Risk Management: Insurance Coverage to Cover Possible Risk of a False Claims Act Claim
Regardless of your industry, companies that have business dealings with the federal government face the persistent risk of False Claims Act (FCA) investigations and lawsuits. The FCA, 31 U.S.C. §§ 3729 – 3733, imposes civil and criminal liability for knowingly making a false or fraudulent claim to the United States for money or property; or to avoid an obligation to pay money (reverse false claim). 31 U.S.C. §§ 3279-3733. Under the FCA, the government may bring its own action or may intervene in the existing qui tam complaint, a private right of action brought by a whistleblower (relator), against an individual or company accused of engaging in fraudulent activities against the government. Contractors face the possibility of treble damages. In addition, the contractor may face civil penalties. 31 U.S.C. 3729(a)(1)(G). In 2018, The maximum per claim penalty is $22,363.
In recent years, FCA claims have been on the rise as the government continues to crack down on fraud, waste, and abuse in order to protect taxpayer dollars. The DOJ reported it obtained over $3.7 billion from FCA cases in FY 2017—making it the eighth straight year the federal government recovered more than $3 billion in FCA cases. This trend does not appear to be changing any time soon.
The uptick in FCA activity has made insurance coverage for FCA contractors an evolving area of law subject to different interpretations by different courts. Accordingly, any risk management program that should include insurance coverage that may be leveraged to cover FCA investigations and claims. To proactively manage these risks, companies should make sure they (1) have appropriate liability insurance in place, given their risk profile; (2) if a FCA claim is asserted against the company, to respond in a manner that does not jeopardize coverage; and (3) carefully consider insurance coverage issues prior to resolving an FCA lawsuit.
Review Your Policy Language
Claims under the FCA primarily 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. Although the three types of policies provide different coverages, each commonly covers loss resulting from a claim for a negligent act (as defined in the policy).
As with any insurance matter, the starting point is with the policy itself. How is “claim” defined? How is “loss” defined? How are “professional services” defined? It is important to be aware of how these terms are defined in your policy. The term “claim,” for instance, may not be limited to the filing of the lawsuit—it 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 policy’s definitions not only set the parameters for what is covered, but also may affect your notice obligations. It may be beneficial for policyholders to procure insurance policies with a broad definition of “claim,” but policyholders should 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” is critical. To maximize potential protection for FCA claims and to better navigate inevitable disputes with the insurance company, the definition should expressly include fines and penalties and any damages multipliers. Similarly, policyholders should avoid definitions of “loss” that exclude “matters uninsurable.” For instance, policies may exclude returned money (restitution) from their definition of “loss” under the policy.
Policyholders should anticipate that insurers may attempt to avoid coverage obligations by asserting exclusions in the policies apply. Be wary of language in your policy for exclusions for fraud or intentional, reckless, or even grossly negligent conduct as well as notice provisions that may later bar your ability to seek coverage against an insurer.
Things to Remember While Negotiating FCA Settlements to Preserve your Coverage Rights
Like most claims, many FCA lawsuits are ultimately resolved by settlement. When drafting a settlement agreement, be cognizant of your insurance policy, including how the conduct is characterized, and whether your settlement needs to include language to allocate between covered and non-covered portions based on the “relative legal exposure” of the covered and non-covered claims (so as to streamline future claims against your insurer). Under this method, the portion of the settlement amount that may be allocated to a non-covered loss is determined by the extent that liability motivated the parties to settle. These considerations will be important in determining how settlements are structured and language is drafted. Nonetheless, the policy language, jurisdiction and public policy will determine to what extent the insurance company can allocate an FCA settlement to a non-insured loss.