the company's defense costs and loss. This article highlights some of the common issues policyholders should consider, both in purchasing their liability insurance policies and responding to FCA suits and allegations.

Preparing for FCA Claims

Claims under the FCA generally implicate three types of liability insurance: 1) Directors and Officers (“D&O”) Liability Insurance; 2) Employment Practices Liability (“EPL”) Insurance; and 3) Errors and Omissions (“E&O”) Insurance. See, e.g., Carolina Cas. Ins. Co. v. Omeros Corp., No. C12-287RAJ, 2013 WL 5530588 (W.D. Wash. Mar. 11, 2013) (denying insurer's motion for summary judgment that FCA claim was excluded under D&O policy and noting that insurer had provided coverage for qui tam anti-retaliation claim under policy's employment coverage); Cmty. Health Ctr. of Buffalo, Inc. v. RSUI Indem. Co., No. 10-CV-813S, 2012 WL 713305 (W.D.N.Y. Mar. 5, 2012) (holding that Defendant failed to establish that defense and indemnification coverage for FCA complaint was excluded under D&O policy).

Coverage also may be available under other types of liability insurance policies, such as commercial general liability policies, depending on the allegations of the claim or lawsuit. See, e.g., Watts Indus., Inc. v. Zurich Am. Ins. Co. , 121 Cal. App. 4th 1029, 1036, 18 Cal. Rptr. 3d 61, 64 (2004), as modified on denial of reh'g (Sept. 15, 2004). Although the three types of policies provide different coverages, each commonly covers “Loss” resulting from a “Claim” for “Wrongful Acts” as those terms are defined in the respective policy.

Because the definitions of these terms differ from policy to policy, it is important to be aware of how these terms are defined. The term “Claim,” for instance, often is not limited to the filing of the lawsuit, but may include the service of subpoena, a written or oral demand for monetary damages or equitable relief, or even a request to toll statute of limitations. Some policies expressly provide that the definition of “Claim” includes government investigations and informal investigations. The definition of “Claim” not only sets the parameters for what is covered, but also may affect the policyholder's notice obligations discussed below. In many instances, it may beneficial for policyholders to procure insurance policies with a broad definition of “Claim,” but policyholder should take note that there may be a corresponding need to make sure notice is provided in a broader set of circumstances.

Likewise, the definition of “Loss” often is important. To maximize protection for FCA claims, and avoid disputes with the insurance company, the definition should expressly include fines and penalties and the multiplied portion of any award. Similarly, policyholders should avoid definitions of “Loss” that exclude “matters uninsurable” as the phrase is hopelessly ambiguous and could present problems in the context of FCA claims.

In addition to these definitions, policyholders should anticipate that insurers may attempt to avoid their coverage obligations by asserting that exclusions in the policies apply. Although it is impossible to predict all of the policy exclusions that insurers may attempt to assert, insurers often have raised several exclusions as a bar to coverage for FCA claims. These include the following:

Conduct-based Exclusions

Conduct-based exclusions include exclusions that limit coverage based on an insured's alleged misconduct. Examples of conduct-based exclusions include exclusions for illegal personal gain, dishonest acts, and fraudulent or illegal conduct. See, e.g., Gen. Star Nat'l Ins. Co. v. Adams Valuation Corp. , No. 13 C 2973, 2014 WL 479759, at *6 (N.D. Ill. Feb. 6, 2014) (finding no coverage for FCA allegations based on exclusion barring coverage for claims “[a]rising out of a dishonest, fraudulent, criminal or malicious act or omission, or intentional misrepresentation”). In many instances, the exclusions are not triggered until there is a final adjudication of wrongdoing. In such cases, the conduct-based exclusions generally will not relieve the insurer's defense obligations, regardless of how egregious the allegations of misconduct, nor preclude coverage in the case of settlements, which are not a final adjudication on the merits of the claim.

To maximize the potential for coverage, policyholders, at a minimum, should insist that any conduct-based exclusion be narrowed in scope and limited to instances where intentional misconduct is established by final adjudication. Policyholders also should examine closely the allegations of any underlying complaints: if any of the claims in the underlying case are based on non-intentional conduct, a conduct-based exclusion likely will not absolve an insurer of its duty to defend. XL Specialty Ins. Co. v. Bollinger Shipyards, Inc., No. CIV.A. 12-2071, 2014 WL 5524407, at *22 (E.D. La. Oct. 31, 2014) (negligent misrepresentation and unjust enrichment allegations, which were part of government's FCA complaint, did not fall within scope of dishonest and infidelity exclusions).

'Prior Acts' or 'Prior Litigation' Exclusions

“Prior acts” and “prior litigation” exclusions include exclusions for claims relating to wrongful acts that occurred prior to a specific date set forth in the policy, or for claims relating to a specified claim or circumstance. See, e.g., Cmty. Health Ctr. of Buffalo, Inc., 2012 WL 713305, at *3 (denying insurer's motion for judgment on the pleadings based on argument that FCA complaint was interrelated with prior claim). These exclusions are particularly dangerous in the context of FCA claims, because qui tam suits are preliminarily filed under seal, and policyholders may not know about a lawsuit until years after it was filed. See, e.g., AmerisourceBergen Corp. v. Ace Am. Ins. Co. , 100 A.3d 283, 286 (Pa. Super. 2014). In AmerisourceBergen , for example, the policyhoder brought a declaratory judgment action seeking to recovr defense costs it expended to defend a FCA lawsuit. Although the policyholder did not learn about the FCA lawsuit until 2009, the lawsuit had been filed three years earlier. The court, nevertheless, held that coverage for the lawsuit was barred by a prior litigation exclusion, which excluded coverage for lawsuits “filed or commenced” before the applicable policy period.

Policyholders should be cognizant of any prior acts exclusions and their impact on any existing but unknown claims, and attempt to limit the application of such exclusions by carving out FCA claims filed under seal and unknown to the alleged wrongdoer.

Policyholders cannot anticipate all potential exclusions or other defenses that an insurer may assert in the event of an FCA claim, but counsel and risk managers should note these common issues at the procurement stage and, where necessary, attempt to minimize any future coverage issues with respect to such claims.

Responding to FCA Claims

Just as important as having a good understanding about the scope of coverage is having a strong grasp on what needs to be done in the event a claim is made. For instance, many policyholders have foregone millions of dollars in coverage by failing to provide proper notice.

Counsel and risk managers carefully should read policy terms and conditions regarding notice requirements in the event a claim is made, and comply with those terms and conditions to the letter. For FCA claims, however, there is an additional complexity. As discussed above, under the FCA, qui tam suits are preliminarily filed under seal to allow the DOJ the opportunity to investigate the allegations and decide whether to intervene. 31 U.S.C. ' 3730(b). In some instances, policyholders may first learn about the lawsuit through an investigatory subpoena by the DOJ. Depending on the policy language ' and, specifically, the definition of “Claim” ' the investigatory subpoena itself may constitute a “Claim” and trigger a policyholder's obligation to provide notice. See, e.g., Minuteman International, Inc. v. Great American Ins. Co., 2004 WL 603482 at *2 (N.D. Ill. Mar. 22, 2004). Additional difficulties arise where the definition of “Claim” does not include subpoenas, the policyholder becomes aware of a suit, but is constrained by the seal from disclosing the case to its insurer. In these circumstances, a policyholder may move to lift the seal to allow for the provision of notice to its insurer. See, e.g., U.S. ex rel. Health Outcomes Technologies v. Hallmark Health Sys., Inc. , 349 F. Supp. 2d 170, 173 (D. Mass. 2004). Short of that, policyholders should provide their insurers with as much publicly available information as possible.

One also must be mindful of any policy requirements for retaining defense counsel. Some policies, for example, require insurer approval prior to incurring defense costs. Additionally, in some instances, insurers improperly may attempt to impose billing guidelines on policyholders that make it increasingly difficult for policyholders to recover their defense costs. Such guidelines generally are not part of liability insurance policies, and policyholders usually should not accept them without discussion and mutual agreement on the terms.

Resolving FCA Claims

If not dismissed on the merits, many FCA lawsuits are resolved by settlement. Insurance coverage issues are particularly crucial during the settlement negotiation process. Indeed, the framework of the settlement agreement can make the difference between millions of dollars in indemnity coverage and no indemnity coverage.

One issue that often arises is a requirement in policies for policyholders to obtain the insurer's consent prior to settlement. Despite this requirement, where the insurer is not providing a defense or paying defense costs, many states permit policyholders to settle a claim without consent, so long as the settlement is reasonable. Policyholders should proceed with caution and evaluate the potentially applicable insurance law before entering into such settlements.

Unless all of the claims in the FCA complaint are covered, another common issue at the settlement stage is whether the entire settlement will be covered when there are both covered and uncovered claims asserted. Many liability insurance policies contain allocation provisions to address these issues. For instance, some policies contain allocation provisions that require insurers and policyholders to use their “best efforts” to allocate between covered and uncovered claims.

Conclusion

Regardless of the industry, companies that have business dealings with the government face the risk of FCA investigations, allegations, and lawsuits. To manage these risks, companies should: 1) make sure they have appropriate liability insurance in place; 2) make sure they respond in a manner that does not jeopardize their coverage if a FCA claim is asserted against the company or its directors or officers; and 3) carefully consider insurance coverage issues prior to resolving a FCA lawsuit.

Joseph Saka is counsel in Lowenstein Sandler LLP's Washington, DC, office. He represents businesses in disputes with their insurance companies and helps clients maximize the value of their insurance assets. The views expressed in this article are those of the author, and are not necessarily the views of the firm or any of its clients.